The Assessing Officer says my non-resident client has a significant economic presence in India and therefore a business connection. From which year does that provision actually operate, what are the thresholds, and does it override the treaty?
Significant economic presence is a DOMESTIC-LAW expansion of 'business connection' in section 9(1)(i) of the Income-tax Act. It has nothing to do with the equalisation levy, which is charged by Chapter VIII of the Finance Act, 2016 and is not in the Income-tax Act at all. Explanation 2A in its present form was inserted by the Finance Act 2020 with effect from 1 April 2022, and it has two limbs: (a) transactions in goods, services or property with any person in India, including provision of download of data or software in India, where the aggregate of payments in the previous year exceeds a prescribed amount; and (b) systematic and continuous soliciting of business activities, or engaging in interaction, with a prescribed number of users in India. Rule 11UD prescribes both: TWO CRORE RUPEES and THREE LAKH USERS. Rule 11UD was inserted by the Income-tax (Thirteenth Amendment) Rules, 2021 with effect from 1 April 2022. And Explanation 2A does not by itself create a permanent establishment: it enlarges a domestic deeming provision, it does not amend any treaty, and where a treaty applies, section 90(2) allows the assessee the more beneficial position, so business profits remain taxable only if there is a permanent establishment as the treaty's own Article 5 defines it.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2022-04-01, reported as Explanation 2A to section 9(1)(i) of the Income-tax Act, 1961, as enacted by section 5 of the Finance Act, 2020, with rule 11UD of the Income-tax Rules, 1962, inserted by the Income-tax (Thirteenth Amendment) Rules, 2021 with effect from 1 April 2022. It bears on section 9(1)(i), section 9, section 90, section 90(2), section Rule 11UD, section 10(50) of the Income Tax Act 1961, in How Tax Law Is Read and Assessment & Scrutiny matters.
The commencement is the first thing to check and it defeats a good many notices. The present Explanation 2A takes effect from 1 April 2022 — assessment year 2022-23 — and the rule prescribing its thresholds takes effect from the same date. Before that, the thresholds were simply not prescribed, and a limb that operates on 'such amount as may be prescribed' and 'such number of users in India, as may be prescribed' cannot operate at all until the prescription exists. So a significant-economic-presence addition for AY 2021-22 or earlier has to be examined very carefully against the legislative history set out in the companion entry on the Finance Act 2020 timeline. The second point is attribution. The second proviso to Explanation 2A limits the deemed income to 'only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b)', and the Finance Act 2020 separately carved SEP out of the general attribution rule in Explanation 1(a) with effect from the same date, so a full attribution of the non-resident's global profit to India is not open to the officer. The third point is the treaty, and it is where most of these notices die. Explanation 2A creates a business connection; a business connection is the domestic gateway in section 9(1)(i). It is not a permanent establishment, it does not amend the definition of permanent establishment in any Double Taxation Avoidance Agreement, and India's treaties continue to tax business profits only where the enterprise has a permanent establishment in India. Where the non-resident is entitled to a treaty and has no permanent establishment under it, section 90(2) allows it the treaty position and the SEP finding does not by itself produce a charge.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
Read aloud by your device. Press again to stop.
Not a judgment. Explanation 2A to section 9(1)(i), in the form inserted by the Finance Act 2020 with effect from 1 April 2022, reads: 'Explanation 2A.—For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute "business connection" in India and "significant economic presence" for this purpose, shall mean— (a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed: Provided that the transactions or activities shall constitute significant economic presence in India, whether or not— (i) the agreement for such transactions or activities is entered in India; or (ii) the non-resident has a residence or place of business in India; or (iii) the non-resident renders services in India: Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.' Rule 11UD of the Income-tax Rules, 1962, headed 'Thresholds for the purposes of significant economic presence', reads: '11UD. (1) For the purposes of clause (a) of Explanation 2A to clause (i) of sub-section (1) of section 9, the amount of aggregate of payments arising from transaction or transactions in respect of any goods, services or property carried out by a non-resident with any person in India, including provision of download of data or software in India during the previous year, shall be two crore rupees. (2) For the purposes of clause (b) of Explanation 2A to clause (i) of sub-section (1) of section 9, the number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be three lakhs.'
Not a judgment. The statutory position is that significant economic presence is a species of business connection created by Explanation 2A to section 9(1)(i) of the Income-tax Act, with effect from 1 April 2022; that its two limbs operate on thresholds that only rule 11UD prescribes, namely two crore rupees of aggregate payments and three lakh users, and that rule too takes effect from 1 April 2022; that the deeming is limited by the second proviso to so much income as is attributable to the transactions or activities in question; and that the Explanation, being a domestic deeming provision defining business connection, does not itself create a permanent establishment under a Double Taxation Avoidance Agreement, so that where a treaty applies the taxability of business profits continues to depend on a permanent establishment under the treaty's own terms, with section 90(2) giving the assessee the more beneficial position.
