Section 9 Income Tax Act: India Source Rules

Section 9 of the Income-tax Act, 1961 is one of the most litigated provisions in Indian cross-border taxation, and for good reason. India taxes residents on their worldwide income, but non-residents are taxed only on income that is received in India, or that accrues or arises (or is deemed to accrue or arise) in India. Section 9 is the deeming provision: it sets out, clause by clause, when income is treated as having an Indian source even though the activity, the payer, or the recipient may sit outside the country.

For an IT services exporter, a non-resident Indian (NRI) drawing a foreign salary, or a multinational licensing software into India, the practical question is always the same. Does my income fall within one of the Section 9(1) clauses, and if it does, can a tax treaty under Section 90(2) reduce or remove India's taxing right? This guide walks through the key sub-clauses of Section 9(1), explains the business connection and SEP rules, the royalty and FTS source rules, and how all of this interacts with the Double Taxation Avoidance Agreements (DTAAs).

Looking for expert help with Section 9 Income Tax Act income deemed to accrue or arise in India source rules? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.

What Section 9 Does and Why It Matters

Section 9 does not impose tax on its own. It works together with the charging section (Section 4) and the scope-of-total-income section (Section 5). Section 5(2) says a non-resident is taxed on income that is received in India, accrues or arises in India, or is deemed to accrue or arise in India. Section 9 supplies that last limb. Once income is deemed to arise in India under Section 9(1), it enters the non-resident's total income, and the payer usually has a withholding obligation under Section 195.

The reason this matters is that without Section 9, a non-resident could argue that because the contract was signed abroad, or payment was made into a foreign bank, no income arose in India. The deeming fiction closes that gap by attaching a statutory Indian source to defined categories of income.

Section 9(1)(i): Business Connection and Significant Economic Presence

Section 9(1)(i) is the broadest clause. It deems income to arise in India where it accrues, directly or indirectly, through a business connection in India, through any property or asset in India, or through the transfer of a capital asset situated in India. Only the part of the income that is reasonably attributable to operations carried out in India is taxed here, which is why attribution is a constant point of dispute.

"Business connection" is not exhaustively defined, but Explanation 2 to Section 9(1)(i) treats a dependent agent who habitually concludes contracts, maintains a stock of goods for delivery, or secures orders in India for the non-resident as creating a business connection. An independent agent acting in the ordinary course of its own business is generally excluded.

Significant Economic Presence (SEP)

The traditional business connection test assumes a physical or agency presence in India. Digital business models broke that assumption. To address this, Explanation 2A was inserted into Section 9(1)(i) by the Finance Act 2020 (operative from assessment year 2022-23), creating the Significant Economic Presence test. SEP treats a non-resident as having a business connection in India in either of two situations:

1. Transaction threshold: transaction in respect of any goods, services, or property carried out by the non-resident with any person in India, including the download of data or software, where the aggregate of payments during the year exceeds a prescribed monetary limit.
2. User threshold: systematic and continuous soliciting of business activities, or engaging in interaction, with a prescribed number of users in India.

The monetary and user thresholds are prescribed by Rule 11UD of the Income-tax Rules (Rs 2 crore of aggregate payments, and 3 lakh users, respectively). Importantly, SEP applies whether or not the non-resident has a place of business in India, and whether or not the agreement is concluded in India, or the services are rendered in India.

The practical catch is that SEP is a domestic-law concept. Where a DTAA applies, the treaty's narrower "permanent establishment" (PE) definition usually governs, and most treaties have not been amended to recognise SEP. So SEP mainly bites on non-residents in non-treaty jurisdictions, while treaty residents continue to rely on the PE article. This is exactly why analysing the treaty alongside Section 9 is non-negotiable.

Section 9(1)(ii) and 9(1)(iii): Salary Income

Two clauses deal with employment income.

Section 9(1)(ii) deems salary to arise in India if it is earned in India, meaning the services are rendered in India. The Explanation clarifies that salary for the rest period or leave period that is preceded and succeeded by services rendered in India, and which forms part of the service contract, is also treated as earned in India. The location of the employer or the place where salary is credited does not change this. If an NRI flies to India and works here for three weeks, the salary attributable to those three weeks is taxable in India even if the employer is foreign and pays into an overseas account.

