Delhi HC Rules on Service PE: Employee Presence for Vacations & Business Development Not Enough

Introduction

The Hon’ble Delhi High Court (‘HC’) recently upheld the Income Tax Appellate Tribunal’s (‘ITAT’) ruling in favour of UK-based law firm Clifford Chance (‘Assessee’), holding that the firm did not constitute a Service Permanent Establishment (‘Service PE’) or Virtual Service PE in India under the India–Singapore Double Tax Avoidance Agreement (‘DTAA’). In its decision, the HC agreed with the ITAT that out of the 120 days of employee presence in India, 71 days spent on vacations and business development could not be considered for PE computation, as no services were rendered to clients in India during those periods. The HC further emphasised that the DTAA requires services to be furnished “within” India, implying physical presence, and that the concept of a Virtual Service PE is not recognised under the DTAA. Accordingly, the HC endorsed the ITAT’s conclusion that Clifford Chance’s receipts were not taxable in India in the absence of a PE.

Facts of the case

• The Assessee is a non-resident company engaged in providing legal advisory services.
• It filed its returns of income for AY 2020-21 and AY 2021-22, both declaring NIL income.
• The Assessing Officer (‘AO’) issued draft assessment orders for the aforementioned AYs, proposing additions of INR 1,555.46 lakhs and INR 797.64 lakhs respectively, on the basis that the Assessee had a Service PE in India.
• The Assessee raised objections before the Dispute Resolution Panel (‘DRP’), but the DRP upheld the AO’s view. The AO then passed final assessment orders, confirming the assessed income at the above amounts proposed in the draft assessment orders.
• The Assessee appealed before the ITAT, challenging the finding of a Service PE and the resulting taxability of its receipts in India.
• On perusal of the facts of the case, the ITAT held that the Assessee did not have a Service PE or Virtual Service PE in India, since the number of days for which services were actually performed in India (after excluding vacation days, business development days and common days) did not meet the threshold under the DTAA.
• Accordingly, the ITAT treated the receipts of INR 1,555.46 lakhs (AY 2020-21) and INR 797.64 lakhs (AY 2021-22) as non-taxable business profits in the absence of a PE and deleted the additions.
• In the instant case, the AO has now appealed against the ITAT’s order before the HC.

Judgements referred

• Supreme Court in the case of Hyatt International Southwest Asia Ltd. v. ADIT, 2025 SCC OnLine SC 1506
• Supreme Court in the case of ADIT v. E-Funds IT Solution Inc., [2017] 399 ITR 34
• Supreme Court in the case of DIT v. Morgan Stanley and Co., [2007] 292 ITR 416
• Supreme Court in the case of Union of India v. Azadi Bachao Andolan, [2004] 10 SCC 1
• Supreme Court in the case of Engineering Analysis Centre for Excellence (P) Ltd v. CIT, [2021] 432 ITR 471
• Delhi High Court in the case of DIT v. EFunds IT Solution, [2014] 364 ITR 256
• Madras High Court in the case of Verizon Communications Singapore Pte Ltd. v. ITO, (2014) 361 ITR 575
• Bengaluru ITAT in the case of ABB FZ-LLC v. DCIT, (2017) 166 ITD 329
• DIT v. New Skies Satellite BV, [2016] 382 ITR 114 (Del)
• Engineering Analysis Centre for Excellence (P) Ltd. (supra)
• CIT v. Telstra Singapore Pte. Ltd., [2024] 467 ITR 302 (Del)
• Spanish Supreme Court in the case of Spain v. Dell, Tribunal Supremo, STS 2861/2016; Case No. 1475/2016

Assessee’s Contention

• The Assessee submitted that, for AY 2020–21, services to Indian clients were rendered partly from abroad and partly by two employees who visited India. Although their combined stay amounted to 120 days, the Assessee argued that only the days on which client services were actually performed in India should count toward the 90-day threshold.
• It was contended that a Service PE arises only when services are furnished in India through employees physically presence in the country; therefore, days on which no client-facing work was performed—such as 36 vacation days, 35 business development days, and 5 common days—must be excluded when determining the threshold.
• The Assessee emphasized that mere physical presence does not satisfy Article 5(6) of the DTAA, and internal functions like business development or employer-facing activities cannot be treated as the “furnishing of services” to Indian clients.
• For AY 2021–22, since no employees visited India and all services were rendered from abroad, the Assessee argued that no Service PE could be triggered.
• With respect to the AO’s contention of a Virtual Service PE for AY 2021–22, the Assessee maintained that the DTAA contains no provision for such a concept, and the AO cannot rely on OECD interim guidance or foreign practices to deem a PE when the DTAA explicitly requires services to be performed in India.
• It was further submitted that the DTAA overrides domestic law under Section 90(2) of the Income-tax Act, 1961, and unilateral measures such as Significant Economic Presence cannot expand the PE definition beyond what is provided in the DTAA.

