Research & Articles

Business Connection Comes Before Permanent Establishment: How India Taxes a Foreign Business With No Office Here

Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt, Dual-qualified lawyer (India and England & Wales) | Bar Council of Gujarat, Enrolment G/504/2008 | SRA (non-practising) Registration No. 492 477 | ADIT, Chartered Institute of Taxation, London

Published: 19 August 2026 | Last reviewed: 19 August 2026

Scope: this article is written against the Income-tax Act, 2025 as in force on 19 August 2026, and refers to the Income-tax Act, 1961 as it stood before its repeal with effect from 1 April 2026. It addresses Indian law and the operation of India’s tax treaties as a matter of Indian law. It does not address the law of any other jurisdiction, and nothing in it constitutes advice on foreign law.

India’s domestic charge on a foreign business is business connection under section 9(9) of the Income-tax Act, 2025, not permanent establishment. Permanent establishment is a treaty concept, and it becomes available only once treaty entitlement is separately established under section 159(8). For interest, royalty and fees for technical services, section 9(11) makes the charge apply whether or not the non-resident has any presence in India at all.

Index of Topics

The question foreign businesses ask, and the question the Act asks
The four source limbs in section 9(2)
What business connection includes under section 9(9)
The agency limb: contracts, stock and orders
Significant economic presence: nexus without any presence
The attribution limit, and what the 2025 Act changed
Interest, royalty and fees for technical services: a charge that needs no presence
Permanent establishment is a treaty defence, not a domestic charge
Treaty entitlement is a condition, not an assumption
Where the exclusions actually bite

1. The question foreign businesses ask, and the question the Act asks

In short: Foreign businesses ask whether they have a permanent establishment in India. Indian domestic law does not impose the charge by reference to permanent establishment. It imposes it by reference to business connection, an asset or source of income in India, property in India, or the transfer of a capital asset situated in India, under section 9(2) of the Income-tax Act, 2025.

The distinction is not academic. Business connection is wider than a treaty permanent establishment and it is tested first. If no business connection or other source limb is engaged, there is nothing for a treaty to relieve. If one is engaged, the charge exists as a matter of Indian law, and the permanent establishment analysis becomes relevant only if the taxpayer is entitled to the treaty and says so on the record.

The practical consequence is a sequencing error that recurs in inbound structures. Groups design around Article 5 of a treaty, satisfy themselves that no fixed place, service or agency permanent establishment exists, and treat the Indian question as closed. It is not closed, because the domestic charge has not been addressed and because treaty access is itself conditional.

2. The four source limbs in section 9(2)

In short: Section 9(2) deems income accruing or arising, directly or indirectly, through or from any asset or source of income in India, any property in India, any business connection in India, or the transfer of a capital asset situated in India, to accrue or arise in India. The words “directly or indirectly” apply to all four limbs.

Three points follow from the drafting. The limbs are alternatives, so a foreign enterprise that fails the business connection test may still be caught by an asset or source of income in India. The words “directly or indirectly” carry the indirect transfer regime, which section 9(10) develops through the substantial value test, a threshold of ten crore rupees and a fifty per cent value proportion, with carve-outs where the transferor holds no right of management or control and not more than five per cent of voting power, share capital or interest.

Section 9(13) then defines “through” to mean and include “by means of”, “in consequence of” or “by reason of”. That is a deliberately wide connector and it should be read before concluding that an arrangement stands outside section 9(2).

3. What business connection includes under section 9(9)

In short: Section 9(9)(a) provides that business connection includes any business carried out in India of which all or part of the operations are carried out in India, and a significant economic presence in India. It is an inclusive definition, so the two named categories do not exhaust it.

The first category turns on operations, not on premises, incorporation or registration. A foreign enterprise that performs part of its operations in India has a business connection in respect of that business even if it has no office, no subsidiary and no employees on a payroll in India. The second category, significant economic presence, dispenses with operations in India altogether and is dealt with below.

