Virtual Services Rendered By Foreign Law Firms In India Not Taxable Under India-Singapore DTAA: Delhi High Court

The Delhi High Court has held that in the absence of any physical presence, virtual services rendered by a foreign law firm in India would not constitute taxable service under India-Singapore Double Taxation Avoidance Agreement.A division bench of Justices V. Kameswar Rao and Vinod Kumar observed,“Article 5(6) of the DTAA only contemplates rendering of services by employees present within the country. If that be so, it is not for this Court to analyse the status or merits of a virtual service permanent establishment which does not find mention either in the DTAA or in the domestic Act. As such, the contention of the Revenue that a virtual service permanent establishment of the assessee has been established for AYs 2020-21 and 2021-22 cannot be accepted.”The Court thus upheld the relief granted to Singapore-based law firm Clifford Chance Pte Ltd.Article 5(6) of the India-Singapore DTAA contemplates that an enterprise shall be deemed to have a permanent establishment in the contracting state only if the activities within the contracting state continue for a period aggregating to 90 days in any fiscal year.Clifford Chance claimed it provided physical legal advisory services in India only for 84 days.Revenue on the other hand claimed that the firm's employees were present in India for a total of 120 days in AY 2020- 21. It thus proposed to make an addition of ₹15,55,45,693/- to the firm's income.The law firm claimed that the said employees were on leave for 36 days and thus the number of days would come to 84 days, which is less than the threshold of 90 days provided under Article 5(6)(a).For the A.Y. 2021-22, addition of ₹7,97,64,414/- was sought to be made on the ground of virtual services rendered in India.ITAT had deleted the additions stating, “in our considered view to constitute a service PE actual performance of service in India is essential and accordingly only when the services are rendered by the employees within India with their physical presence during the financial year relevant to the AYs under consideration shall be taken into account for computing threshold limit for creation of a service PE of the assessee in India.”Before the High Court, Revenue argued that as a result of rapid digitisation, companies can now continue to provide services even without the physical presence of employees in the contracting state. Thus, a virtual service permanent establishment of the assessee company was established in India, making the receipts on account of those services are taxable in India.While the High Court agreed that taxability of foreign entities must be governed keeping in mind the increasingly open global virtual economy, and the diminishing requirement of physical presence of non-resident employees to furnish services. However, it added that taxability of entities in such instances remains subject to the applicable provisions of law— India-Singapore DTAA in this case, which is silent on taxability of virtual services.It observed that Article 5(6)(a) of the DTAA reads “An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services… within a Contracting State through employees or other personnel…”. The words “within a Contracting State” and “through employees or other personnel”, the Court said, contemplates rendition of services in India by the employees of the non-resident enterprise, while mandating a fixed nexus; a physical footprint within India. “The term “within” has a certain territorial connotation and in the absence of personnel physically performing services in India, there can be no furnishing of services “within” India. A plain reading of the whole provision would thus reveal that, it is such rendition of services by employees present within the country which would constitute a service permanent establishment.”Revenue insisted that receipts on account of virtual services rendered by the firm must be held to be amenable to taxation in India, since a “virtual service permanent establishment‟ has been established. The Court however held,“We find that no such eventuality is contemplated by the DTAA. The concept of a virtual service permanent establishment does not find mention anywhere in the DTAA. In the absence of any such provision, the argument would be at variance that the express provisions of the DTAA which we have already interpreted above.”As such, it dismissed Revenue's appeal.Appearance: For the Appellant : Mr. Puneet Rai, SSC, Mr. Ashvini Kr., Mr. Rishabh Nangia, Mr. Gibran, JSC. For the Respondent : Mr. Ajay Vohra, Senior Advocate with Mr. Adityya Vohra, Mr. Kunal Pandey and Mr. Tanmay, Advocates. Case title: Commissioner Of Income Tax, International Taxation-1, New Delhi v. Clifford Chance Pte Ltd.Citation: 2025 LiveLaw (Del) 1669Case no.: ITA 353/2025 + ITA 354/2025Click here to read order

Virtual Services Rendered By Foreign Law Firms In India Not Taxable Under India-Singapore DTAA: Delhi High Court

Kapil Dhyani

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