To Constitute a Service PE, Services Must Be Furnished Within India Through Employees Present in India: Delhi High Court

“Courts Cannot Read New Concepts Into Treaty Provisions Which Are Not Explicitly Included”: Delhi High Court delivered a significant judgment in the case of Commissioner of Income Tax, International Taxation-1, New Delhi v. Clifford Chance Pte Ltd (ITA 353/2025 & ITA 354/2025), affirming that a foreign enterprise can be taxed in India under Article 5(6)(a) of the India-Singapore Double Taxation Avoidance Agreement (DTAA) only if services are “furnished within” India through employees physically present in India for more than 90 days. The Court held that a ‘Virtual Service Permanent Establishment (PE)’ has no recognition under the existing DTAA and cannot be judicially constructed in the absence of express treaty language. The Revenue’s appeals were accordingly dismissed.

The central legal question before the Division Bench of Justices V. Kameswar Rao and Vinod Kumar was whether the Singapore-based legal advisory firm Clifford Chance Pte Ltd had a Service PE or a Virtual Service PE in India for AYs 2020–21 and 2021–22 under Article 5(6)(a) of the DTAA. The Revenue contended that either the physical presence (exceeding 90 days) or virtual provision of services to Indian clients would trigger PE under the treaty, thereby attracting Indian tax liability. The High Court, however, upheld the Tribunal's finding that actual performance of services within India through physically present employees is mandatory for a Service PE under the India-Singapore DTAA.

Clifford Chance Pte Ltd, a non-resident Singapore-based legal advisory firm, filed NIL income returns for AYs 2020–21 and 2021–22. The Assessing Officer, however, assessed taxable income of ₹15.55 crore and ₹7.97 crore respectively, alleging that the assessee had a Service PE in AY 2020–21 and a Virtual Service PE in AY 2021–22 based on services rendered to Indian clients. The assessee appealed successfully before the ITAT, which held that the Service PE threshold was not crossed and that the DTAA did not recognize a Virtual PE. The Revenue challenged this before the High Court.

The core legal issue was the interpretation of Article 5(6)(a) of the India-Singapore DTAA, which 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, but only if: (a) the activities of that nature continue within that Contracting State for a period or periods aggregating more than 90 days in any fiscal year.”

The Revenue contended that:

1. Vacations and business development days should not be excluded from the 120-day stay period of the employees in AY 2020–21.

2. Virtual services rendered remotely also amount to furnishing services “within” India, thus constituting a “Virtual PE”.

The High Court disagreed on both counts, holding that neither the aggregate threshold was met after legitimate exclusions, nor does the DTAA contemplate a “Virtual PE”.

On Exclusion of Vacation and Business Development Days

The Court endorsed the Tribunal's detailed factual analysis and legal reasoning in excluding 36 vacation days, 35 business development days, and 5 common days from the 120-day period of presence in India. The Court held:

“It is only logical that only the days on which actual services were rendered by the employees of the assessee need to be considered while computing the threshold limit of 90 days.”

The Court referred to E-Funds IT Solutions Inc [(2017) 399 ITR 34 (SC)] and DIT v. E-Funds IT Solutions [(2014) 364 ITR 256 (Del)] to reiterate that actual performance of services within the source country by personnel physically present is an essential prerequisite to trigger Article 5(6).

On Virtual PE and Treaty Interpretation

Rejecting the Revenue’s reliance on global digitisation trends and OECD commentary, the Court categorically ruled that:

“The concept of a virtual service permanent establishment does not find mention anywhere in the DTAA… Courts cannot read in concepts which are not expressly provided for by the treaty.”

Citing Union of India v. Azadi Bachao Andolan [(2004) 10 SCC 1] and Engineering Analysis Centre for Excellence [(2021) 432 ITR 471 (SC)], the Court reiterated the primacy of treaty provisions under Section 90(2) of the Income Tax Act. It noted:

“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.”

Rejection of ABB FZ-LLC and Verizon Judgments

The Court distinguished the ABB FZ-LLC case [(2017) 166 ITD 329 (Bang)] and Verizon Communications [(2014) 361 ITR 575 (Mad)] relied upon by the Revenue, noting they dealt with different treaty frameworks or domestic provisions such as royalty/FTS, and not Article 5(6) of the India-Singapore DTAA. It emphasized that “the facts and treaty provisions in those cases were fundamentally different.”

The High Court decisively rejected the Revenue's attempt to import the “Virtual Service PE” doctrine into the India-Singapore DTAA in the absence of express treaty text. Reaffirming the principle of strict treaty interpretation, the Court held that physical presence of personnel is sine qua non for establishing a Service PE under Article 5(6)(a). The appeals were dismissed and both questions of law were answered in favour of the Assessee.

“If something is conspicuous by its absence, the presumption is that it has deliberately been done so. It is not for courts to read in concepts which are not expressly provided for by the treaty.”

Date of Decision: 04 December 2025