Because the definition is inclusive, the general law on what amounts to a business connection continues to matter alongside the statutory limbs. The statutory limbs tell you what is certainly included; they do not tell you what is excluded, and section 9(9)(c) does that job separately.

4. The agency limb: contracts, stock and orders

In short: Under section 9(9)(b), a business carried out in India includes activity carried out through a person who, acting on behalf of the non-resident, habitually exercises authority to conclude contracts, habitually concludes contracts, or habitually plays the principal role leading to their conclusion, and also a person who habitually maintains a stock of goods for delivery, or habitually secures orders mainly or wholly for the non-resident.

The contracts limb is qualified. It bites where the contracts are in the name of the non-resident, or for the transfer of ownership of or the grant of the right to use property owned by the non-resident or which it has the right to use, or for the provision of services by the non-resident. The phrase “habitually plays the principal role leading to conclusion of contracts” is the material one: an Indian person who negotiates every commercial term and leaves signature to be executed abroad is within the language.

The orders limb reaches further than the contracts limb. A person who habitually secures orders in India mainly or wholly for the non-resident, or for that non-resident and other non-residents under common control, brings the activity within business connection without any authority to conclude anything. Section 9(9)(b)(ii) then deems a broker, general commission agent or other agent working mainly or wholly for the principal non-resident or its connected non-residents not to have independent status.

5. Significant economic presence: nexus without any presence

In short: Under section 9(9)(d), a non-resident has a significant economic presence where transactions in goods, services or property with any person in India, including the provision or download of data or software, exceed a prescribed aggregate of payments in the tax year, or where there is systematic and continuous soliciting of business or interaction with a prescribed number of users in India.

The provision then removes the three defences a foreign supplier would ordinarily raise. It applies irrespective of whether the agreement for the transactions or activities is entered into in India, irrespective of whether the non-resident has a residence or place of business in India, and irrespective of whether the non-resident renders any services in India. A wholly offshore supplier contracting under foreign law with Indian customers is squarely within the language once the threshold is crossed.

Section 9(9)(g) extends what counts as attributable income here: advertisement targeting a customer resident in India or accessing it through an Indian internet protocol address, the sale of data collected from such persons, and the sale of goods or services using such data. The thresholds are prescribed rather than stated in the Act, and they should be checked against the current Rules before any position is taken on them.

6. The attribution limit, and what the 2025 Act changed

In short: Section 9(9)(f) provides that only income reasonably attributable to operations carried out in India, where not all operations of the business are carried out in India, and to the transactions or activities constituting significant economic presence, is deemed to accrue or arise in India from any business connection.

This is a change worth noticing. Under the Income-tax Act, 1961, the corresponding attribution limitation in Explanation 1(a) to section 9(1)(i) was expressed so as to exclude a business connection arising on account of significant economic presence. The 2025 Act brings both within a single attribution rule. A significant economic presence therefore now carries an express statutory limit on what may be deemed to accrue in India, rather than sitting outside that limit.

What “reasonably attributable” means in a given case is a separate and heavily contested question, and where an Indian associated enterprise is remunerated for the relevant functions it is bound up with transfer pricing. That interaction is dealt with separately in our analysis of transfer pricing and permanent establishment disputes.

7. Interest, royalty and fees for technical services: a charge that needs no presence

In short: Section 9(11) provides that for the interest, royalty and fees for technical services limbs in sections 9(5), 9(6) and 9(7), income of a non-resident is deemed to accrue or arise in India and included in total income whether or not the non-resident has a residence, place of business or business connection in India, and whether or not the non-resident has rendered services in India.

This is the provision that defeats the “we have no presence in India” position outright for these three categories. The source rule in each case is payer-based: interest, royalty or fees for technical services payable by the Government, or by a resident subject to the stated exceptions, or by a non-resident where the underlying right or service is used for a business carried on by that non-resident in India or for earning income from any source in India.

