Taxation is an essential component of any economy, ensuring that the government has the necessary funds to finance public services and infrastructure. In India, the Income Tax Act, 1961, governs the taxation of individuals and entities. One crucial concept in this framework is "income accrued or deemed to accrue or arise in India", which plays a fundamental role in determining tax liability.

This article delves into the concept, its legal basis, tax implications, and how it affects different categories of taxpayers, including residents, non-residents, and foreign companies.

Legal Framework Under the Income Tax Act, 1961

The determination of whether income is taxable in India depends primarily on the residential status of the taxpayer, as well as the source of income. Sections 5 and 9 of the Income Tax Act, 1961 are pivotal in this regard.
Section 5 specifies that Indian residents are liable to pay tax on their global income, whereas non-residents are taxed only on income that is received or accrues (or is deemed to accrue) in India.
Section 9 explicitly defines income that is deemed to accrue or arise in India, even if the transaction is executed outside the country.

Understanding Income Accrued in India

What Does "Accrual of Income" Mean?

Income is said to have accrued in India when the right to receive it arises in India. This means that if income is earned due to business operations, services, or transactions carried out in India, it is taxable in India, regardless of where the payment is made.

Examples of Income Accrued in India

• Salary Income: If an individual is employed in India and receives a salary for services rendered within the country, the income accrues in India and is subject to tax.
• Business Profits: If a business operates in India and earns profits from its operations, the income accrues in India.
• Interest on Deposits: If an individual or entity earns interest from an Indian bank or an Indian company, the income is accrued in India.
• Rental Income: Rent earned from immovable property situated in India is accrued in India and is taxable.

Case Law Example

• In CIT v. Chunilal B. Mehta (1938), it was held that for income to accrue, there must be a right to receive it, and mere expectation is not sufficient.

Understanding Income Deemed to Accrue or Arise in India

Concept of Deemed Income

Section 9(1) of the Income Tax Act lays down various scenarios where income is deemed to accrue or arise in India, even if the income is received outside India. This provision is crucial for non-residents and foreign entities conducting business with India.

Categories of Income Deemed to Accrue or Arise in India

1. Income from Business Connection (Section 9(1)(i))
   • If a non-resident has a business connection in India (such as a branch office, agent, or other significant operations), then a portion of its income is taxable in India.
   • Example: A foreign company operating through an agent in India is deemed to have a business connection, making its income taxable in India.
2. Income from Property or Assets in India
   • Any capital gains arising from the sale of property, assets, or shares in Indian companies are deemed to accrue in India.
   • Example: If a non-resident sells land situated in India, the gains are taxable in India.
3. Salaries Paid for Services in India (Section 9(1)(ii))
   • If a non-resident is employed and renders services in India, their salary is deemed to accrue in India.
   • Example: A foreign consultant working in India for a few months is liable to pay tax on earnings for that period.
4. Dividend Income (Section 9(1)(iv))
   • Dividends paid by an Indian company to a non-resident shareholder are deemed to arise in India.
5. Interest, Royalties, and Fees for Technical Services (Section 9(1)(v), (vi), (vii))
   • Interest paid by an Indian entity to a foreign lender is taxable in India.
   • Royalties paid for the use of intellectual property or trademarks in India are deemed to accrue in India.
   • Fees paid for technical services provided by a non-resident to an Indian company are taxable.

Landmark Case Law

• CIT v. R.D. Aggarwal & Co. (1965): The Supreme Court held that a business connection includes any real and continuous relationship with a non-resident that results in income accruing in India.

Tax Implications for Residents and Non-Residents

Residents

• Indian residents are taxed on their global income.
• Even if a resident earns income abroad, it is taxable in India unless covered under the Double Taxation Avoidance Agreement (DTAA).

Non-Residents (NRIs, Foreign Companies, etc.)

• Taxable only on income that is received, accrues, or is deemed to accrue in India.
• Non-residents can claim benefits under DTAA to avoid double taxation.

Double Taxation Avoidance Agreement (DTAA)

• India has signed DTAAs with multiple countries to prevent double taxation.
• If income is taxed in both India and another country, tax relief mechanisms such as tax credit or tax exemption may apply.

Recent Amendments & Judicial Interpretations

1. Significant Economic Presence (SEP) Amendment (Finance Act, 2020)
   • A non-resident entity having a significant economic presence in India can be deemed to have a business connection in India.
   • Example: Digital service providers with user transactions in India may be taxed under this provision.
2. Equalization Levy
   • A tax on digital advertisements and services provided by foreign companies to Indian businesses.
   • Aimed at ensuring fair taxation for digital businesses earning revenue from India.

Conclusion
The concept of income accrued or deemed to accrue or arise in India is critical in determining tax liability under Indian law. Understanding the provisions of Sections 5 and 9 of the Income Tax Act is essential for individuals, businesses, and foreign entities engaged in financial transactions with India.

Given India's evolving tax landscape, businesses and non-residents must stay updated with legal changes and judicial interpretations to ensure compliance. Consulting tax professionals or leveraging DTAA provisions can help optimize tax liabilities and avoid legal complications.