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  • Writer's pictureIRALR


Updated: Jul 28, 2020

The Article has been authored by Jagrat Shah, a current third year law student at Gujarat National Law University


The Indian economy has been in peril and the growth of the Indian Gross Domestic Product (GDP) in the third quarter has been recorded at 4.7%, a nearly seven-year low growth. Arvind Subramaniam, the former Chief Economic Advisor to the Government of India has noted that Indian economy is facing a great slowdown and has entered a four-balance sheet problem, wherein, the banks, infrastructure companies, non-banking financial corporations and the real estate companies have been hit hard due to the non-performing assets.

While, majority of the sectors of the Indian economy were failing in recording an economic growth in the preceding years, it was the Information Technology sector that recorded a growth of about 6.1% in the year 2019. Government of India has closely kept a view on this growing economic progress of the technology sector of India and has significantly focused on the growth of the Information Technology sector in the Union Budget 2021.

The President of NASSCOM, Mr. Debjani Ghosh has appreciated the efforts of the government in the budget to focus on the Information Technology sector and has optimistically seen creation of technology as a bedrock of development and growth of the Indian economy.

Embracing the relationship between the Data Privacy Bill, 2019 and the Data Centre Parks

In today’s time, the technology sector is the fast-growing sector in all the major economies of the world. Indeed, technology has been identified as the most significant sector in the decade of 2010s in comparison to all the other sectors in the industry. As the technology sector is growing exponentially, the use of data of private customers collected through online means is also increasing manifolds. Since, the entire technology industry is highly dependent upon storage and maintenance of data, the need for development of data park centres has increased at the global levels. These data park centres are generally created by huge investments from real estate and technology sector companies where large amount of data storage devices are stored and maintained. It is through these data centres that the data of various people is stored and used by the companies to add a technological aspect to each stage of their value addition process.

The legislative efforts of the government in this regard started with the constitution of the B N Srikrishna Committee in 2018 to draft a law on data privacy in India. After the submission of the report and review of the bill, the Union Cabinet approved the Personal Data Protection Bill, 2019 on December 04, 2019, and was later sent for review to the Joint Parliamentary Committee. Localisation of data refers to the practice that the companies that collect data of the citizens have to store such data in the servers located within the territorial jurisdiction of the country and highly sensitive data can be shared overseas only with the approval of the government.

However, the government has attenuated localisation of data in the Personal Data Protection Bill. The information related to the citizens has been divided into two types. First is the sensitive data which includes data related to finance, health, caste, religion, affiliation, genetic and biometric data which can be shared overseas with the permission of the user, as per Section 3(36) of the Data protection Bill 2019. The company has to however maintain a copy of the data shared in India too. The other type of data is classified as critical personal data which would include data as determined by the Parliament, especially the data that is closely connected with national security, and such data cannot be shared with anyone except if permitted by the government, as per Section 33(2) of the Data Protection Bill, 2019.

In the light of the observations made above, it may be stated that the government has deliberately placed emphasis on the importance of the technology sectors in Budget 2020 and has further promised to make a national policy dealing with the establishment of the data centre parks in India by the private players during the announcement of the Union Budget in the Parliament. Hopefully, the government shall understand the negative impact of data localisation on the multi-national technology players and shall try to balance the interests of right to privacy of the Indian citizens and enable the global technology companies to continue their smooth functioning in India. This can effectively be done by taking away the wide discretion given to the Parliament to determine what is ‘critical personal data’ and giving a specific definition to the same and thus, such international global companies shall not face any legal uncertainty in India while dealing with the data of the Indian citizens.

Amendments brought in Income Tax Act, 1961 vis-à-vis information technology sector

Section 9 of Income Tax Act, 1961 deals with the provisions of when can an income be said to be accrued or arisen in India. It also creates a legal fiction and by its virtue it gives a deeming effect to certain incomes to have been accrued or arisen in India. The Privy Council in the case of CIT v. Bombay Trust held that the effect of deeming fiction is that even though the same in reality may not fall in the purview of the definition, the Act of Parliament required it to be treated as if it were. In Cl. (1)(i) of Section9 it is laid down that all income accruing or arising, whether directly or indirectly, through or from any business connection in India shall be deemed to be Indian income. Therefore, business connection is necessary for income to accrue or arise in India.

One of the controversial points which would have resulted into litigation under the previous explanation 2A was the use of the words ‘digital means’ in clause (b). It meant that even though a non-resident may be soliciting customers from India and he may be doing the same without having an agent in India so as to constitute business connection i.e. through use of bill boards, postal services, pamphlets etc. then even though the business pertains to digital economy, it will not be taxable under explanation 2A of the Act as the same neither constitutes a business connection nor will it fall within the purview of digital means under clause (b) of explanation 2A.

The amendment through Finance Act, 2020 also has now removed the words ‘through digital means’ from clause (b) of explanation 2A of § 9 of The Income Tax Act, 1961, thereby not limiting solicitation of clients just through digital means but now solicitation of clients through any means would impose liability on the non-resident for income generated from India if the clients they engage with continuously increased prescribed limit.

One of the other problems in the erstwhile explanation 2A was that it did not clarify what constituted a transaction in India and this in turn affected the taxability as there were different approaches that had been adopted by the courts so as to determine whether the transaction was to be considered within India or not. The two dominant tests on this subject are the control test over the server and the access test of the data of the server.

But the new amendment tries to cure this controversy by adding the phrase with any person in India in clause (a) of explanation 2A of § 9 thereby putting an end to the controversy about the place of transaction being determined as now any transaction by a non-resident with a resident in India if it exceeds the limit then would be taxable.

Also, an explanation 3A was added by the Finance Act 2020. The mischief that is sought to be cured by proposing this Explanation 3A is that earlier if data was collected from Indian users and was sold then though the business was driven by Indian data the same was not taken into consideration for determining whether the organization had significant economic presence or not. This has been done in accordance with the OECD draft report.

The result of this explanation is that even if a resident Indian goes abroad for tourism and downloads an application, the same shall be considered for the purposes of calculating the income attributable to profits in India.

Another challenge to this provision is the use of Virtual Private Network Apps. The usage of these apps change the location of the Internet protocol address. Therefore, a person using a VPN app is physically located in any other country and hence it creates problem. It leads to miscalculation of the figures and results in higher burden on the companies even when the data collected is neither of Indian residents nor the physical location of those people is in India. It creates an additional burden on the Non-residents that carry on business in India through electronic means.


Though the Finance Act, 2020 has brought in certain changes in the Income Tax Act ,1961 for the benefit of the information technology sector, there are certain loopholes as illustrated in the preceding sections, which need certain more polishing and legislative effort so that the desired result is achieved. The government has time up to the year 2021 because the provisions of explanation 2A shall be in force up to financial year 2020-21. The challenged faced by the Government is a bit complex as it involves an interplay of various factors such as the use of VPN or BOTS which are many times used to garner more cyber traffic on website and it is a practice that is followed by a lot of e-commerce platforms as well as social marketing apps and websites. To prevent this the government must look into to the international approach which is mandated by the OECD in its final report which is expected to be published in the later part of the year 2020. All in all, the changes made by the Government are welcoming in certain aspects but they do require a bit more polishing at some levels and thus it generates a mixed effect when the provisions of the 2020 Budget with regards to The Income Tax Act, 1961 are seen vis-à-vis the Information Technology Sector.

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