So a foreign supplier with no office, no agent, no employees and no economic presence in India can still face an Indian charge, simply because an Indian resident pays it for something falling within the royalty or fees for technical services definitions. Section 9(11) removes presence from the enquiry altogether. Whether the payment falls within those definitions is therefore the entire question, and it is a characterisation question rather than a presence question.

8. Permanent establishment is a treaty defence, not a domestic charge

In short: The Income-tax Act, 2025 defines permanent establishment only in section 173(c), and only for the purposes of that section and sections 161, 162, 163, 165, 171 and 172. The definition is inclusive: it includes a fixed place of business through which the business of the enterprise is wholly or partly carried on. There is no general domestic charge cast by reference to permanent establishment.

Two consequences follow. First, the operative permanent establishment test for a foreign enterprise is Article 5 of the applicable treaty, together with the business profits article, and not the Act. Second, that test is a limitation on a charge that must already exist under section 9. A taxpayer who establishes the absence of a permanent establishment has established a treaty defence to the taxation of business profits; it has not established that section 9 is not engaged, and it has said nothing about the separate royalty and fees for technical services articles.

Section 9(5)(b) borrows the section 173(c) meaning for one specific purpose: interest payable by the Indian permanent establishment of a non-resident engaged in banking to its head office or another part of the same enterprise is deemed to accrue in India and is chargeable in addition to income attributable to that establishment, with the establishment treated as a separate and independent person. That is a targeted rule, not a general charging concept.

9. Treaty entitlement is a condition, not an assumption

In short: Under section 159(8) of the Income-tax Act, 2025, a non-resident is entitled to claim relief under an agreement with a foreign country or specified territory only where a certificate of residence is obtained from the Government of that country or territory. Prescribed information must also be furnished in Form No. 41, which replaced Form 10F, under Rule 75 of the Income-tax Rules, 2026.

The structural point is that treaty relief is a claim, with conditions, made by the taxpayer. It is not a background state of affairs. Until the residence certificate and Form No. 41 are in place, the payer is dealing with a non-resident who has not established entitlement, and the domestic position governs the deduction at source.

The evidential standard applied to that claim, and the payer-side consequences of getting it wrong, are dealt with separately in our work on withholding tax on payments to non-residents. The point for present purposes is narrower: the permanent establishment argument in section 8 above lives inside the treaty, so it is unavailable until the section 159(8) condition is satisfied.

Two different tests, applied in sequence

	Business connection, section 9(9)	Permanent establishment, treaty Article 5
Source	Income-tax Act, 2025	The applicable tax treaty
Function	Creates the domestic charge	Limits a charge that already exists
Availability	Applies to every non-resident	Available only on establishing treaty entitlement under section 159(8)
Fixed place	Not required	Central to the fixed place limb
Agency	Contracts concluded, principal role, stock held, or orders habitually secured	Turns on the treaty wording, commonly authority to conclude contracts
Presence	Not required for significant economic presence, or for section 9(11) income	Presence, in one of the treaty forms, is the test

10. Where the exclusions actually bite

In short: Section 9(9)(c) excludes from business carried out in India activity carried out through a broker, general commission agent or other agent of independent status acting in the ordinary course of business, and activity confined to the purchase of goods in India for export, the collection of news for transmission out of India by a news agency or publisher, the display of uncut and unassorted diamonds in a notified zone by a foreign diamond mining company, and the shooting of a cinematograph film by specified non-residents.

These exclusions are narrower than they look. The independent agent exclusion is displaced by section 9(9)(b)(ii), which deems an agent working mainly or wholly for the principal non-resident or its connected non-residents not to have independent status. So the exclusion protects a genuinely independent agent with a diversified book, not a dedicated one. The purchase-for-export exclusion is carried across to significant economic presence by section 9(9)(e), which is the one place where the two limbs are expressly aligned.

Section 9(12) adds a distinct safe harbour: fund management activity carried out by an eligible investment fund through an eligible fund manager acting on its behalf does not constitute a business connection of the fund, and the fund is not resident merely because the manager is in India. The conditions sit in Schedule I, and the Central Government may relax them where the manager is located in an International Financial Services Centre and commenced operations on or before 31 March 2030.

