The threshold establishes a domestic nexus, not the final tax bill
For tax year 2026–27, use section 9(9)(d) of the Income-tax Act, 2025 and Rule 13 of the Income-tax Rules, 2026. The payments limb requires aggregate qualifying payments exceeding ₹2 crore during the tax year. The separate user limb uses 3,00,000 users with the statutory solicitation/interaction condition. Crossing either relevant limb can establish significant economic presence (SEP), subject to the export-only procurement exclusion; it does not convert gross receipts, or only the threshold excess, into taxable profit.
This article is a working-paper guide for 1 April 2026–31 March 2027, checked against sources available on 23 October 2026. It develops ledger and analytics controls rather than repeating a general digital-tax overview. Older references to Explanation 2A to section 9(1)(i) and Rule 11UD belong to the 1961 Act/1962 Rules framework; do not copy those labels into a current-year compliance note without checking the applicable period.
Read the current provisions together
The Income-tax Act, 2025, as amended by Finance Act, 2026 contains the current business-connection and SEP provisions in section 9(9). Clause (d) covers goods, services or property, including downloads of data or software, and the separate user-activity limb. It applies regardless of where the agreement is entered into, whether the non-resident has a residence/place of business in India, or whether it renders services in India. SEP is therefore not restricted to businesses with Indian offices, nor is the payments limb confined to digital products.
Rule 13 of the notified Income-tax Rules, 2026 prescribes ₹2 crore for the payments limb and 3,00,000 for the number of users. The Act uses an express exceeding condition for payments; the user test is framed by reference to the prescribed number and qualifying activity. Do not import the payments limb’s wording into the user limb. Exactly ₹2 crore does not exceed ₹2 crore; exactly 3,00,000 qualifying users reaches the prescribed user benchmark.
Section 9(9)(e) excludes transactions or activities confined to buying goods in India for export. Section 9(9)(f) limits deemed income to income reasonably attributable to the relevant operations/SEP transactions or activities. Clause (g) additionally addresses specified targeted advertising and data-related income. An absence of Indian bank receipts does not resolve these sourcing questions.
A defensible reconciliation has two populations
| Population | Working-paper fields | Review point |
|---|---|---|
| Qualifying payments | Non-resident legal entity, Indian counterparty, contract, transaction type, period, gross consideration and settlement mapping. | Aggregate across relevant counterparties; reconcile commissions and deductions. |
| User activity | User identifier, India-location evidence, activity period, interaction/solicitation basis and duplication controls. | Traffic, cookies and downloads are not automatically qualifying users. |
| Exclusions and unresolved items | Pure export-procurement evidence, refunds, agency status and uncertain sourcing. | Do not silently net an uncertain item to get below a threshold. |
| Tax consequence | Domestic nexus, treaty eligibility, applicable income article and attribution analysis. | Keep nexus, characterisation, income computation and withholding separate. |
Rule 13 is not a complete analytics specification. Document a reasonable user-identification and deduplication method, retain evidence of Indian location and qualifying activity, and disclose limitations. Do not describe a chosen monthly-active-user, cookie or device methodology as a universally prescribed statutory definition. Likewise, the payments test should not be reduced to a bank-credit report: identify the contractual payee, principal/agent status and gross transaction consideration before dealing with deductions and settlements.
Test the treaty after the domestic nexus
Section 159(4) applies the more beneficial treatment where an agreement covers the taxpayer; section 159(6) preserves the specified domestic anti-avoidance provisions. Under section 159(8), a non-resident claiming treaty relief needs a government-issued tax-residence certificate and prescribed information. Rule 75 and Form 41 identify the current information requirement. A certificate is necessary evidence, not proof that every treaty condition is met.
For an eligible US enterprise earning ordinary business profits, India–US DTAA Articles 5 and 7 require a treaty PE before India can tax those business profits under Article 7. Domestic SEP does not by itself amend Article 5. However, royalty, included services, other income categories, treaty limitation-on-benefits conditions and domestic anti-avoidance require their own examination. No-PE language is not a universal exemption from Indian tax, withholding or reporting.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: Exactly ₹2 crore and a one-rupee crossing
One non-resident has qualifying payments of ₹80 lakh, ₹70 lakh and ₹50 lakh from three Indian counterparties: total ₹2,00,00,000. The monetary limb is not crossed. One further qualifying rupee makes ₹2,00,00,001 and crosses it. This is not an exemption for the whole enterprise: the user limb and other domestic nexuses remain separate.
Illustrative example 2: Aggregate across the tax year, not each contract
Four non-overlapping quarterly payment populations are ₹40 lakh, ₹55 lakh, ₹60 lakh and ₹50 lakh: total ₹205 lakh. The monetary threshold is exceeded by ₹5 lakh. The test is not applied separately to each quarter, customer or contract. The ₹5 lakh excess is not automatically the tax base; attribution and the applicable treaty still need examination.
Illustrative example 3: A settlement net of platform fees is not the whole population
Assume contracts establish the foreign enterprise as principal seller, with qualifying customer consideration ₹210 lakh. A payment platform retains an identifiable ₹21 lakh commission and remits ₹189 lakh. The reconciliation is 189 + 21 = ₹210 lakh. On these facts the monetary test is crossed; the commission is not a reduction merely because it was withheld in settlement. Genuine agency arrangements, refunds and different contractual facts need separate legal analysis.
Illustrative example 4: Avoid counting the same user in two product databases
Two Indian-user datasets contain 1,80,000 and 1,70,000 qualifying users, with 70,000 evidenced overlaps: the reconciled population is 2,80,000. Another 20,000 distinct qualifying users gives 3,00,000 and reaches the prescribed benchmark. The example assumes the statutory activity condition and Indian location are established; it does not prescribe a cookie, device or active-user standard.
