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?
The equalisation levy is charged by Chapter VIII of the Finance Act, 2016 and is not in the Income-tax Act; significant economic presence is the Income-tax Act's separate answer to the same problem, and its history is untidy in a way that matters. An earlier Explanation 2A was inserted into section 9(1)(i) by section 4 of the Finance Act, 2018 with effect from 1 April 2019. Section 5 of the Finance Act, 2020 then did three things: it OMITTED that Explanation with effect from 1 April 2021, inserted the present Explanation 2A with effect from 1 April 2022, and inserted a new Explanation 3A with effect from 1 April 2021. The consequence is that for assessment year 2021-22 there was no Explanation 2A on the statute book at all. Explanation 3A is the provision that survives that gap: from 1 April 2021 the income attributable to operations carried out in India under Explanation 1 'shall include' income from advertisement targeting an Indian-resident customer or a customer accessing it through an Indian internet protocol address, from sale of data collected from such a person, and from sale of goods or services using such data.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2021-04-01, reported as Section 4 of the Finance Act, 2018 and section 5 of the Finance Act, 2020; the resulting text of section 9(1)(i) of the Income-tax Act, 1961, as amended up to 2024. It bears on section 9(1)(i), section 9, section Rule 11UD, section 90(2) of the Income Tax Act 1961, in How Tax Law Is Read and Assessment & Scrutiny matters.
This timeline is the answer to a class of notices. For AY 2019-20 and AY 2020-21 the Finance Act 2018 Explanation 2A was on the statute book, but both of its limbs operate only on amounts and user numbers 'as may be prescribed', and the only rule I could find prescribing them, rule 11UD, was inserted with effect from 1 April 2022. For AY 2021-22 there was no Explanation 2A at all — Parliament omitted the old one from 1 April 2021 and did not bring the new one in until 1 April 2022. An officer invoking significant economic presence for any of those years has to confront that. Explanation 3A, however, does apply from AY 2021-22, and it is a different and narrower tool: it does not create a business connection, it enlarges what counts as income attributable to Indian operations under Explanation 1 once a business connection exists. The Finance Act 2020 also joined the two together prospectively — from 1 April 2022 it inserted a proviso extending Explanation 3A to income attributable to Explanation 2A transactions, and it amended Explanation 1(a) to take business connections arising 'on account of significant economic presence' out of the general attribution rule. The wording of the earlier Explanation 2A also differed from the present one in two respects that can matter for an old year: limb (a) spoke of a transaction 'carried out by a non-resident in India' rather than 'with any person in India', and limb (b) of interaction 'with such number of users as may be prescribed, in India through digital means' rather than 'with such number of users in India, as may be prescribed'.
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. Section 4 of the Finance Act, 2018 begins 'In section 9 of the Income-tax Act, in sub-section (1), in clause (i), with effect from the 1st day of April, 2019,-' and then, after substituting clause (a) of Explanation 2, inserts an Explanation 2A whose limb (a) reads 'transaction in respect of any goods, services or property carried out by a non-resident 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' and whose limb (b) reads 'systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means', with the same two provisos as the later version. Section 5 of the Finance Act, 2020 provides, in clause (a)(ii), 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', and sets out the present Explanation 2A. Clause (a)(iii) inserts, with effect from 1 April 2021: 'Explanation 3A.-For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from - (i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India; (ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and (iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.' Clause (a)(iv) inserts after Explanation 3A, with effect from 1 April 2022, a proviso: 'Provided that the provisions contained in this Explanation shall also apply to the income attributable to the transactions or activities referred to in Explanation 2A.' Clause (a)(i) substitutes, with effect from 1 April 2022, in Explanation 1 clause (a), for the words 'in the case of a business', the words 'in the case of a business, other than the business having business connection in India on account of significant economic presence,'.
Not a judgment. The statutory position is that section 9(1)(i) carried an Explanation 2A inserted by the Finance Act 2018 from 1 April 2019; that the Finance Act 2020 omitted it from 1 April 2021 and inserted the present Explanation 2A only from 1 April 2022, leaving assessment year 2021-22 with no Explanation 2A in force; that the Finance Act 2020 inserted Explanation 3A from 1 April 2021, which does not create a business connection but declares that income attributable to Indian operations under Explanation 1 includes income from India-targeted advertising, from the sale of data collected from persons in India or using Indian internet protocol addresses, and from the sale of goods or services using such data; and that from 1 April 2022 Explanation 3A was extended to Explanation 2A transactions while significant-economic-presence business connections were taken out of the general attribution rule in Explanation 1(a).
Not a judgment; no judicial reasoning is stated. The dates are Parliament's own, taken from the commencement words within each amending clause.