Frequently Asked Questions

Does a foreign company need a permanent establishment in India before India can tax it?

No. Permanent establishment is a treaty concept. The domestic charge under the Income-tax Act, 2025 operates through section 9(2), which deems income accruing directly or indirectly through or from an asset or source of income in India, property in India, a business connection in India, or the transfer of a capital asset situated in India, to accrue in India. Permanent establishment becomes relevant only as a treaty limitation, and only where treaty entitlement is separately established under section 159(8).

Can India tax a foreign business with no office, staff or subsidiary in India?

Yes, in two ways. Section 9(9)(d) creates a significant economic presence where transactions with persons in India exceed a prescribed aggregate, or where there is systematic soliciting or interaction with a prescribed number of users, irrespective of where the agreement is made, whether the non-resident has a place of business in India, or whether it renders services in India. Separately, section 9(11) applies the interest, royalty and fees for technical services limbs whether or not the non-resident has any presence in India.

What is the difference between business connection and permanent establishment?

Business connection is the domestic nexus in section 9(9) of the Income-tax Act, 2025 and it creates the charge. Permanent establishment is defined in the applicable treaty and it limits the charge on business profits. Business connection is the wider concept: it is satisfied by operations in India, by an agent who habitually secures orders, or by significant economic presence, none of which necessarily amounts to a permanent establishment under a treaty.

Does an Indian agent create a taxable presence for a foreign company?

It can. Section 9(9)(b) brings within business carried out in India an agent who habitually exercises authority to conclude contracts, habitually concludes them, or habitually plays the principal role leading to their conclusion, and also one who habitually maintains a stock of goods for delivery or habitually secures orders mainly or wholly for the non-resident. An agent of genuinely independent status acting in the ordinary course of business is excluded, but section 9(9)(b)(ii) removes independent status from an agent working mainly or wholly for the non-resident or its connected non-residents.

What changed for significant economic presence under the Income-tax Act, 2025?

Under the Income-tax Act, 1961, the attribution limitation in Explanation 1(a) to section 9(1)(i) was expressed so as to exclude a business connection arising on account of significant economic presence. Section 9(9)(f) of the 2025 Act now applies a single attribution rule to both, so that only income reasonably attributable to operations carried out in India, and to the transactions or activities constituting significant economic presence, is deemed to accrue in India.

Is a tax residency certificate enough to claim treaty benefits in India?

Section 159(8) of the Income-tax Act, 2025 makes a certificate of residence obtained from the Government of the country or specified territory a condition of claiming relief under an agreement. Prescribed information must additionally be furnished in Form No. 41 under Rule 75 of the Income-tax Rules, 2026, which replaced Form 10F. Whether those documents are sufficient in a contested case depends on the substance behind them, which is a separate enquiry from the documentary condition itself.

How R & D Law Chambers Works on These Matters

Inbound structures are examined here in the statutory order rather than the commercial one: whether section 9 is engaged at all, what is reasonably attributable if it is, and only then what the treaty does with the result. That order matters because the answer to the second question is usually decided by documents created long before anyone asks the first.

The practice acts on the assessment record as well as the structuring, which is why the section 9(9)(b) agency material and the correspondence that creates it are treated as evidence from the outset rather than as commercial housekeeping. For direct tax assessment and appellate work arising from these positions, see our page for income tax lawyers in Ahmedabad.

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Disclaimer: this article is provided for general information only. It does not constitute legal advice and does not create a lawyer-client relationship. Outcomes under the Income-tax Act, 2025, the Income-tax Rules, 2026 and any applicable tax treaty depend on the facts of each case and on the state of the law at the relevant time. References to statutory provisions, rules, forms, treaty articles and judicial decisions should be verified against the current primary sources before they are acted on. R & D Law Chambers does not guarantee any particular outcome in any matter.