Illustrative example 5: Do not substitute group turnover for the tested non-resident
Two genuinely separate non-resident suppliers have qualifying payments of ₹120 lakh and ₹130 lakh respectively. Combined group payments are ₹250 lakh, but each is below ₹200 lakh on these facts. Section 9(9)(d)’s test is for the non-resident; a consolidated dashboard alone does not establish that each supplier crosses it. Artificial splitting, agency/business-connection facts, user activity and other nexus rules require independent review.
Illustrative example 6: Pure procurement for export has an express exclusion
A non-resident’s only relevant Indian transactions are purchases of goods worth ₹300 lakh, documented as confined to export out of India. Section 9(9)(e) excludes those transactions/activities from clause (d), despite the size of the procurement. If a separate Indian sales activity of ₹40 lakh is later identified, the pure-procurement conclusion cannot simply be extended to that activity; analyse it and the user limb separately.
Illustrative example 7: Separate receipts, commercial profit and attributable income
Qualifying receipts of ₹250 lakh exceed the threshold; related commercial costs are ₹230 lakh, giving an accounting margin of ₹20 lakh before other adjustments. Neither ₹250 lakh of receipts, ₹50 lakh of threshold excess, nor automatically all ₹20 lakh is the final Indian taxable amount. Prepare a supported attribution and tax-computation analysis, then apply any available treaty limitation. No standard SEP attribution percentage is assumed in this example.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Fix tax year and the current Act/Rules references. | Period note: section 9(9), Rule 13 and source versions. |
| 2 | Identify the precise non-resident and contracting capacity. | Legal-entity chart and principal/agent contracts. |
| 3 | Extract qualifying Indian transaction populations. | Counterparty and transaction register. |
| 4 | Reconcile consideration to settlements and deductions. | Invoices, platform statements and commission records. |
| 5 | Aggregate payments across the tax year. | Quarter/customer totals and boundary test. |
| 6 | Build a supported qualifying-user population. | Activity, location and deduplication evidence. |
| 7 | Test pure export-procurement exclusion and other exceptions. | Purchase/export trail and scope memorandum. |
| 8 | Analyse treaty residence and entitlement. | TRC, Form 41 information and treaty conditions. |
| 9 | Separate income characterisation and attribution. | Treaty article and supported profit attribution workpaper. |
| 10 | Document withholding/reporting conclusions and uncertainties. | Dated reasoned memo and follow-up responsibility. |
Sixteen practitioner FAQs
1. Does exactly ₹2 crore cross the payments threshold?
No. Section 9(9)(d)(i) requires the aggregate to exceed the prescribed amount. The user limb and other nexus provisions must still be tested.
2. Is the user benchmark also worded as payments exceeding a limit?
No. It is a separate limb referring to the prescribed number of users and qualifying solicitation/interaction. Rule 13 specifies 3,00,000 users.
3. Must both limbs be satisfied?
No. They are alternatives, subject to the statutory conditions and exclusions. A small payment amount does not eliminate a qualifying user-based nexus.
4. Is SEP limited to digital advertising?
No. The payments limb covers qualifying goods, services or property, including specified downloads. Advertising/data income also requires attention under clause (g).
5. Does signing the agreement outside India prevent SEP?
No. Clause (d) expressly makes the nexus independent of where the agreement is entered into, among other physical-presence factors.
6. Can the test be run customer by customer?
The monetary test aggregates qualifying transactions of the non-resident during the tax year. Testing each customer in isolation can miss the crossing.
7. Are bank receipts always the prescribed payments base?
A bank statement can omit commissions, deductions or payments routed through intermediaries. Reconcile contractual consideration and explain disputed inclusions rather than relying on a net settlement total.
8. Does Rule 13 prescribe monthly active users?
It specifies a number and the relevant activity condition, not a complete monthly analytics methodology. Keep a reasoned identification, location and deduplication policy.
9. Are website hits equivalent to users?
Not automatically. Repeated hits, bots, multiple devices and non-Indian activity can distort the population; evidence must support the statutory user/activity test.
10. Does a free service avoid the user limb?
Not merely because it has no user payment. Assess whether the separate qualifying solicitation/interaction condition and user number are met.
11. Is export procurement exempt regardless of activity?
The exclusion is for transactions/activities confined to purchases in India for export. It should not be extended without analysis to Indian sales or unrelated services.
12. Does crossing the threshold tax only the excess?
No automatic excess-only base follows from the threshold. The relevant income attribution, computation and treaty analysis determine the consequence.
13. Does SEP automatically create a treaty PE?
No. Domestic business connection and the actual treaty’s PE definition are separate tests. Read the specific agreement and applicable modifications.
14. Does a TRC settle all treaty questions?
No. The current prescribed information, residence facts, income article, beneficial ownership where relevant, limitation-on-benefits and anti-avoidance conditions also matter.
15. Which current form supports treaty-information disclosure?
Rule 75 of the Income-tax Rules, 2026 refers to Form 41 for the non-resident information under section 159(8)(b). Older Form 10F references must be matched to their period.
16. What if the user database cannot be reliably reconciled?
Record the data limitation, preserve the underlying extracts and obtain a supported tax analysis. An unverified count below the threshold is not a defensible no-SEP conclusion.
Conclusion
Maintain two evidence-based reconciliations—qualifying payments and qualifying users—then separately decide treaty entitlement, income character and attribution. A threshold dashboard should flag the review; it should not manufacture a final tax amount.