Flash Alert: Ruling of the Hon’ble Delhi ITAT in the case of Clifford Chance Pte. Ltd.

Flash Alert: Ruling of the Hon’ble Delhi ITAT in the case of Clifford Chance Pte. Ltd.

Flash Alert: Ruling of the Hon’ble Delhi ITAT in the case of Clifford Chance Pte. Ltd.

  • Posted by kalyani
  • On March 21, 2024

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A significant concept in international taxation is Permanent Establishment (‘PE’), through which Source states can tax profits earned by non-resident entities in their state. Most treaties executed by India have a concept of a Service PE. In most cases, a Service PE in the Source state is established if:

  • The non-resident provides services for a period longer than the prescribed threshold period.
  • The said services are provided in the Source state through the employees or other personnel of the non-resident.

Traditionally, Service PE requires the physical presence of non-resident employees in the Source state. However, with the advent of the digital economy, the concept is changing. Jurisdictions like Saudi Arabia have issued internal guidelines suggesting that Virtual PE may be created even when services are rendered remotely and employees are not physically present in the Source state.

In this regard, the Hon’ble Delhi ITAT, in the case of Clifford Chance Pte. Ltd. Vs. ACIT[1], has ruled that the physical presence of employees/other personnel in India is essential to constitute a Service PE and in the absence of Virtual PE provisions in the DTAA, services provided remotely do not constitute a Virtual Service PE in India.

The summary of the Ruling is provided below:


  • The taxpayer, a tax resident of Singapore, provided legal advisory services to several international clients, including certain clients in India.
  • For the years under consideration, i.e., Financial Year (‘FY’) 2019-20 and 2020-21, the taxpayer had executed legal advisory contracts with Indian clients.
  • In FY 2019-20, the advisory services were partly rendered remotely from outside India, and there were occasions when three employees physically travelled to India to render the services. In FY 2020-21, all services were provided remotely, with no physical presence of employees in India for the provision of any services.
  • For both the years under consideration, the taxpayer filed a Nil return of income in India, claiming a refund of taxes deducted at source.
  • The taxpayers’ case was selected for scrutiny, and reasons were sought as to why rendering services to Indian clients does not constitute a Service PE and Virtual service PE in India for the years under consideration.

Contentions of the Revenue Authorities

  • The Revenue Authorities contended that a Service PE and a Virtual service PE were established in India in FY 2019-20 and FY 2020-21 in view of the physical and virtual presence of the company’s employees for rendering services to clients in India.
  • Also, the Revenue Authorities relied on the OECD’s Interim Report of 2018 titled ‘Tax Challenges arising from Digitalisation’ (‘the Report’) to hold that the taxpayer had a Virtual Service PE in India for the years under consideration.

Arguments of the Taxpayer

  • The taxpayer had no office/fixed base in India, and the aggregate stay of the employees in India was only 44 days, which is lower than the 90 days threshold as provided in Article 5(6)(a)of the India-Singapore DTAA (‘the DTAA’) to constitute a Service PE in India.
  • For constituting a Service PE, rendering services ‘within India’ is relevant. Therefore, the physical presence of employees in India providing the services is relevant, not the duration of services, which may even include services provided remotely.
  • Days spent by employees/other personnel in India while on vacation or for undertaking business development activities are to be excluded from calculating the Service PE threshold. In effect, only days when actual services are physically rendered in India are determinant for the constitution of Service PE.
  • Common days to be excluded. Only ‘solar days’ are to be considered.
  • Reliance placed on the Report for contending that taxpayer had a Virtual Service PE in India is unwarranted, in the absence of such provisions in the DTAA.

Ruling of Hon’ble Delhi ITAT

  • Actual performance of services in India is essential for constituting a Service PE, and only when the services are physically rendered in India by non-residents beyond the threshold period does a Service PE arise. Mere physical presence of employees without any rendition of services will not result in a Service PE under the DTAA.
  • After reducing days spent on vacation, business development, and common days, it is an undisputed fact that services have been provided by the taxpayer only for 44 days in FY 2019-20. Since the duration of service provided by the employees does not exceed the 90-day threshold, Service PE is not created as per the DTAA.
  • The Report on which the Revenue Authorities have relied on for dispensing with the physical presence requirement to create a Service PE has not been officially endorsed by India in the DTAA entered into with Singapore. In the absence of a specific provision to this effect, no Virtual PE of the taxpayer is created in India under the DTAA. Also, the Report on which the Revenue Authorities have placed reliance mentions specifically that in the absence of any specific amendment to the DTAA provisions, the taxpayer is entitled to challenge the Report before the Courts in litigation proceedings.

In conclusion, the ITAT ruled in favour of Clifford Chance Pte. Ltd. and concluded that no Service PE and Virtual Service PE of the taxpayer were constituted in India for FY 2019-20 and FY 2020-21.

KNAV Comments

This Ruling brings clarity to the concept of Service PE. It also touches on the vital aspect of ‘Virtual Service PE’ based on the Report. Apart from that, it also clarifies that vacation days, business development days, and common days are to be excluded when calculating the Service PE threshold under the DTAA.

Also, the Ruling signifies the need to maintain accurate documentation. In this case, the taxpayer provided the Hon’ble ITAT with timesheets of the employees traveling to India, which clearly demonstrated the various activities undertaken by them. This assisted the Hon’ble ITAT in determining the number of days for which services were rendered by the employees in India. This emphasizes the pivotal role of robust documentation in tax disputes which provides accurate and credible information.

[1] ITA Nos. 2681 & 3377/Del/2023



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