Delhi High Court: In appeals under Section 260-A of the Income-tax Act, 1961, filed by the Income Tax Department, challenging the Income Tax Appellate Tribunal’s (‘Tribunal’s’) order dated 14-3-2024 (‘impugned order’) deleting additions made on the premise that the assessee did not have a virtual service permanent establishment in India, the Division Bench of V Kameswar Rao, J and Vinod Kumar, J, upheld the Tribunal’s order.
The Court held that the assessee did not constitute either a service permanent establishment or a virtual service permanent establishment in India for the relevant assessment years, and consequently, the receipts earned by the assessee from Indian clients were not taxable in India under the DTAA.
Also read: Virtual Permanent Establishment: Indian High Court Rejects Clamour to Expand Tax Treaty Contours
Background
The respondent-assessee is a non-resident company engaged in the business of legal advisory services. It had filed its income for Assessment Year (‘AY’) 2020-2021 and AY 2021-2022 as ‘nil’. The Assessing Officer (‘AO’) had passed draft assessment order for AY 2020-2021 and AY 2021-2022, proposing additions. Aggrieved by the same, the assessee had approached the Dispute Resolution Panel (DRP) which had dismissed the objections of the respondent. Vide orders dated 28-7-2023 and 29-10-2023 the AO had passed final assessment orders assessing a total income of Rs. 15,55,45,693 and Rs. 7,97,64,414 for AYs 2020-2021 and 2021-2022 respectively. The said orders had been challenged before the Tribunal which vide the impugned order had deleted the additions made by the AO.
The petitioner, challenged the impugned orders on the ground that the Tribunal had erred in holding that the assessee did not have a service permanent establishment or a virtual service permanent establishment in India.
Analysis, Law and Decision
The primary question for consideration before the Court in the instant appeal was whether the assessee a service permanent establishment or a virtual service permanent establishment in India so as to be taxed on the gross total receipt for the two assessment years.
According to Section 5(6) of the India-Singapore Double Taxation Avoidance Agreement (‘DTAA’) an enterprise shall be deemed to have a permanent establishment in the contracting state through its employees or other personnel only if the activities within the contracting state continue for a period aggregating to 90 days in any fiscal year.
The Court emphasised that the expression ‘within a Contracting State’ carries a territorial connotation and contemplates actual performance of services in India by employees physically present in the country.
With respect to AY 2020-2021, the Court accepted the Tribunal’s finding that although the assessee’s employees were present in India for 120 days, services were actually rendered only for 44 days after excluding vacation days, business development days, and common days. The Court observed that only days on which services were rendered to clients resulting in income could be counted for determining the threshold under Article 5(6). On this basis, the threshold of 90 days was not met, and no service permanent establishment was constituted.
For AY 2021-22, the Court held that in the absence of any physical presence of employees in India, the assessee could not be said to have furnished services ‘within’ India. The Court rejected the petitioner’s contention that virtual or remote rendition of services could constitute a service permanent establishment, noting that the DTAA does not recognise the concept of a ‘virtual service permanent establishment’. It was held that treaty provisions must be interpreted strictly, and concepts not expressly provided for cannot be read into them by judicial interpretation.
The Court further observed that while developments in the digital economy and OECD reports may reflect evolving international tax policy, such considerations cannot override the clear language of the DTAA. In the absence of treaty amendments, unilateral domestic developments or minority views expressed in OECD reports could not alter the taxability framework agreed upon by the contracting States.
The Court upheld the Tribunal’s order and dismissed the petitioner’s appeals. It was held that the assessee did not constitute either a service permanent establishment or a virtual service permanent establishment in India for the relevant assessment years, and consequently, the receipts earned by the assessee from Indian clients were not taxable in India under the DTAA.
[Commissioner of Income Tax v. Clifford Chance Pvt. Ltd., 2025 SCC OnLine Del 8771, decided on 4-12-2025]
*Judgment authored by: Justice V. Kameswar Rao
Advocates who appeared in this case:
For the Appellant: Puneet Rai, SSC, Ashvini Kr., Rishabh Nangia, Gibran, JSC
For the Respondent: Ajay Vohra, Senior Advocate, Adityya Vohra, Kunal Pandey, Tanmay, Advocates