Section 9(1)(vii)(b) — The True Scope of “Foreign Source” Exclusion: A Judicial and Doctrinal Analysis
The Cross-Border Grey Zone
When an Indian company pays fees for technical or consultancy services (FTS) to a non-resident, the first instinct is to examine Section 9(1)(vii) of the Income-tax Act, 1961.
This provision deems such income to accrue or arise in India if the payer is resident.
Yet Parliament consciously introduced a carve-out — the foreign source exclusion — under Section 9(1)(vii)(b):
“Provided that nothing contained in this clause shall apply where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India.”
This single proviso is a lifeline for Indian enterprises globalizing their operations, and also one of the most frequently misapplied clauses by tax authorities.
Legislative Intent and the Territorial Nexus Doctrine
The deeming fiction under Section 9(1)(vii) was enacted to tax income where the source of payment lies in India, even when services are performed abroad.
However, the foreign source exclusion acts as a constitutional restraint — preserving the territorial nexus principle affirmed by the Supreme Court in GVK Industries Ltd. v. ITO (2015) 371 ITR 453 (SC).
India’s taxation power extends only to income with a real connection to its territory. The exclusion thus prevents extraterritorial overreach and aligns with the source-based taxation model recognized in OECD commentary.
Judicial Evolution — Divergent Interpretations
Over time, courts have taken two distinct approaches while interpreting the exclusion:
A. Restrictive Line
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Havells India Ltd. v. DCIT (2012) 208 Taxman 254 (Del)
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Shriram Capital Ltd. v. DCIT (2021) Chennai ITAT
In these rulings, the exclusion was denied because the foreign business was not “carried on” abroad in the year of payment, or the services had a remote or preparatory connection with export activities.
Authorities reasoned that a resident payer automatically triggers taxability unless a real, ongoing foreign business exists — effectively nullifying the benefit intended by Parliament.
B. Liberal / Purposive Line
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Motif India Infotech (P) Ltd. v. DCIT (2010) 38 SOT 505 (Ahd)
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Hofincons Infotech & Industrial Services (P) Ltd. v. ITO (2013) 33 taxmann.com 249 (Chennai)
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QAI India Ltd. v. ACIT (2018) 95 taxmann.com 193 (Del HC)
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Bajaj Hindustan Ltd. v. ACIT (2015) ITA No. 1981/Mum/2010
Here, courts upheld the exclusion when the ultimate benefit of services accrued to a foreign project, client, or source, even if the contract or payment originated in India.
The decisive test was “where the benefit is consumed, not where the cheque is signed.”
Comparative Judicial Summary
| Judicial Approach | Key Cases | Principle Evolved | Implication for Taxpayers |
|---|---|---|---|
| Restrictive | Havells India Ltd. (Del HC); Shriram Capital Ltd. (Chennai ITAT) | Source linked to Indian control or domestic business presence | FTS taxable even for preparatory foreign projects |
| Liberal / Purposive | Motif India Infotech (Ahd ITAT); Hofincons Infotech (Chennai ITAT); QAI India Ltd. (Del HC); Bajaj Hindustan Ltd. (Mum ITAT) | Focus on utilization and benefit abroad | Strengthens defense for export-oriented or foreign client-linked services |
Analytical Insight — The Compliance Dimension
Most disputes arise from documentation lapses rather than substantive misinterpretation.
To successfully claim the exclusion, taxpayers should demonstrate:
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Foreign Utilization Evidence — Contracts, client correspondence, or project documentation proving services were for overseas clients or projects.
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Revenue Linkage — Invoices or financial statements showing income earned or to be earned from an identifiable foreign source.
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Purpose Test — Clear board resolution or business note linking the service payment to an overseas expansion, bid, or assignment.
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Form 15CB / 15CA Documentation — Correct characterization of FTS vis-à-vis DTAA to avoid TDS mismatches and 37BA credit disputes.
Without these, even legitimate foreign-linked services risk being taxed domestically.
Interplay with DTAA
Where a Double Taxation Avoidance Agreement (DTAA) applies, Article 12 (Fees for Technical Services) usually restricts taxation to the recipient’s residence country unless services are made available or performed through a PE in India.
If the DTAA condition is more beneficial, Section 90(2) allows it to override domestic law — further reinforcing the foreign source exclusion.
Policy and Practical Perspective
As India aspires to be a global service hub, interpreting Section 9(1)(vii)(b) narrowly undermines competitiveness and deters cross-border collaborations.
The clause was meant to facilitate outward service integration, not penalize it.
A balanced interpretation — one that respects both revenue protection and global business realities — is essential.
Until legislative clarification or Supreme Court guidance settles the divergence, the safest course for professionals is:
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Substantive justification (why the service benefits a foreign source),
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Procedural compliance (Form 15CB/15CA with adequate reasoning), and
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Preservation of contemporaneous evidence.
These three together form the “holy trinity of cross-border tax certainty.”
Conclusion
Section 9(1)(vii)(b) is not an escape clause; it is a deliberate policy instrument to ensure that India taxes only what truly belongs to its economy.
Courts that uphold its purposive reading reaffirm not only legislative intent but also India’s credibility as a jurisdiction that honours global tax principles.
In essence: The exclusion must be interpreted through the prism of economic benefit — where the service lives, not where it is born.
