The quiet expansion of Section 9(1)(viii)
I was pleasantly surprised to see that an interesting change made to the new Income-tax Act, 2025 has remained under the radar for so long. One that has a significant implication for Non-resident Taxation moving forward.
Section 9(1)(viii) of the 1961 Act states that any sum of money referred to in Section 2(24)(viia) (i.e income from other sources u/s 56(2)(x)) paid by a resident in India to a non-resident shall "deemed to accrue or arise in India" and will be taxable in India. Thus simply put, any sum of money gifted to a non-resident by a resident shall be taxable in India. The text is reproduced here for reference:
"(viii) income arising outside India, being any sum of money referred to in sub-clause (xviia) of clause (24) of section 2, paid on or after the 5th day of July, 2019 by a person resident in India to a non-resident, not being a company, or to a foreign company."
But interestingly, this is not what the Ministry wanted to insert in the first place. The Finance Bill (No. 2) of 2019 proposed the following text
"(viii) income of the nature referred to in sub-clause (xviia) of clause (24) of section 2, arising from any sum of money paid, or any property situate in India transferred, on or after the 5th day of July, 2019 by a person resident in India to a person outside India"
To the discerning eye, it would appear that this draft is significantly different from what was eventually enacted as 9(1)(viii). Particularly:
The phrase "of the nature" was removed. This was perhaps because the enacted clause was far limited in its scope than what was proposed. Thus, while "of the nature" worked well for the wide ambit proposed initially, it was consequently removed.
Removing "any property situate" is significant and indicates a key error. Section 2(24)(viia) refers to both "sums of money" and "value of property" as computed under 56(2)(x), but Section 9(1)(viii) only brings one facet to tax i.e "sums of money paid".
Of course, this drafting error did not remain unnoticed. Mr. Datar -- in revising Kanga & Palkhiwala -- opined as follows:
This seems to be a case of faulty drafting and as the statute reads today cl. (viii) will include only "any sum of money" received by a non-resident until an amendment is made to include "property."
The Income-tax Act, 2025
The new act was brought in with the object of simplifying the statutory language and to improve structural clarity. Though, in doing so, the Ministry ended up substantively altering various provisions. It appears that Section 9(8), ITA 2025 is one such section.
The new Section 9(8) attempts to partly patch the faulty drafting identified in Section 9(1)(viii). The part relevant to our discussion reads as follows:
"(8) Income arising outside India, in the nature of a sum referred to in Section 2(49)(u) paid by a person resident in India"
The Legislature has brought back some of the same language that was part of the originally proposed 9(1)(viii). Key changes in this regard are
"in the nature of a sum" has been brought back, indicating that the scope of the new provision has been intentionally enlarged.
The phrase "sum referred to in Section 2(49)(u)" is also interesting because it no longer narrowly specifies the form of receipt. While Section 2(49)(u) still contains both "sums of money" and "value of property" (corresponding to 2(24)(viia)) the Legislature has not narrowly defined the nature of receipt taxable under this clause.
A valid counterpoint would be that sub-section still states "any sums (...) paid" which would indicate that the Legislature still intends to tax only "sums of money." Since only money can be paid, property must be transferred.
Even so, it does not underestimate the argument that the phrase has in-fact been given an enlarged scope. The language of the new provision manifestly indicates this.
"any sums paid" - Money ?
I intend to argue that while the 1961 Act was concerned with taxing "sums of money" specifically, the 2025 Act taxes both "money" and also money's worth. The jurisprudence crystallised through judicial interpretation appears to bolster this argument. I discuss some of these cases in the following sections.
CIT v. Vellore Electric Corporation ([1998] 101 Taxman 616 (Madras)[29-10-1997])
The Hon'ble Madras High Court held that the expression, ‘paid’ in section 36(1)(v) cannot be construed or confined only to the payment of cash alone during the relevant assessment year. In the present case, the assessee made payments to the gratuity fund party in cash and partly transferred approved securities to the gratuity fund. Applying the principle laid down by the Supreme Court of India in Raja Mohan Raja Bahadur v. CIT [1967] 66 ITR 378 it was held that:
(W)hen the trustees of the gratuity fund received the approved securities in discharge of the assessee’s obligation to pay gratuity liability to the said fund, it must be taken that the money value embedded in the value of the security was deemed to have been received by the trustees.