Section 9(1)(iii) covers a narrower case. Salary payable by the Government of India to an Indian citizen for services rendered outside India is deemed to arise in India. This is how Indian diplomats and government employees posted abroad remain within the Indian tax net. Note that under Section 10(7), allowances and perquisites paid outside India by the Government to such citizens are exempt, so only the basic salary element is effectively taxed.

For most NRIs, the residential status test under Section 6 and the relevant DTAA's "dependent personal services" article will decide the final outcome. We cover the residency mechanics in detail in our guide to NRI income tax, residential status and DTAA.

Section 9(1)(iv) and 9(1)(v): Dividend and Interest

Section 9(1)(iv) deems a dividend paid by an Indian company outside India to accrue or arise in India. Since the abolition of the Dividend Distribution Tax by the Finance Act 2020, dividends are taxable in the hands of shareholders, so a non-resident shareholder of an Indian company is taxed on the dividend in India, subject to the rate cap in the dividend article of the applicable DTAA (commonly 5%, 10%, or 15%).

Section 9(1)(v) is the source rule for interest. Interest is deemed to arise in India when it is payable by:

• the Government;
• a resident, except where the interest relates to money borrowed and used for a business or profession carried on outside India, or for earning income from a source outside India; or
• a non-resident, where the interest relates to money borrowed and used for a business or profession carried on in India.

The logic is "use of funds". If the borrowed money funds an Indian business, the interest has an Indian source. The withholding rate on interest paid to non-residents is governed by Section 115A read with the interest article of the relevant treaty, and concessional rates apply to specified borrowings such as External Commercial Borrowings under Section 194LC.

Section 9(1)(vi): Royalty

Section 9(1)(vi) deems royalty to arise in India under the same payer-based source rule used for interest: royalty payable by the Government, by a resident (unless for a business outside India), or by a non-resident (where used for a business in India), is deemed to arise in India.

The definition of "royalty" sits in Explanation 2 to Section 9(1)(vi) and is deliberately wide. It covers consideration for the transfer of rights in, or use of, patents, inventions, models, designs, secret formulae, trademarks, and similar property, as well as the imparting of information concerning technical, industrial, commercial, or scientific knowledge.

The Retrospective Expansions

The Finance Act 2012 inserted Explanations 4, 5, and 6 to Section 9(1)(vi), all with retrospective effect from 1 June 1976. These clarified that:

• royalty includes consideration for the transfer of all or any right for use of computer software, irrespective of the medium (Explanation 4);
• royalty applies whether or not the payer has possession or control of the right, and whether or not the right is used directly by the payer or is located in India (Explanation 5);
• "process" includes transmission by satellite, cable, optic fibre, or similar technology, whether or not secret (Explanation 6).

These expansions were intended to bring software licensing, bandwidth and transponder charges, and similar payments within the royalty net.

The Conflict with Narrower DTAA Definitions

Here is the crux of years of litigation. The domestic definition of royalty is wider than the royalty definition in most DTAAs, and the retrospective Explanations cannot unilaterally enlarge a treaty term. In Engineering Analysis Centre of Excellence Pvt Ltd v. CIT (2021), the Supreme Court held that payments by Indian end-users or distributors to non-resident suppliers for the resale or use of shrink-wrapped or off-the-shelf software are not royalty under the relevant DTAAs, because what is transferred is a copyrighted article, not a right in the copyright itself. As a result, no tax was deductible under Section 195 on such payments where a beneficial treaty applied.

The takeaway for an MNC software vendor or an Indian importer of software is to test the payment against the treaty definition of royalty, not only Explanation 2. Where the treaty is narrower and more beneficial, Section 90(2) allows the taxpayer to rely on it. For the rate mechanics on royalty and FTS taxed in India, see our guide to Section 115A: royalty and FTS tax for non-residents.

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

Section 9(1)(vii) applies the same payer-based source rule to fees for technical services. FTS is defined in Explanation 2 as consideration for the rendering of any managerial, technical, or consultancy services, including the provision of technical or other personnel, but it specifically excludes consideration for any construction, assembly, mining, or like project undertaken by the recipient, and consideration that would be chargeable as salary in the recipient's hands.

A key feature, again confirmed by case law, is that the place of rendering the service is not decisive. After the retrospective Explanation to Section 9(2) (Finance Act 2010), FTS is deemed to arise in India whenever the payer is a resident using the service in India, even if the service was performed entirely offshore and the service provider has no presence in India.

