Virtual Services Of Foreign Law Firms In India Not Taxable Under India-Singapore DTAA; Delhi High Court
Safiya Malik
The High Court of Delhi Division Bench of Justice V. Kameswar Rao and Justice Vinod Kumar held that a Singapore-based law firm did not have a service or virtual service permanent establishment in India and therefore its receipts from Indian clients for the relevant assessment years were not taxable here. The Bench considered legal advisory services rendered partly through short visits of employees to India and largely from abroad, and concluded that only days involving actual on-ground client services could be counted towards the 90-day threshold under the India–Singapore DTAA. It further concluded that, in the absence of any physical presence in India, virtual legal services provided from overseas do not amount to taxable services under that treaty framework.
The assessee, a non-resident company engaged in legal advisory services, filed returns of income for AY 2020-21 and AY 2021-22 declaring nil income. The Assessing Officer issued draft assessment orders proposing additions of ₹15,55,45,693 for AY 2020-21 and ₹7,97,64,414 for AY 2021-22. The Dispute Resolution Panel dismissed the assessee’s objections and final assessment orders were passed assessing these amounts as taxable income. The AO held that the assessee constituted a service permanent establishment and a virtual service permanent establishment in India under Article 5(6) of the India-Singapore DTAA.
The Revenue contended that the assessee’s employees were present in India for 120 days during AY 2020-21 and that the Tribunal erred in excluding 36 vacation days, 35 business development days and 5 common days. It further asserted that physical presence was not necessary for a service PE and that services furnished from outside India created a virtual service PE. Reliance was placed on the OECD Interim Report 2018 and decisions including Hyatt International Southwest Asia Ltd.
The assessee submitted that Article 5(6) requires actual performance of services in India through employees present within India, and only days on which services were furnished to clients in India could be counted. Time-stamp sheets, HR leave records and declarations were placed on record to demonstrate that only 44 days of actual client services were performed in India in AY 2020-21. For AY 2021-22, no employees were present in India and all services were rendered from outside India. The assessee asserted that the DTAA does not recognize virtual service PE. The Tribunal accepted the assessee’s position and deleted the additions.
The Court recorded that “Article 5(6) of the DTAA contemplates that 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.” It noted the Tribunal’s reasoning that “actual performance of services in India by employees physically present in the country is necessary.” The Court stated that the assessee had produced “time sheets for the employees wherein annual leave has been captured, and also the leave record extracted from its HR system,” and that these established that “if the vacation days are excluded … the number of days would come to 84 days, which is less than the threshold of 90 days.”
The Court observed that business development days and common days could not be counted because “no services were provided to customers in India during the time spent on business development and … the computation should not be based on man days by aggregating the common days spent by more than one individual.” It further recorded that “only the days on which actual services were rendered by the employees … need to be considered while computing the threshold limit of 90 days.”
Addressing the Revenue’s virtual PE contention, the Court stated that “no such eventuality is contemplated by the DTAA.” It held that “the concept of a virtual service permanent establishment does not find mention anywhere in the DTAA” and that “in the absence of personnel physically performing services in India, there can be no furnishing of services ‘within’ India.” The Court further observed that “language which is not explicitly included in treaty provisions cannot be artificially read into such provisions by way of judicial fiction.” On OECD materials, the Court recorded that “until Article 5(6) of the DTAA is renegotiated or supplemented, the existing treaty framework does not extend to virtual or digital services provided from abroad.”
The Court noted that reliance on ABB FZ-LLC was misplaced because “the facts of that case and the context in which this decision was rendered … differs from the facts of the assessee’s case,” and that the judgement concerned taxation of FTS under the India-UAE DTAA. It also recorded that the Madras High Court’s observations in Verizon were “obiter dicta, and not an authoritative view on the issue.” With respect to Hyatt International Southwest Asia Ltd., the Court stated that the judgment was distinguishable because it addressed “continuity of business presence in the aggregate” for a fixed-place PE, not the threshold days under Article 5(6).
The Court directed that “the Tribunal was justified in passing the impugned order. We agree with the reasoning given by the Tribunal and find no reason to interfere with the same. The substantial questions of law A and B are both answered against the appellant/Revenue and in favour of the respondent/Clifford Chance Pte. Ltd.” Accordingly, “the appeals are dismissed.”
Advocates Representing The Parties
For the Appellant (Revenue): Mr. Puneet Rai, SSC; Mr. Ashvini Kr.; Mr. Rishabh Nangia; Mr. Gibran, JSC.
For the Respondent (Assessee): Mr. Ajay Vohra, Senior Advocate with Mr. Adityya Vohra; Mr. Kunal Pandey; Mr. Tanmay.
Case Title: Commissioner of Income Tax, International Taxation-1, New Delhi v. Clifford Chance Pte Ltd
Neutral Citation: 2025: DHC:10838-DB
Case Number: ITA 353/2025 & ITA 354/2025
Bench: Justice V. Kameswar Rao; Justice Vinod Kumar