Not a judgment; no judicial reasoning is stated for the Explanation itself. The commencement is Parliament's own: section 5(a)(ii) of the Finance Act, 2020 provides that 'Explanation 2A shall be omitted with effect from the 1st day of April, 2021 and the following Explanation shall be inserted with effect from the 1st day of April, 2022'. On the primacy of the treaty where one applies, the ITAT Mumbai restated the ordinary rule at paragraph 44 of its order of 30 December 2025 in Acronis Asia Pte Ltd: 'section 90(2) of the Act mandates that where the provisions of the Act and the provisions of the DTAA are in conflict, the provisions which are more beneficial to the assessee shall prevail.'
Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppSignificant economic presence is a DOMESTIC-LAW expansion of 'business connection' in section 9(1)(i) of the Income-tax Act. It has nothing to do with the equalisation levy, which is charged by Chapter VIII of the Finance Act, 2016 and is not in the Income-tax Act at all. Explanation 2A in its present form was inserted by the Finance Act 2020 with effect from 1 April 2022, and it has two limbs: (a) transactions in goods, services or property with any person in India, including provision of download of data or software in India, where the aggregate of payments in the previous year exceeds a prescribed amount; and (b) systematic and continuous soliciting of business activities, or engaging in interaction, with a prescribed number of users in India. Rule 11UD prescribes both: TWO CRORE RUPEES and THREE LAKH USERS. Rule 11UD was inserted by the Income-tax (Thirteenth Amendment) Rules, 2021 with effect from 1 April 2022. And Explanation 2A does not by itself create a permanent establishment: it enlarges a domestic deeming provision, it does not amend any treaty, and where a treaty applies, section 90(2) allows the assessee the more beneficial position, so business profits remain taxable only if there is a permanent establishment as the treaty's own Article 5 defines it. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 9(1)(i), section 9, section 90, section 90(2), section Rule 11UD, section 10(50) of the Income Tax Act 1961. It is reported as Explanation 2A to section 9(1)(i) of the Income-tax Act, 1961, as enacted by section 5 of the Finance Act, 2020, with rule 11UD of the Income-tax Rules, 1962, inserted by the Income-tax (Thirteenth Amendment) Rules, 2021 with effect from 1 April 2022. The commencement is the first thing to check and it defeats a good many notices. The present Explanation 2A takes effect from 1 April 2022 — assessment year 2022-23 — and the rule prescribing its thresholds takes effect from the same date. Before that, the thresholds were simply not prescribed, and a limb that operates on 'such amount as may be prescribed' and 'such number of users in India, as may be prescribed' cannot operate at all until the prescription exists. So a significant-economic-presence addition for AY 2021-22 or earlier has to be examined very carefully against the legislative history set out in the companion entry on the Finance Act 2020 timeline. The second point is attribution. The second proviso to Explanation 2A limits the deemed income to 'only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b)', and the Finance Act 2020 separately carved SEP out of the general attribution rule in Explanation 1(a) with effect from the same date, so a full attribution of the non-resident's global profit to India is not open to the officer. The third point is the treaty, and it is where most of these notices die. Explanation 2A creates a business connection; a business connection is the domestic gateway in section 9(1)(i). It is not a permanent establishment, it does not amend the definition of permanent establishment in any Double Taxation Avoidance Agreement, and India's treaties continue to tax business profits only where the enterprise has a permanent establishment in India. Where the non-resident is entitled to a treaty and has no permanent establishment under it, section 90(2) allows it the treaty position and the SEP finding does not by itself produce a charge. If it applies to you, the first step is this: Fix the assessment year first. For AY 2022-23 onwards the present Explanation 2A and Rule 11UD both operate; for earlier years read the companion entry on the Finance Act 2020 timeline before conceding that any SEP provision was in force and workable.
