"Virtual Service PE" - Wow!
In the recent case of Clifford Chance Pte. Ltd. dealing with the India-Singapore DTAA, the Hon’ble Delhi High Court held that for constitution of a service PE in India, there must be rendition of services within India through employees or other personnel in India and such activities should continue for a period more than 90 days in a fiscal year.
Further, the High Court upheld the following findings of the Tribunal:
- For calculating 90 days threshold, the period of “activity” is relevant (therefore, common days spent by multiple employees are not to be aggregated);
- Only the days on which “services” were actually rendered by the employees in India to the clients are to be counted (therefore, holidays and days spent on business development are to be excluded).
The High Court also clarified that services rendered virtually from outside India don’t quite make the cut and cannot lead to constitution of the so-called “virtual service PE” as alleged by the Revenue, since no such concept finds any mention in Article 5 of the DTAA.
There is another interesting aspect which further dismantles the imaginative concept of a “virtual service PE”.
As per Article 7 of the DTAA, business profits of a resident of one contracting state can be taxed in the other contracting state only if it carries on business in the other contracting state through a “permanent establishment situated therein”.
The words “situated therein” add an additional condition which further indicates a requirement of some sort of physical presence. It is inconceivable how the so-called virtual service PE could be said to be situated in India when the services are being rendered in Singapore. Such a virtual service PE, if at all, would be situated in Singapore.
Be that as it may, till the time there is no amendment in the DTAAs, the concept of virtual service PE remains what its name suggests; virtual, not real.
[CIT v. Clifford Chance Pte. Ltd. ITA No. 353/2025 (Delhi HC)]
#Incometax #TaxLitigation #VirtualServicePE