Virtual Service PE Not Recognised under DTAA: Delhi HC Rules in Clifford Chance Case [Read Judgment]

The Delhi High Court in a recent case has ruled in favour of Clifford Chance, holding that the Virtual service permanent establishment (PE) is not recognised under the India-Singapore Double Taxation Avoidance Agreement (DTAA). The court ruled that the firm's legal advisory income of ₹15,55,45,693/- and ₹7,97,64,414/- in financial years 2020-21 and 2021-22 is not taxable in India.

The case arose from assessments made against Clifford Chance Pte Ltd, a Singapore‑based legal advisory firm, for Assessment Years (AYs) 2020‑21 and 2021‑22. The Assessing Officer (AO) had attributed receipts of ₹15.55 crore and ₹7.97 crore, respectively, to a supposed service permanent establishment (PE) in India.

The AO argued that the firm’s employees were present in India for 120 days in AY 2020‑21, thereby crossing the 90‑day threshold under Article 5(6)(a) of the DTAA. For AY 2021‑22, despite no employee presence, the AO alleged a “virtual service PE” existed, since services were rendered remotely to Indian clients.

The Dispute Resolution Panel (DRP) upheld the AO’s view, holding that aggregate duration of services mattered, not physical presence. Clifford Chance appealed to the Income Tax Appellate Tribunal (ITAT), which deleted the additions, holding that only actual services rendered in India through employees physically present count toward the 90‑day threshold.

The ITAT found that the Employees were present in India for 120 days in AY 2020‑21, but 36 were vacation days, 35 were business development days, and 5 were overlapping “common days.”Excluding these, only 44 days of actual client services were furnished in India.

Since this fell short of the 90‑day threshold, no service PE was constituted. For AY 2021‑22, with no employee presence, there was no PE at all. Also The DTAA does not recognize a “virtual service PE.”

On appeal, the Revenue contended that Vacation days should not be excluded, as employees were still in India. The DTAA does not mandate “physical presence”; services furnished virtually should count. OECD reports and foreign jurisprudence (South Africa, Spain, ABB FZ‑LLC, Verizon, Hyatt International) support recognition of virtual service PEs. India’s domestic law amendments introducing “Significant Economic Presence” reflect policy intent to tax such services.

The Division Bench of Justice V Kameswar Rao and Justice Vinod Kumar rejected these arguments.

It was observed that Article 5(6) of the DTAA contemplates that an enterprise shall be deemed to have a permanent establishment in the contracting state through its employees or other personnel only if the activities within the contracting state continue for a period aggregating to 90 days in any fiscal year.

The court also highlighted that Article 5(6) requires services furnished “within India” and “through employees or other personnel.” This mandates a physical nexus. Also Presence without client work (vacation, business development, overlapping days) cannot be counted. The threshold was not met in AY 2020‑21.

It was further observed that the DTAA does not contemplate virtual service PEs. Courts cannot read in concepts absent from the treaty text.

Also, Section 90(2) ensures treaty provisions prevail over unilateral amendments like SEP. Cases cited by Revenue involved different treaty language or contexts (fixed place PE, royalty, FTS), and were not applicable.

The Court upheld the ITAT’s order, holding that Clifford Chance did not constitute a service PE in AY 2020‑21, as only 44 days of actual services were rendered in India. And no PE existed in AY 2021‑22, as employees were absent. Also, Virtual service PE is not recognised under the India–Singapore DTAA. thus Business profits of Clifford Chance are not taxable in India in the absence of a PE.

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