Not a judgment. Explanation 2A to section 9(1)(i), in the form inserted by the Finance Act 2020 with effect from 1 April 2022, reads: 'Explanation 2A.—For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute "business connection" in India and "significant economic presence" for this purpose, shall mean— (a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed: Provided that the transactions or activities shall constitute significant economic presence in India, whether or not— (i) the agreement for such transactions or activities is entered in India; or (ii) the non-resident has a residence or place of business in India; or (iii) the non-resident renders services in India: Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India.' Rule 11UD of the Income-tax Rules, 1962, headed 'Thresholds for the purposes of significant economic presence', reads: '11UD. (1) For the purposes of clause (a) of Explanation 2A to clause (i) of sub-section (1) of section 9, the amount of aggregate of payments arising from transaction or transactions in respect of any goods, services or property carried out by a non-resident with any person in India, including provision of download of data or software in India during the previous year, shall be two crore rupees. (2) For the purposes of clause (b) of Explanation 2A to clause (i) of sub-section (1) of section 9, the number of users with whom systematic and continuous business activities are solicited or who are engaged in interaction shall be three lakhs.' The matter was decided on 2022-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that significant economic presence is a species of business connection created by Explanation 2A to section 9(1)(i) of the Income-tax Act, with effect from 1 April 2022; that its two limbs operate on thresholds that only rule 11UD prescribes, namely two crore rupees of aggregate payments and three lakh users, and that rule too takes effect from 1 April 2022; that the deeming is limited by the second proviso to so much income as is attributable to the transactions or activities in question; and that the Explanation, being a domestic deeming provision defining business connection, does not itself create a permanent establishment under a Double Taxation Avoidance Agreement, so that where a treaty applies the taxability of business profits continues to depend on a permanent establishment under the treaty's own terms, with section 90(2) giving the assessee the more beneficial position.
Not a judgment; no judicial reasoning is stated for the Explanation itself. The commencement is Parliament's own: section 5(a)(ii) of the Finance Act, 2020 provides that 'Explanation 2A shall be omitted with effect from the 1st day of April, 2021 and the following Explanation shall be inserted with effect from the 1st day of April, 2022'. On the primacy of the treaty where one applies, the ITAT Mumbai restated the ordinary rule at paragraph 44 of its order of 30 December 2025 in Acronis Asia Pte Ltd: 'section 90(2) of the Act mandates that where the provisions of the Act and the provisions of the DTAA are in conflict, the provisions which are more beneficial to the assessee shall prevail.' In the words reproduced by the source cited on this page: "Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall be deemed to accrue or arise in India."
It was decided by the CBDT Circulars & Instructions on 2022-04-01 and is reported as Explanation 2A to section 9(1)(i) of the Income-tax Act, 1961, as enacted by section 5 of the Finance Act, 2020, with rule 11UD of the Income-tax Rules, 1962, inserted by the Income-tax (Thirteenth Amendment) Rules, 2021 with effect from 1 April 2022. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 9(1)(i), section 9, section 90, section 90(2), section Rule 11UD, section 10(50), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that significant economic presence is a species of business connection created by Explanation 2A to section 9(1)(i) of the Income-tax Act, with effect from 1 April 2022; that its two limbs operate on thresholds that only rule 11UD prescribes, namely two crore rupees of aggregate payments and three lakh users, and that rule too takes effect from 1 April 2022; that the deeming is limited by the second proviso to so much income as is attributable to the transactions or activities in question; and that the Explanation, being a domestic deeming provision defining business connection, does not itself create a permanent establishment under a Double Taxation Avoidance Agreement, so that where a treaty applies the taxability of business profits continues to depend on a permanent establishment under the treaty's own terms, with section 90(2) giving the assessee the more beneficial position. It arises in How Tax Law Is Read and Assessment & Scrutiny matters, on section 9(1)(i), section 9, section 90, section 90(2), section Rule 11UD, section 10(50) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Make the officer identify which limb he is on, and produce the working: for limb (a), the aggregate of payments arising from transactions with persons in India in the previous year measured against two crore rupees; for limb (b), the number of users in India measured against three lakh. Take the attribution point separately from the existence point. Even a good SEP finding deems only so much income as is attributable to the transactions or activities in clause (a) or (b), by the second proviso. If the client is resident in a treaty country, plead the treaty. Establish the tax residency certificate, take section 90(2), and put the Revenue to proof of a permanent establishment under the treaty's own Article 5 — a domestic business connection is not a substitute for it. Check whether the receipts were subjected to equalisation levy for the same period, because that is a separate charge under a separate statute and section 10(50) of the Income-tax Act may exclude the same income from total income altogether.