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, namely: -
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 WhatsAppThe equalisation levy is charged by Chapter VIII of the Finance Act, 2016 and is not in the Income-tax Act; significant economic presence is the Income-tax Act's separate answer to the same problem, and its history is untidy in a way that matters. An earlier Explanation 2A was inserted into section 9(1)(i) by section 4 of the Finance Act, 2018 with effect from 1 April 2019. Section 5 of the Finance Act, 2020 then did three things: it OMITTED that Explanation with effect from 1 April 2021, inserted the present Explanation 2A with effect from 1 April 2022, and inserted a new Explanation 3A with effect from 1 April 2021. The consequence is that for assessment year 2021-22 there was no Explanation 2A on the statute book at all. Explanation 3A is the provision that survives that gap: from 1 April 2021 the income attributable to operations carried out in India under Explanation 1 'shall include' income from advertisement targeting an Indian-resident customer or a customer accessing it through an Indian internet protocol address, from sale of data collected from such a person, and from sale of goods or services using such data. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 9(1)(i), section 9, section Rule 11UD, section 90(2) of the Income Tax Act 1961. It is reported as Section 4 of the Finance Act, 2018 and section 5 of the Finance Act, 2020; the resulting text of section 9(1)(i) of the Income-tax Act, 1961, as amended up to 2024. This timeline is the answer to a class of notices. For AY 2019-20 and AY 2020-21 the Finance Act 2018 Explanation 2A was on the statute book, but both of its limbs operate only on amounts and user numbers 'as may be prescribed', and the only rule I could find prescribing them, rule 11UD, was inserted with effect from 1 April 2022. For AY 2021-22 there was no Explanation 2A at all — Parliament omitted the old one from 1 April 2021 and did not bring the new one in until 1 April 2022. An officer invoking significant economic presence for any of those years has to confront that. Explanation 3A, however, does apply from AY 2021-22, and it is a different and narrower tool: it does not create a business connection, it enlarges what counts as income attributable to Indian operations under Explanation 1 once a business connection exists. The Finance Act 2020 also joined the two together prospectively — from 1 April 2022 it inserted a proviso extending Explanation 3A to income attributable to Explanation 2A transactions, and it amended Explanation 1(a) to take business connections arising 'on account of significant economic presence' out of the general attribution rule. The wording of the earlier Explanation 2A also differed from the present one in two respects that can matter for an old year: limb (a) spoke of a transaction 'carried out by a non-resident in India' rather than 'with any person in India', and limb (b) of interaction 'with such number of users as may be prescribed, in India through digital means' rather than 'with such number of users in India, as may be prescribed'. If it applies to you, the first step is this: Put the assessment year against the timeline before arguing anything else: Finance Act 2018 Explanation 2A from 1 April 2019 to 31 March 2021; nothing from 1 April 2021 to 31 March 2022; the present Explanation 2A from 1 April 2022.
Not a judgment. Section 4 of the Finance Act, 2018 begins 'In section 9 of the Income-tax Act, in sub-section (1), in clause (i), with effect from the 1st day of April, 2019,-' and then, after substituting clause (a) of Explanation 2, inserts an Explanation 2A whose limb (a) reads 'transaction in respect of any goods, services or property carried out by a non-resident 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' and whose limb (b) reads 'systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means', with the same two provisos as the later version. Section 5 of the Finance Act, 2020 provides, in clause (a)(ii), 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', and sets out the present Explanation 2A. Clause (a)(iii) inserts, with effect from 1 April 2021: 'Explanation 3A.-For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from - (i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India; (ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India; and (iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India.' Clause (a)(iv) inserts after Explanation 3A, with effect from 1 April 2022, a proviso: 'Provided that the provisions contained in this Explanation shall also apply to the income attributable to the transactions or activities referred to in Explanation 2A.' Clause (a)(i) substitutes, with effect from 1 April 2022, in Explanation 1 clause (a), for the words 'in the case of a business', the words 'in the case of a business, other than the business having business connection in India on account of significant economic presence,'. The matter was decided on 2021-04-01 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 section 9(1)(i) carried an Explanation 2A inserted by the Finance Act 2018 from 1 April 2019; that the Finance Act 2020 omitted it from 1 April 2021 and inserted the present Explanation 2A only from 1 April 2022, leaving assessment year 2021-22 with no Explanation 2A in force; that the Finance Act 2020 inserted Explanation 3A from 1 April 2021, which does not create a business connection but declares that income attributable to Indian operations under Explanation 1 includes income from India-targeted advertising, from the sale of data collected from persons in India or using Indian internet protocol addresses, and from the sale of goods or services using such data; and that from 1 April 2022 Explanation 3A was extended to Explanation 2A transactions while significant-economic-presence business connections were taken out of the general attribution rule in Explanation 1(a).
