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Section 9: Deemed Income of Non-Residents and Business Connection in India

Section 9 of Income Tax Act deems certain incomes of non-residents as arising in India. Learn about business connection, royalty, FTS, capital gains, and DTAA overriding Section 9 ...

TaxClue Team Tax & Compliance Expert

May 13, 2026 3 min read 1 views Updated Jun 16, 2026

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Section 9 of the Income Tax Act 2025 (previously Section 9 of ITA 1961) provides for income deemed to accrue or arise in India. This section is crucial for taxing income of non-residents with Indian nexus. DTAA provisions, however, can override Section 9 and provide more favorable treatment.

Categories of Income Deemed to Arise in India

Section 9(1)(i): Business Connection

Income from a business connection in India is deemed to accrue in India. The concept of "business connection" is broader than "Permanent Establishment" (PE) under DTAA:

Activities carried through a dependent agent in India
Agent habitually exercises authority to conclude contracts on behalf of non-resident
Activities resulting in income accruing partly outside India — proportionate attribution required
Significant Economic Presence (SEP) test introduced: Transaction value exceeding Rs.2 crore or user count exceeding 3 lakh in India creates SEP-based business connection

Section 9(1)(ii): Salary Deemed to Arise in India

Salary for services rendered in India: Taxable in India regardless of where paid
Salary received for rest leave period — deemed to arise where services performed
Employment income of NRIs for India-based employment: Taxable in India

Section 9(1)(iv): Dividend from Indian Company

All dividends paid by Indian companies are deemed to arise in India, even if paid to a non-resident shareholder. Taxable at rates specified in DTAA (typically 5%-15%) or domestic rate of 20% plus surcharge, whichever is beneficial to non-resident.

Section 9(1)(v): Interest

Interest deemed to accrue in India if:

Payable by Government of India
Payable by Indian resident (except when borrowed money deployed outside India for non-India business)
Payable by non-resident from India business/profession

Section 9(1)(vi): Royalty

Royalty deemed to arise in India if:

Paid by Indian Government, Indian resident, or used in India
Royalty includes: payments for use of patent, copyright, trademark, secret formula, know-how, commercial/industrial/scientific equipment
After 2012: Computer software royalty taxation was controversial; settled by retrospective amendment (Vodafone and other issues)

Section 9(1)(vii): Fees for Technical Services (FTS)

FTS deemed to arise in India if:

Paid by Indian Government, Indian resident, or for India-based activities
FTS includes: managerial, technical, or consultancy services
Make Available clause: DTAA may restrict FTS to services that "make available" technical knowledge
Excludes: construction/assembly/installation projects with PE

DTAA Override

Section 90(2) provides that DTAA provisions apply if more beneficial than domestic law. Therefore:

If DTAA has a lower royalty rate (e.g., 10% under India-Germany DTAA) vs domestic 20%: DTAA applies
If DTAA restricts FTS to "make available" condition: Non-make-available services not taxable despite Section 9
If DTAA PE threshold is not met: Business income not taxable even if Section 9 business connection exists

Withholding Tax (TDS) on Payments to Non-Residents

Payment Type	Section	Domestic Rate
Interest	195	20% + surcharge
Royalty	195	20% + surcharge
FTS	195	20% + surcharge
Dividend	195 / 196C	20% + surcharge
Salary to NR employee	192	Slab rate

Significant Economic Presence (SEP)

Budget 2018 introduced SEP concept to tax digital economy non-residents without physical presence:

Systematic/continuous business soliciting in India by digital means creates taxable SEP
Threshold: Rs.2 crore revenue from India or 3 lakh users in India
Tax treaties (DTAAs) may modify or override SEP provisions until treaties updated
OECD Pillar One discussions aim to update DTAAs for digital business taxation globally

Form 15CA/15CB: Payments to non-residents taxable under Section 9 require Form 15CA (declaration by remitter) and Form 15CB (CA certificate). These are filed online before making international payments. Failure to comply invites penalty under Section 271-I of Rs.1 lakh per default.

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Frequently Asked Questions

What is a business connection under Section 9?

A business connection exists when a non-resident carries on business activities in India through a dependent agent who habitually exercises authority to conclude contracts on behalf of the non-resident, or when significant economic presence exists. Income attributable to Indian activities is taxable.

Is royalty paid by an Indian company to a foreign company taxable in India?

Yes, royalty payments by Indian residents to non-residents are deemed to arise in India under Section 9(1)(vi) and are taxable. However, DTAA provisions (if applicable) may reduce the withholding tax rate below the domestic 20% rate. The non-resident can claim DTAA benefits by providing Tax Residency Certificate.

What is the Significant Economic Presence (SEP) concept?

SEP creates a taxable presence in India for non-residents who derive revenue from India exceeding Rs.2 crore or have 3 lakh or more users in India through digital means, even without physical presence. This is meant to address taxation of digital economy companies. DTAA override currently limits its practical application.

What is Form 15CA and Form 15CB?

Form 15CA is an online declaration filed by the remitter before making payment to a non-resident, stating whether tax has been deducted. Form 15CB is a certificate from a Chartered Accountant confirming that applicable tax has been deducted at the correct rate. Both are required for most international payments.

Can a non-resident avoid Indian tax on FTS under DTAA?

Yes, if the applicable DTAA has a "make available" clause for FTS (like India-US, India-Singapore DTAA), only services that transfer technical knowledge, experience, skill, or know-how are taxable. Routine services that do not transfer technology are not taxable under the make available restriction.

What is the tax rate on royalty paid to non-residents in India?

The domestic rate for royalty to non-residents is 20% plus applicable surcharge and cess under Section 115A. However, applicable DTAA rates are typically lower (10-15% under most DTAAs). The non-resident can opt for the more beneficial rate by providing a valid Tax Residency Certificate.