Section 9 of Income Tax Act, 1961 deals with income deemed to accrue or arise in India. However, many explanations have been provided regarding this but still the scope of confusion prevails in this section. For the removal of doubt, CBDT has provided a clarification regarding Explanation to Sec. 9(1) (i).   

As per Sec 9(1): The following incomes shall be deemed to accrue or arise in India-

“All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.”

The Finance Act, 2012 inserted Explanation 5 to the above. This reads as:

“For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India.”

After the insertion of this Explanation, doubts about its applicability aroused regarding the transactions not resulting in any transfer, directly or indirectly of assets situated in India. As per this Explanation, dividend income declared by a foreign company outside India shall be taxable in India, which will result in double taxation.

The Explanatory Memorandum clearly provides that the amendment of section 9(l) (i) was to reiterate the legislative intent in respect of taxability of gains having economic nexus with India irrespective of the mode of realisation of such gains.

 

Thus, Explanation 5 would be applicable in relation to deeming any income arising outside India from any transaction in respect of any share or interest in a foreign company or entity, which has the effect of transferring, directly or indirectly, the underlying assets located in India, as income accruing or arising in India.

 

Declaration of dividend by such a foreign company outside India does not have the effect of transfer of any underlying assets located in India. It is therefore, clarified that the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would not be deemed to be income accruing or arising in India by virtue of the provisions of Explanation 5 to section 9 ( I ) (i) of the Act.

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