The "Make Available" Clause

Several DTAAs override this wide domestic charge through a "make available" condition in the FTS (or "fees for included services") article. Under treaties such as the India-USA DTAA (Article 12) and the India-UK DTAA (Article 13), a technical or consultancy service is taxable as FTS only if it makes available technical knowledge, experience, skill, know-how, or processes to the payer, such that the payer can apply the technology independently in future without the service provider.

If the service is a one-off deliverable that does not transfer enduring technical know-how (for example, a routine market-research report or recurring engineering support where the client cannot replicate the skill), the "make available" test is not satisfied, and the payment is not taxable as FTS under that treaty. This is one of the most valuable treaty positions for Indian companies importing consultancy from the US or UK, and it overrides the broader Section 9(1)(vii) charge through Section 90(2).

How Section 9 Interacts with DTAAs

This is the part that turns a textbook reading of Section 9 into a workable compliance position. Section 90(2) of the Income-tax Act provides that where the Central Government has entered into a DTAA with another country, the provisions of the Act apply to a non-resident only to the extent they are more beneficial to that taxpayer. In other words, the taxpayer can choose the Act or the treaty, whichever results in lower tax.

The sequence a practitioner follows is:

1. Apply Section 9 to test whether the income is deemed to arise in India at all. If it does not, India has no charge and the treaty analysis is academic.
2. If Section 9 catches the income, identify the relevant DTAA and the specific article (business profits, royalty, FTS, interest, dividend, capital gains, dependent personal services).
3. Compare the outcomes. The treaty may exempt the income (for example, business profits without a PE), cap the rate (royalty or FTS at 10%), or impose a condition the domestic law does not (the "make available" test).
4. Apply Section 90(4) and 90(5). A non-resident claiming treaty benefits must furnish a Tax Residency Certificate (TRC) from its home country and, where required, Form 10F. Without these, the benefit can be denied.

A treaty can limit India's taxing right even where Section 9 clearly deems income to arise here. The classic example is business income: SEP may create a business connection under Section 9(1)(i), but if the non-resident is a treaty resident with no permanent establishment in India, the treaty's business profits article (usually Article 7) prevents India from taxing those profits at all.

Worked Examples

IT services exporter (Indian company): An Indian software firm pays a US consultant for a one-time advisory engagement performed entirely in the US. Under Section 9(1)(vii) this is FTS deemed to arise in India, triggering withholding under Section 195. But under Article 12 of the India-USA DTAA, the "make available" test is not met because no technical knowledge is transferred for independent future use. Relying on Section 90(2) and a valid TRC plus Form 10F, the Indian firm can take the position that no tax is deductible.

NRI drawing a foreign salary: An NRI employed by a Dubai company spends 40 days working in India during the year. The salary for those 40 days is "earned in India" under Section 9(1)(ii) and is taxable here, regardless of where it is paid. The India-UAE DTAA's dependent personal services article and the day-count test then determine whether relief applies.

MNC licensing software into India: A US company licenses standardised, off-the-shelf software to an Indian distributor. Explanation 4 to Section 9(1)(vi) treats the payment as royalty under domestic law. But following the Supreme Court ruling in Engineering Analysis, the narrower royalty definition in the India-USA DTAA does not cover the sale of a copyrighted article, so the payment is not royalty and no Section 195 withholding is required where the treaty is invoked with proper documentation.

A Note on the New Income-tax Act, 2025

The Income-tax Act, 2025 is being implemented to replace the 1961 Act. The source-rule architecture, business connection, SEP, the royalty and FTS source tests, and the treaty-override principle, carries forward in substance under the new law, though the section numbering is reorganised. Because taxpayers, advisors, and existing judicial precedent continue to reference the Section 9(1) sub-clauses of the 1961 Act, this guide retains those citations. Always confirm the corresponding provision once the new Act and its rules are fully notified for the relevant assessment year.

FAQ

Frequently Asked Questions

What is the basic purpose of Section 9 of the Income-tax Act?

Section 9 is a deeming provision. It lists the categories of income that are treated as accruing or arising in India even when the activity, payer, or recipient is partly or wholly outside India. This is what allows India to tax a non-resident on Indian-source income such as a business connection, salary earned in India, dividends from Indian companies, interest, royalty, and fees for technical services.