Assessing Officer’s (‘AO’) Contention

• The AO contended that the Assessee had a Service PE in India since its employees were present for 120 days during FY 2019–20, and the 36 days claimed as vacation should not be excluded as no reliable documentary evidence was provided to substantiate the leave period.
• The AO argued that under the DTAA, physical presence is not a mandatory requirement; what matters is that services are furnished within India for more than 90 days in a fiscal year— a condition the AO believes was met for both AY 2020–21 and AY 2021–22.
• It was further submitted that the Assessee had admitted to having a Service PE in earlier years, indicating an ongoing and continuous pattern of service activities in India, and therefore the entire 120-day period should be considered for PE determination.
• The AO also emphasized that with advancements in technology, services could have been rendered remotely or digitally, even without physical employee presence, thereby giving rise to a Virtual Service PE.
• Additionally, the AO highlighted that repeated employee travel over multiple years demonstrated a consistent and sustained service footprint – whether physical or virtual – sufficient to establish a PE under the DTAA.

Issues raised before the ITAT

1. Whether the Assessee constituted a Service PE in India under the DTAA based on the nature and duration of employee presence?
2. Whether the Assessee’s activities could give rise to a Virtual Service PE in India under the DTAA?

Decision on the issue raised

1. Whether the Assessee constituted a Service PE in India under the DTAA based on the nature and duration of employee presence?

• The DTAA requires a minimum 90 days of service-rendering presence in India within any 12-month period for a Service PE to arise. Only days on which employees actually furnish services to clients in India can be counted.
• Basis the facts of the case, the HC observed that while the employees were physically present in India for 120 days, only 44 days involved actual client-service activity after excluding 36 vacation days, 35 business-development days, and 5 common days with no client service. placing the countable service days well below the 90-day limit.
• The HC held that remote services performed from Singapore cannot be attributed to India, as the DTAA requires services to be furnished within India through physical presence.
• The AO’s attempt to classify business development trips, internal reviews, preparatory or auxiliary interactions, and vacation days as “service days” was rejected because these activities did not involve rendering any services to Indian customers, nor did they generate any billable output. They were preparatory/ancillary in nature and therefore outside the scope of “services furnished in India” under the DTAA.
• The HC also emphasized that the AO’s interpretation was inconsistent with the DTAA text, which requires an active service function performed in the source State, not merely presence or non-revenue-generating activities.
• Accordingly, the HC concluded that no Service PE was constituted, since (i) the 90-day test was not satisfied, and (ii) the nature of the activities did not meet the DTAA definition of services rendered in India.

• Whether the Assessee’s activities could give rise to a Virtual Service PE in India under the DTAA?

• The DTAA provision i.e., Article 5(6)(a) of the DTAA, requires services to be furnished “within India”, which the HC interpreted as necessitating a territorial nexus – i.e., services must be physically performed in India by personnel.
• The HC reiterated that the DTAA does not contain any clause recognizing a “Virtual Service PE”, and there is no language permitting the creation of a PE based on remote virtual service delivery from outside India.
• The AO’s argument that technology enables services to be digitally delivered into India was rejected because the HC held that mere consumption of services in India does not satisfy the DTAA test; what matters is where the services are performed, not where the benefit is received.
• The HC emphasized that “virtual presence” cannot substitute physical presence unless the DTAA is expressly amended. DTAAs must be interpreted strictly, and concepts not expressly included cannot be read into it. What the DTAA omits is presumed intentional, and courts cannot introduce provisions by judicial interpretation.
• While acknowledging global developments such as Significant Economic Presence, OECD discussions, and the shift toward taxing the digital economy, the HC held that such policy developments cannot override the clear wording of a bilateral DTAA.
• The AO’s reliance on the increasing prevalence of remote work and digital interactions was rejected because the DTAA still requires personnel of the foreign enterprise to be physically in India for a Service PE to arise.
• Since all services were rendered from Singapore, and no personnel were virtually or physically “within India” for the purpose of performing services, the HC concluded that the DTAA does not permit creation of a Virtual Service PE, and therefore no such PE could arise in the given case.

Conclusion

In this case, the HC upheld the ITAT’s view that the Assessee did not constitute a Service PE or a Virtual Service PE in India under the DTAA. It reiterated that only services actually performed in India can trigger a Service PE and that days spent on business development, internal meetings, or vacations cannot be treated as service-rendering days, resulting in the 90-day threshold not being met.

The HC further clarified that the DTAA does not recognize a Virtual Service PE, and such an expanded concept cannot be read into the DTAA without express amendment.

The ruling reinforces that PE determinations under tax treaties must be strictly based on DTAA language, and remote or digitally delivered services performed entirely abroad cannot create a taxable presence in India in the absence of clear DTAA provisions.