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Concept of Business Connection and Significant Economic Presence under Income Tax Act

Business Connection and Significant Economic Presence

Relevance of Business Connection in India

Any income is deemed to be accrued or arise in India if it is related to business connection in India. In practical scenarios, for non-residents carrying on business in India, it becomes key to determine whether it is taxable in India or not and for that, they need to go through the test of business connection.

Business Connections

The business connection includes any business activity carried out by any other person on behalf of the Non-Resident and does any of the following activities :

  1. Conclude the contracts in India on behalf of non-residents and the said contracts are made in the name of Non - the Resident and contracts are about rendering of service, transfer or granting of rights owned by non-residents.

  2. In case there is no authority to conclude contracts but maintains in India stock of goods on behalf of non-residents which are regularly delivered on behalf

  3. Secures orders in India mainly and wholly for non-residents or for any other non-resident who is controlled by the first non-resident or jointly controlled by any other non-resident.

Key Note for Business Connection : No business connection can be established if the business is carried out by an Independent Broker or Agent whose principal business is not to work wholly or mainly for Non-Residents or for Non-Residents under common management.

Significant Economic Presence

A Non-Resident company or any other entity is said to have a significant economic presence and will result in business connection in India if :

  • The transaction relating to any goods or service or property including download of data or software in India, if total aggregate payment or transaction in the previous year exceeds Rs 2 Crore (Rule 11UD).

  • systematic and continuous soliciting business activity or engaging with more than 3 Lakh users in India (Rule 11UD).

Key Note for Significant Economic Presence

  • Above mentioned transaction need not be rendered in India or need to have any place of business in India or contracts need not be entered in India.

  • Where business connection is established due to significant economic presence then only so much of income that is attributable to transactions as detailed above is deemed to accrued or arise in India

Cases Were Specifically Business Connection in India shall not be treated

  1. If all operations are not carried out in India then Income only to the extent attributable to business activities carried in India shall only be deemed to accrue in India.

  2. Non-resident income shall not be deemed to accrue in India where activities include purchases made for export purposes.

  3. News Collections for transmitting outside India.

  4. Operations confined to the shooting of cinematography films where such non-resident is not a citizen of India or in case of company or firm does not have any partner or shareholder who is an Indian Citizen or Indian Resident.

  5. Activities confined to the display of rough diamonds in Special Notified Zones.

For Foreign Companies Place of Effective Management read here

To Know Which Income is Taxable in India read here


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