Facts of the Case

The assessee, Clifford Chance Pte. Ltd., a Singapore-based non-resident company, was engaged in providing legal advisory services to Indian clients. For Assessment Years 2020-21 and 2021-22, it filed returns declaring nil income. Draft assessment orders proposed additions of ₹15,55,45,693 for AY 2020-21 and ₹7,97,64,414 for AY 2021-22 on the premise 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 DRP upheld the approach of the Assessing Officer. The ITAT, however, deleted the additions holding that no service PE or virtual service PE existed. Aggrieved, the Revenue filed appeals under Section 260A.

Issues Involved

Whether the assessee constituted a service permanent establishment in India during AY 2020-21 under Article 5(6) of the India-Singapore DTAA, whether a virtual service permanent establishment could be inferred in the absence of physical presence of employees in India, and whether the receipts from Indian clients were taxable in India for AYs 2020-21 and 2021-22.

Appellant’s Arguments

The Revenue contended that the assessee’s employees were present in India for 120 days during AY 2020-21 and that exclusion of vacation, business development and common days was erroneous. It was argued that Article 5(6) of the DTAA does not mandate physical presence of employees and that continuity of services, including services rendered virtually, was sufficient to constitute a service PE. The Revenue also relied on judicial precedents and OECD reports to argue for recognition of a virtual service permanent establishment.

Respondent’s Arguments

The assessee submitted that under Article 5(6) of the DTAA, actual performance of services in India through employees physically present is mandatory. It was argued that days on which no services were rendered, such as vacation days, business development days and common overlapping days, had to be excluded. After such exclusions, services were rendered only for 44 days in AY 2020-21, which was below the 90-day threshold. For AY 2021-22, no employee was present in India and services were rendered entirely from outside India. The assessee relied on binding precedents including e-Funds IT Solution and Morgan Stanley to submit that the concept of a virtual service PE is alien to the DTAA.

Court Order / Findings

The Delhi High Court held that Article 5(6) of the India-Singapore DTAA requires furnishing of services “within” India “through employees or other personnel”, which necessarily implies physical presence of employees in India while rendering services. The Court upheld the Tribunal’s exclusion of vacation days, business development days and common days, noting that only days on which actual services were rendered could be considered for computing the 90-day threshold. The Court found no infirmity in the Tribunal’s conclusion that services were rendered only for 44 days in AY 2020-21 and that no service PE was constituted.

The Court further rejected the Revenue’s plea of a virtual service permanent establishment, holding that such a concept finds no mention in the DTAA and cannot be judicially imported. It observed that while digitalisation may necessitate policy changes, treaty provisions must be interpreted strictly as drafted. OECD reports and foreign jurisprudence could not override the express language of the DTAA.

Important Clarification

The Court clarified that unless the DTAA is amended, services rendered from outside India without physical presence of employees in India cannot give rise to a service permanent establishment. Unilateral domestic law changes or evolving international discourse cannot override treaty provisions under Section 90(2) of the Income-tax Act.

Final Outcome

Both appeals filed by the Revenue were dismissed. The findings of the ITAT holding that Clifford Chance Pte. Ltd. did not constitute a service permanent establishment or a virtual service permanent establishment in India for AYs 2020-21 and 2021-22 were upheld, and the receipts from Indian clients were held to be not taxable in India.

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769503063_COMMISSIONEROFINCOMETAXINTERNATIONALTAXATION1NEWDELHIVsCLIFFORDCHANCEPTELTD..pdf

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