What is Significant Economic Presence (SEP) and when did it apply?

SEP is an extension of the business connection concept inserted as Explanation 2A to Section 9(1)(i) by the Finance Act 2020, operative from assessment year 2022-23. It treats a non-resident as having a business connection in India if aggregate payments from transactions in goods, services, or property with persons in India cross a prescribed monetary limit (Rs 2 crore under Rule 11UD), or if the non-resident systematically solicits or interacts with a prescribed number of users (3 lakh users). It applies even without any physical presence in India.

Does SEP override a tax treaty?

No. SEP is a domestic-law concept. Where a DTAA applies, the treaty's permanent establishment (PE) definition governs, and most treaties have not been amended to include SEP. So SEP mainly affects non-residents in countries with which India has no DTAA. Treaty residents continue to rely on the PE article, which Section 90(2) preserves where it is more beneficial.

Is payment for off-the-shelf software taxable as royalty in India?

Under domestic law, Explanation 4 to Section 9(1)(vi) treats software payments as royalty. However, in Engineering Analysis Centre of Excellence Pvt Ltd v. CIT (2021), the Supreme Court held that payments for shrink-wrapped or off-the-shelf software are not royalty under the narrower DTAA definitions, because a copyrighted article is sold rather than a right in the copyright. Where a beneficial treaty applies with proper documentation, no Section 195 withholding is required.

What is the 'make available' clause in DTAAs?

The 'make available' clause appears in the fees for technical services article of several treaties, including the India-USA (Article 12) and India-UK (Article 13) DTAAs. It restricts taxation of technical or consultancy services to cases where the service transfers technical knowledge, skill, or know-how that the payer can then apply independently in future. If no such enduring know-how is transferred, the payment is not taxable as FTS under that treaty, overriding the wider Section 9(1)(vii) charge.

How does Section 90(2) help a non-resident taxpayer?

Section 90(2) provides that for a non-resident from a country with which India has a DTAA, the provisions of the Income-tax Act apply only to the extent they are more beneficial than the treaty. The taxpayer can therefore choose the Act or the treaty, whichever results in lower tax. A treaty can exempt the income, cap the rate, or add a condition (such as 'make available') that the domestic law does not have.

What documents does a non-resident need to claim treaty benefits?

Under Section 90(4) and 90(5), a non-resident claiming DTAA benefits must furnish a Tax Residency Certificate (TRC) issued by the home country tax authority, and where the TRC does not contain prescribed particulars, Form 10F as well. Beneficial ownership of the income may also need to be established. Without valid documentation, the assessing officer can deny the treaty rate and apply domestic withholding.

Is salary earned by an NRI during a short India visit taxable here?

Yes. Section 9(1)(ii) deems salary to arise in India if the services are rendered in India, regardless of where the employer is located or where the salary is paid. So salary attributable to days physically worked in India is taxable here. Relief may then be available under the residential status rules in Section 6 and the dependent personal services article of the relevant DTAA, subject to day-count thresholds.

---

Sources and verification: This guide is based on Section 9 of the Income-tax Act, 1961, specifically sub-clauses 9(1)(i) (business connection, including Explanation 2 on dependent agents and Explanation 2A on Significant Economic Presence inserted by the Finance Act 2020), 9(1)(ii) and 9(1)(iii) (salary), 9(1)(iv) and 9(1)(v) (dividend and interest), 9(1)(vi) (royalty, including Explanation 2 and the retrospective Explanations 4, 5, and 6 inserted by the Finance Act 2012), and 9(1)(vii) (fees for technical services, with Explanation 2). SEP thresholds are per Rule 11UD of the Income-tax Rules, 1962 (Rs 2 crore aggregate payments and 3 lakh users). Treaty interaction is governed by Section 90(2), 90(4), and 90(5), with the "make available" condition referenced from Article 12 of the India-USA DTAA and Article 13 of the India-UK DTAA. The software royalty position reflects the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt Ltd v. CIT (2021) 432 ITR 471. Withholding on non-resident payments is under Section 195, with rates read alongside Section 115A. The Income-tax Act, 2025 reorganises these provisions but the source-rule concepts carry forward. All sub-sections, thresholds, and treaty articles should be verified against the bare Act, the relevant DTAA text, and the latest CBDT notifications before applying to a specific transaction.