Still good law. The text of Explanation 2A is corroborated: two independent sources - a consolidation of section 9 and the Finance Act 2020 provision that inserted it - print it in identical words, which also means there was no amendment to it between 2020 and that consolidation's vintage. Rule 11UD is available with a footnote giving its insertion and its effective date. But consolidated texts of the Rules carry no vintage, and it could not be confirmed from any second source that rule 11UD has not been amended since 2021, so a practitioner relying on the two crore or three lakh figure for a recent year should re-read the rule. No decision construing Explanation 2A or applying rule 11UD has been found, and no exhaustive search for one has been made. The narrow negative that can be stated is that no decision has been found in which a tribunal or court decided whether significant economic presence by itself confers a treaty permanent establishment. That negative matters, because the proposition this entry exists for depends on it. Explanation 2A defines 'business connection' for section 9(1)(i); section 90(2) gives the assessee the more beneficial of the Act and the agreement; and no Finance Act provision read here amends any treaty. So a significant economic presence does not by itself create a permanent establishment under a treaty. That is a reading built on the structure of the provisions and not a holding, and it should be argued as such. For a tax year governed by the Income-tax Act 2025 the successor of section 9(1)(i) and of the rule should be identified; that correspondence has not been established here. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
ON THE TEXT AND ITS CORROBORATION. Explanation 2A has been read twice from independent sources that agree word for word: a consolidation of section 9 headed 'Income deemed to accrue or arise in India', where it was read in a continuous run with Explanation 2 before it and Explanation 3 after it, and section 5 of the Finance Act, 2020, which is the provision that inserted it and which states its own commencement date. The commencement - 1 April 2022 - is Parliament's, taken from the words of section 5(a)(ii) of that Act. ON RULE 11UD, AND WHY IT CANNOT BE DATED THE WAY A SECTION CAN. Consolidated texts of the Rules carry no vintage, so the rule's date here comes from the footnote printed with it - 'Inserted by the IT (Thirteenth Amdt.) Rules, 2021, w.e.f. 1-4-2022' - and not from any edition stamp. Whether the rule has been amended since 2021 could not be confirmed from a second source, so a practitioner relying on the two crore or three lakh figure for a recent year should re-read the rule itself. ON THE FOOTNOTES TO EXPLANATION 2A. The only footnote attached to it is 'See rule 11UD'. It carries no amendment footnote, so the substitution history in this entry comes entirely from the Finance Acts. THE TREATY PROPOSITION IS NOT TAKEN FROM A DECISION. No decision holding it in terms has been found, and none is cited for it. It is stated from the structure of the provisions: Explanation 2A defines 'business connection' for section 9(1)(i), section 90(2) gives the assessee the more beneficial of the Act and the agreement, and no Finance Act provision read amends any treaty. Treat it as an argument built on the structure rather than as settled. ON THE ABSENCE OF AUTHORITY, stated precisely. No decision construing Explanation 2A or applying rule 11UD has been found, and no exhaustive search for one has been made. The narrow negative that can be stated is that no decision has been found in which a tribunal or court decided whether significant economic presence by itself confers a treaty permanent establishment. ONE DECISION THAT IS OFTEN CITED HERE AND SHOULD NOT BE.ONE DECISION THAT IS OFTEN CITED HERE AND SHOULD NOT BE. The Delhi Bench's order in Booking.com B.V. (6 February 2026) is not authority on significant economic presence: the Tribunal decided it on fixed-place and agency permanent establishment and expressly left the remaining grounds, including the significant-economic-presence grounds, open as academic. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that significant economic presence is a species of business connection created by Explanation 2A to section 9(1)(i) of the Income-tax Act, with effect from 1 April 2022; that its two limbs operate on thresholds that only rule 11UD prescribes, namely two crore rupees of aggregate payments and three lakh users, and that rule too takes effect from 1 April 2022; that the deeming is limited by the second proviso to so much income as is attributable to the transactions or activities in question; and that the Explanation, being a domestic deeming provision defining business connection, does not itself create a permanent establishment under a Double Taxation Avoidance Agreement, so that where a treaty applies the taxability of business profits continues to depend on a permanent establishment under the treaty's own terms, with section 90(2) giving the assessee the more beneficial position.
TaxSphere, “Statutory position — s.9(1)(i) Explanation 2A: significant economic presence, the Rule 11UD thresholds of two crore rupees and three lakh users, its commencement from AY 2022-23, and why it does not by itself create a treaty permanent establishment”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-9-1-i-explanation-2a-significant-economic-presence-rule-11ud-thresholds-and-why-it-does-not-create-a-treaty-permanent-establishment/ (validity last checked 2026-09-09)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
The notice invokes significant economic presence for an assessment year before 2022-23. Was there any such provision in force then, and what else did the Finance Act 2020 do to section 9(1)(i) for the digital economy?
My client paid two per cent equalisation levy on its Indian receipts and the department has still assessed the same receipts as fees for technical services and denied s.10(50). In what order should the argument be run?
My non-resident client pays equalisation levy on its Indian receipts, and the Assessing Officer has still refused a NIL section 197 certificate and directed ten per cent withholding. What is the answer?
My client paid equalisation levy on the same receipts the Assessing Officer is now taxing as income. Is there an exemption, and has the department any answer to it?
