Income tax liability arising out of a ‘business connection’ in India


Molina Swarup Asthana

In one of my previous articles I discussed the liability of non-resident Indians (NRIs) to pay income tax in India in certain circumstances. One of the circumstances mentioned was the liability of NRIs on income arising through or from a ‘business connection’, under section 9 of the Indian Income Tax Act (the Act). Such Income will be deemed to accrue or arise in India, therefore NRIs are liable to be taxed on such income.

This article expands on tests to determine a ‘business connection’ as it may be of some interest to NRIs who have left the country to reside here yet have some income from a ‘business connection’ back home, through family or old associates. This would qualify as income accruing or arising in India and therefore incur income tax in India.

Even though section 9 of the Act makes an NRI liable to be taxed on such income, the term ‘business connection’ has not been defined in the Act. The contextual meaning to the term has therefore been given through case law and has been quite wide including within its ambit ‘professional connections’.

A ‘business connection’ involves a relation between a business carried on by an NRI, which yields profits and gains, and any activity in India that contributes directly or indirectly to the earning of those profits and gains. The various forms in which a ‘business connection’ can take place include carrying on a part of the main business or activity incidental to the main business of the NRI through an agent, or it may merely be a relation between the business of the NRI and the activity in India, which facilitates or assists in carrying on of that business. In each case, the question whether there is a business connection from or through which income arises or accrues is a mixed question of fact and law, which is determined upon the facts and circumstances of that case.

The following can be considered as tests to determine ‘business connection’:


One of the tests of a ‘business connection’ is an element of continuity between the business of the NRI and the activity in India. It should involve some continuous operation and continuous business activity. An isolated or one-off transaction will normally not be considered a ‘business connection’. However, the volume of activity, and not the time factor, is the test of continuity as continuity does not signify any length of time.


The commonality of mutual interest must run though the activity carried on outside and inside India and this connection must be ‘real and intimate’. This commonality may arise through the sharing of profit or in some other manner but would generally involve more than mere transaction of purchase and sale between agent and principal. It would, however, include a branch, factory, agency, receivership or management but can exist without any regular agency, branch or other definite organization.


There must exist a business relationship in order to constitute a business connection. That means that there must exist a common intention between the parties to carry on and continue the business and not just a casual relationship.

The courts have held that the expression ‘business connection’ postulates a real and intimate relation between the trading activity carried on outside the taxation territories i.e. India and trading activity within such territories which contributes to the earning of income by the NRI in his trading activity. The courts also observed that “the expression ‘business connection’ undoubtedly means something more than business”. It must have all the elements discussed in the preceding paragraphs to fall within the ambit of section 9 of the Act.

In short, what is necessary is that there should be
(i)      a business in India;
(ii)    a connection between an NRI or company and that business or vice-versa; and
(iii)   that the NRI or even the resident has directly or indirectly earned an income by virtue of or though such connection.

It does not matter whether the income to the NRI has flown directly from the business connection or indirectly.


The ‘business connection’ concept is not applicable in regard to residents of any country with which India has a tax treaty. All treaties generally stipulate a ‘permanent establishment’ as a basis for taxing the residents of a country on their business income in the source country. Australia has recently signed a tax protocol with India that stipulates that only the profits attributable to an enterprise’s permanent establishment (branch) in Australia or India may be taxed in that country. This removes the force of attraction rule in the existing treaty which allows for the taxation of indirect profits connected with a permanent establishment.

Where income is from operations which are merely confined to the purchase of goods in India for the purposes of export, it is not ‘deemed income’ for the purposes of Section 9 of the Act.

Also a relationship between an NRI and a resident which is merely limited to collection of news and views in India for transmission out of India and operations confined to shooting cinematograph films in India by NRIs is excluded from the ambit of the term ‘business connection’.


It is advisable that an NRI (including a non-resident company) seek legal advice on their tax liability if they believe that they may be liable to pay income tax in India as a result of a ‘business connection’ that may have been voluntarily or involuntarily established.

Molina is a legal practitioner admitted to practice both in India and Australia. She has significant experience in India in general litigation and also corporate and commercial, having practiced in the Supreme Court of India (with matters being reported in the newspapers) and then in the corporate area in a top law firm and also as an in-house counsel for a big business group.

She is now working as a Principal Solicitor with the Victorian Government Solicitor’s Office (Department of Justice), having practiced as a mergers and acquisition lawyer with Minter Ellison Lawyers in Melbourne and also worked in the banking and finance area with Clayton Utz, Melbourne.

The opinions contained in these articles are the personal views of the author.


  1. I’m impressed, I need to say. Really not often do I encounter a weblog that’s each educative and entertaining, and let me let you know, you’ve got hit the nail on the head. Your idea is outstanding; the problem is something that not enough people are speaking intelligently about. I’m very comfortable that I stumbled across this in my search for one thing regarding this.