No Virtual Service Permanent Establishment In India In The Absence Of A Specific Provision

Acuity Law


Acuity Law
The advent of the Digital economy has led to the introduction of various taxation issues. One such issue being creation of a virtual permanent establishment (PE) in a country...
India Tax
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The advent of the Digital economy has led to the introduction of various taxation issues. One such issue being creation of a virtual permanent establishment (PE) in a country, where the services are rendered without having any physical presence. The Income Tax Appellate Tribunal, Delhi (Tribunal), recently has dealt with the issue of creation of a virtual PE in India in the case of Clifford Chance Pte Ltd. v. ACITi.

In this article, we have discussed the ruling of the Tribunal in the ensuing paragraphs:

Facts of the case

The taxpayer, a tax resident of Singapore, is engaged in providing legal advisory services to several international clients including those in India. The taxpayer filed its return of income for AY 2020-21 and 2021-22 declaring Nil income and claimed credit of taxes deducted. During the AY 2020-21, part of the advisory services was rendered by the taxpayer remotely (outside India) and part of it was rendered by visiting India. The aggregate number of days during which the employees of the taxpayer were present in India to render legal advisory services was for 44 days. During the AY 2021-22, the services were rendered remotely, and no employees had visited India for rendering of services.

On these facts, the Assessing Officer (AO) passed the final assessment orderii against the taxpayer by holding that the taxpayer constituted a service PE based on the physical presence of employees in India (For AY 2020-21) and also a virtual service PE (for both the years). For AY 2020-21, the AO also contended that the employees of the taxpayer were present in India for 120 days (which was arrived at by considering vacation days, business development days and common days) instead of 44 days as contended by the taxpayer.

The AO held that in terms of Article 5(6)(a) of the India Singapore Double Taxation Avoidance Agreement (DTAA), what is important is the aggregate duration of provision of services by the non-resident within India and Singapore and the duration of physical presence of the employees in India is not material. Accordingly, the AO attributed to the PE, 100% receipts of the taxpayer earned from India and taxed accordingly.

The taxpayer filed an appeal before the Tribunal challenging the order of the AO.

Ruling of the Tribunal

Article 5(6)(a) of the DTAA

Article 5(6) of the DTAA, which prescribes the conditions for constitution of a service PE is as follows:

"An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12, within a Contracting State through employees or other personnel, but only if:

(a) activities of that nature continue within that contracting state for a period or periods aggregating more than 90 days: or...."

The Tribunal, based on the above provision held that the following conditions needs to be cumulatively satisfied for constitution of a service PE in India:

  1. Employees of the taxpayer should be present in India;
  2. The taxpayer should furnish services in India through the employees present in India; and
  3. Such services shall be provided for more than 90 days in a financial year.

Physical presence is a pre-condition

On the interpretation of Article 5(6)(a) of the DTAA, the Tribunal held that to constitute a service PE in India, actual performance of services in India is essential. Thus, only if the employees are physically present in India, a service PE is constituted. In this regard, the Tribunal relied upon the decision of the Hon'ble Supreme Court in ADIT v. E-funds IT Solutions Inciii. wherein it was held that the requirement of service PE is that services must be furnished "within India".

For AY 2020-21 – Computation of the threshold limit of 90 days

While computing the threshold limit of 90 days, specifically for AY 2020-21, the Tribunal held that the following should be excluded:

  • Number of days spent on vacation by the employees;iv
  • Number of days spent to undertake business development by the employees;
  • Common days spent by the employees (computation of threshold should not be based on man days).

Thus, the Tribunal held that "In effect, the services have been furnished by the assessee only for 44 days in India after excluding vacation period, Business Development days and common days and accordingly the assessee does not constitute service PE in India as per India-Singapore DTAA during the AY 2020-21".

For AY 2021-22

For A.Y. 2021-22, the Tribunal held that the taxpayer did not constitute a service PE in India, as none of the employees of the taxpayer were physically present in India.

Virtual PE

For both the AYs under consideration, the AO contended that the taxpayer created a virtual PE in India. The AO to support its argument relied upon the OECD Interim Report (2018) on "Tax challenges arising from Digitalisation" which discusses the concept of virtual service PE as a measure towards digitalization of economy.

The Tribunal addressed this contention by holding that "[i]n our considered view the assessee does not constitute virtual service PE in India as no provision regarding establishment of virtual service PE are mentioned under India Singapore DTAA and hence the present service PE provision under the India-Singapore DTAA which requires physical rendition of service in India should only be applied".

On the OECD report argument, the Tribunal held that the OECD report clearly mentions that in absence of any amendments to the tax treaty, such measures can be challenged by the taxpayers. The Tribunal also observed that the view on virtual PE has been officially endorsed in Saudi Arabia only but not in India. Therefore, ITAT rejected the virtual PE argument.


On the basis of the above reasoning, the Tribunal concluded that the taxpayer did not constitute a service PE/virtual PE in India for AY 2020-21 and 2021-22. Revenue earned by the taxpayer from Indian clients in these two AYs is in the nature of business profits, not taxable in India in the absence of a PE in India in accordance with Article 5(6)(a) and Article 7 of the DTAA.

Our thoughts

The law is evolving when it comes to addressing the tax challenges associated with digital economy. Countries are evolving measures to address these challenges. However, till the time no specific provision is agreed upon and inbuilt into the law, a taxpayer cannot be taxed. This is exactly what the Delhi Tribunal has pronounced.

This is a welcome ruling as it clearly clarifies that physical presence is a pre-condition for creation of a service PE in India and in the absence of a specific provision, a virtual PE cannot be created. The Tribunal has clarified the manner in which the threshold limit is to be computed i.e., only days which relate to rendering of services should be considered. Vacation and business development days should be excluded. Further, it is a settled law that multiple counting of common days should be avoided (days when more than one individual is present), which has been re-affirmed by the Tribunal. It would be interesting to see how the law evolves on the concept of virtual PE in India.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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