Rules Service PE cannot be constituted by mere presence of employees (with no actual service) or virtual rendering of services from abroad

 In a recent ruling, the Delhi High Court affirmed the decision of the Tribunal in Clifford Chance Pte Ltd. v. ACIT, holding that a foreign entity did not constitute a Service Permanent Establishment (“PE”) in India under Article 5(6) of the India–Singapore DTAA merely because its employees rendered services (virtually as well as physically) to India customers for more than 90 days in aggregate. The Court held that, for a service PE to arise, the relevant test is the actual number of days on which services are rendered in India by employees physically present.

In the present case, the assessee, a Singapore-based law firm provided legal advisory services to Indian clients partly through remote means (from outside India) and partly through two employees who visited India during AY 2020–21. Although the employees were present in India for 120 days, the assessee demonstrated through time-sheets and records that services were rendered only for 44 days, after excluding vacation days, business development days, and common days. For AY 2021–22, no employees visited India and services were rendered entirely from outside India. The Assessing Officer nevertheless alleged existence of both a service PE / virtual service PE and sought to tax the receipts in India. The same was upheld by the DRP.
On appeal, the ITAT held that only days on which actual services were furnished to clients by employees of the taxpayer in India could be counted towards the 90-day threshold under Article 5(6) of the DTAA, and further rejected the concept of a “virtual service PE” as not envisaged under the DTAA. The Delhi High Court agreed with this reasoning and held that the treaty language requires a physical nexus, i.e., services must be furnished “within” India through employees present in India. In the absence of such physical performance of services, and given that the threshold was not met, no service PE could be said to exist.
This ruling reinforces that, under the India–Singapore DTAA, mere presence of employees or virtual rendering of services from abroad (to Indian customers) is insufficient to create a service PE. What is determinative is the actual performance of services in India by employees physically present, strictly in line with the treaty language, thereby providing certainty to cross-border service providers.
A copy of the judgment is enclosed for your reference.