Not a judgment; no judicial reasoning is stated. The dates are Parliament's own, taken from the commencement words within each amending clause. In the words reproduced by the source cited on this page: "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, namely: -"
It was decided by the CBDT Circulars & Instructions on 2021-04-01 and is reported as Section 4 of the Finance Act, 2018 and section 5 of the Finance Act, 2020; the resulting text of section 9(1)(i) of the Income-tax Act, 1961, as amended up to 2024. 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 Rule 11UD, section 90(2), 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 section 9(1)(i) carried an Explanation 2A inserted by the Finance Act 2018 from 1 April 2019; that the Finance Act 2020 omitted it from 1 April 2021 and inserted the present Explanation 2A only from 1 April 2022, leaving assessment year 2021-22 with no Explanation 2A in force; that the Finance Act 2020 inserted Explanation 3A from 1 April 2021, which does not create a business connection but declares that income attributable to Indian operations under Explanation 1 includes income from India-targeted advertising, from the sale of data collected from persons in India or using Indian internet protocol addresses, and from the sale of goods or services using such data; and that from 1 April 2022 Explanation 3A was extended to Explanation 2A transactions while significant-economic-presence business connections were taken out of the general attribution rule in Explanation 1(a). It arises in How Tax Law Is Read and Assessment & Scrutiny matters, on section 9(1)(i), section 9, section Rule 11UD, section 90(2) 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. For AY 2019-20 or AY 2020-21, ask the officer to identify the rule that prescribed the amount and the number of users for those years. Rule 11UD takes effect only from 1 April 2022. For AY 2021-22, take the omission point squarely: Parliament omitted Explanation 2A with effect from 1 April 2021 and the replacement took effect only from 1 April 2022. Where the addition is really about targeted advertising or data, address Explanation 3A rather than Explanation 2A — it applies from 1 April 2021 and it goes to attribution, so it presupposes a business connection established some other way. For AY 2022-23 onwards, note the amendment to Explanation 1(a), which carves an SEP-based business connection out of the general attribution rule so that the second proviso to Explanation 2A governs attribution instead.
Still good law. The amendments described are on the statute book, and the resulting current text of Explanation 2A and Explanation 3 has been independently confirmed on a separately published version of section 9. Explanation 3A has since been confirmed on the same version, where it appears in the same words as the Finance Act 2020 inserted it, together with the proviso extending it to Explanation 2A transactions. What has not been done: it has not been verified from any government source that no rule prescribed the significant-economic-presence thresholds before 1 April 2022, and no court decision on the assessment year 2021-22 gap has been traced. That gap is the point of this entry and a practitioner should handle it carefully. For a year in which Explanation 2A was on the statute book but the thresholds were unprescribed, the Revenue's case has to be put on something else, and Explanation 3A is what it will be put on: it reaches income from advertisement targeting a customer in India, or a customer who accesses the advertisement through an internet protocol address in India, and income from the sale of data collected from a person resident in India or using an internet protocol address in India. A reader should therefore check, for his own year, first whether the thresholds were prescribed, and second whether the receipt falls within Explanation 3A independently. And because Explanation 2A and Explanation 3A both operate on business connection under section 9(1)(i), the treaty position under section 90(2) has to be taken before either of them decides anything; neither Explanation overrides a treaty article on business profits. 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.
The whole of this timeline comes from the two amending Finance Act provisions themselves, read in full: section 4 of the Finance Act, 2018 and section 5 of the Finance Act, 2020. Both state their own commencement dates in terms, and those are the dates used. `decided_on` is 1 April 2021, the date on which Explanation 3A — the provision that governs the otherwise empty year — took effect, and is not the date of any publication. Two limits on what is stated here. First, no rule prescribing the amount or the number of users for a period before 1 April 2022 has been found, and the only rule read that prescribes them, rule 11UD, carries the footnote 'Inserted by the IT (Thirteenth Amdt.) Rules, 2021, w.e.f. 1-4-2022'. No search has been directed at whether some earlier rule existed and was later omitted, so the statement that the thresholds were unprescribed before assessment year 2022-23 is an inference from what has been read and not an established negative. Second, the differences in wording between the 2018 and 2020 versions of Explanation 2A are stated from a direct comparison of the two amending provisions, and not from any judicial or official comparison. The ITAT Delhi's order in Booking.com B.V. (6 February 2026), for AY 2018-19, records submissions to the effect that the threshold 'wasn't prescribed until AY 2022-23'; those are the assessee's submissions recorded in the order, not the Tribunal's holding, and the Tribunal decided the appeal on permanent establishment and left the remaining 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 section 9(1)(i) carried an Explanation 2A inserted by the Finance Act 2018 from 1 April 2019; that the Finance Act 2020 omitted it from 1 April 2021 and inserted the present Explanation 2A only from 1 April 2022, leaving assessment year 2021-22 with no Explanation 2A in force; that the Finance Act 2020 inserted Explanation 3A from 1 April 2021, which does not create a business connection but declares that income attributable to Indian operations under Explanation 1 includes income from India-targeted advertising, from the sale of data collected from persons in India or using Indian internet protocol addresses, and from the sale of goods or services using such data; and that from 1 April 2022 Explanation 3A was extended to Explanation 2A transactions while significant-economic-presence business connections were taken out of the general attribution rule in Explanation 1(a).
TaxSphere, “Statutory position — the significant economic presence timeline: the earlier Explanation 2A, the assessment year in which there was none at all, and Explanation 3A on targeted advertising and data from 1 April 2021”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-significant-economic-presence-timeline-the-year-with-no-explanation-2a-and-explanation-3a-on-targeted-advertising-and-data/ (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 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?
Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
We outsource back-office work to our Indian subsidiary. Does that give us a permanent establishment in India?
I hold a valid TRC. Can the AO go behind it and reopen my assessment for lack of substance?