The phraseology of Section 36(1)(v) is very similar to Section 9(8), and is reproduced for reference:
"(v) any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust.
It was held that the phrase "any sum paid" could not be limited to mere transfer of cash, and included money and money's worth.
It is also worth noting the Supreme Court's position in Raja Mohan Raja Bahadur (supra) which the High Court has wholly relied on. In that case, the principal issue before the Hon'ble Supreme Court was whether the receipt of encumbered estate bonds amounted to receipt of cash. The assessee was in the money-lending business and had undertaken a legal recovery, where he was paid partly in cash, and partly in Encumbered Estate Bonds. The Court held that the receipt of bonds is the receipt of income and once title to a convertible asset vests with the assessee the income the "money's worth" embedded in it is also received.
On this line, the Madras High Court held that when a obligation is discharged through transfer of valuable securities, it constitutes the ambit of "sums paid" under 36(1)(v).
Further in the case of CIT v. Vijay Ship Breaking [2003] 129 Taxman 120 (Gujarat) the Hon'ble Gujarat High Court has held the following in the context of usance charges as "interest" under Section 195.
As per OECD Commentary (para 110.06), the term "paid" in paragraph 1 of the Article concerning taxation of interest has a very wide meaning "since the concept of payment means fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom". Payment would therefrom mean the fulfilment of the claim to receive interest in whatever form it may actually occur (See Klans Vogel on Double Taxation Convention, 3rd Edition at page 714). Thus, payment of interest by means of irrevocable letter of credit by the buyer will be considered as an interest paid to the seller.
It appears on Taxmann that the Gujarat High Court decision has been reversed by the Supreme Court, but the reversal was not on merits since the Legislature had retrospectively amended the law for shipping companies retrospectively. A nuanced discussion on the precedent value of the Gujarat High Court decision is available in Assistant Commissioner of Income-tax, Circle-1, Margao vs. Bhavani Enterprises [2014] 52 taxmann.com 489 (Panaji - Trib.)/[2015] 152 ITD 339 (Panaji - Trib.)[28-08-2014]. (Annex - D) (Paragraph 3)
Although the OECD Commentary has limited persuasive value, the term "paid" is defined twice in the Commentary, once under Art. 10 and later under Art. 11. Both definitions are identical and indicate the broad context in which the phrase is used internationally (Annex - E).
The term “paid” has a very wide meaning, since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the shareholder in the manner required by contract or by custom. (Commentary on Art. 10 Para 7)
The word “payment”, used in the definition, has a very wide meaning since the concept of payment means the fulfilment of the obligation to put funds at the disposal of the creditor in the manner required by contract or by custom. (Commentary on Art. 11 Para 8.3)
Thus a view can be taken that generally the phrase "any sums paid" also includes sums paid both as money or money's worth. Since the use of the phrase "any sums paid" as against "any sum of money" widens the scope marginally, yet significantly.
The Possible Implication
Tax professionals have a particular talent for imagining the worst possible outcome of any given change, and this provision offers fertile ground. Consider a resident that discharges foreign liabilities, say a loan owed to a foreign AE, through the transfer of securities rather than cash. Or consider a resident that sells shares to a non-resident below fair market value. In either scenario, the shortfall between the actual consideration and the fair market value could now be brought to tax under Section 9(8). This is a meaningfully different exposure from what existed under the 1961 Act. Capital gains on the transfer of a capital asset situated in India were already taxable under Section 9(1)(i). Section 9(8) could now additionally reach the artificial income notionally arising from a below FMV transaction, a tax base that simply did not exist before.
A caveat is in order here. The "paid" jurisprudence relied on above (Vellore Electric, Raja Mohan Raja Bahadur, the OECD Commentary) arose in the context of deductions and treaty characterisation, provisions that confer a benefit on the assessee. Courts have historically been willing to read such provisions liberally, often to give effect to the relieving purpose behind them. Section 9(8) does the opposite. It is a charging provision that expands India's taxing jurisdiction over a non-resident, and the settled canon requires such provisions to be construed strictly rather than liberally.
Whether a liberal reading of "paid" developed for beneficial provisions can simply be transplanted onto a charging provision remains, in my view, the central question this argument still has to answer. Though even if read literally it is possible to take the position that even valuable securities which are in the nature of sums under Section 2(49)(u) could be held as taxable under 9(8). The legislative intent appears to broaden the scope of the language used in the Section.