- within Tax topic(s)
- with Senior Company Executives, HR and Finance and Tax Executives
- with readers working within the Accounting & Consultancy, Technology and Law Firm industries
- Introduction
The taxation of cross-border professional services has become increasingly complex in a digitally connected economy. With law firms, consultants and advisors routinely servicing clients across jurisdictions through a combination of physical visits and remote engagement, tax authorities have sought to stretch traditional permanent establishment concepts to capture income earned without a substantial physical footprint.
Against this backdrop, the decision of the Delhi High Court in Commissioner of Income Tax (International Taxation) v. Clifford Chance Pte Ltd (ITA Nos. 353–354/2025) assumes considerable importance. In a carefully reasoned judgment, the Court rejected the Revenue's attempt to introduce the concept of a "virtual Service Permanent Establishment" and held that legal fees earned by a Singapore-based international law firm from Indian clients were not taxable in India in the absence of physical performance of services beyond the treaty threshold.
The ruling reinforces the primacy of tax treaty interpretation, reaffirms the requirement of physical presence for Service PE under the India–Singapore DTAA, and provides much-needed certainty for foreign professional service providers operating in India.
- Factual Background
The taxpayer, Clifford Chance Pte Ltd, is a Singapore-resident international law firm engaged in providing legal advisory services to clients across jurisdictions, including India. During the relevant assessment years, the firm earned professional fees from Indian clients for legal services rendered partly through short visits to India and partly through work performed outside India.
As a tax resident of Singapore, the taxpayer opted to be governed by the India–Singapore Double Taxation Avoidance Agreement. The core dispute revolved around whether the firm had constituted a Service Permanent Establishment in India under Article 5(6) of the treaty, thereby rendering its Indian-sourced fees taxable in India as business profits.
- The Service PE Provision Under the India–Singapore DTAA
Article 5(6)(a) of the India–Singapore DTAA provides that a foreign enterprise shall be deemed to have a permanent establishment in India if it furnishes services within India through its employees or other personnel for a period aggregating more than 90 days in any fiscal year. This provision represents a departure from the traditional fixed-place PE concept and instead focuses on the physical rendering of services through personnel in the source country.
However, as the Clifford Chance case demonstrates, the Service PE provision is not unbounded. It is anchored in the territorial requirement that services must be performed "within" India, a phrase that ultimately proved decisive in the Court's analysis.
- Computation of Days: The Crux of the Dispute
For the financial year 2019-20, employees of the taxpayer were physically present in India for an aggregate of 120 days. However, this period included days during which no client services were rendered. Specifically, the stay comprised 36 days of vacation or personal leave, 35 days spent on business development activities, and 5 common days where more than one employee was present simultaneously.
After excluding these categories, the actual days on which services were rendered to Indian clients came down to 44 days. For the financial year 2020-21, the taxpayer did not render any services in India at all, with all legal work being performed entirely from outside India.
Based on these facts, the taxpayer took the position that it had not crossed the 90-day threshold under Article 5(6) and therefore did not have a Service PE in India for either year.
- Revenue's Case and the Theory of Virtual Presence
The tax authorities disagreed with the taxpayer's position and sought to tax the entire receipts from Indian clients. For FY 2019-20, the Revenue argued that the taxpayer had failed to substantiate that employees were on vacation for 36 days and contended that intermittent leave could not be excluded, particularly since the firm had been rendering services in India in earlier years. Reliance was placed on the Supreme Court's decision in Hyatt International Southwest Asia Ltd v. ADIT to argue that continuity of business operations was more relevant than individual days of presence.
More significantly, the Revenue advanced the argument that Article 5(6) does not require physical presence in India. According to this interpretation, what matters is the continuity of services, not the location from which they are rendered. Since the taxpayer continued to provide legal services to Indian clients remotely from outside India, the Revenue claimed that a "virtual Service PE" had come into existence for both assessment years.
To support this position, reliance was placed on the OECD Interim Report on the Digital Economy (2018), the Madras High Court's ruling in Verizon Communications Singapore Pte Ltd, and the Bangalore ITAT's decision in ABB FZ-LLC v. DCIT. These authorities were cited to argue that rapid digitalisation has diluted the relevance of physical presence in determining tax nexus.
The Dispute Resolution Panel accepted this line of reasoning. However, the Delhi Income Tax Appellate Tribunal overturned the findings and ruled in favour of the taxpayer, prompting the Revenue's appeal to the Delhi High Court.
- High Court's Analysis and Ruling
The Delhi High Court dismissed the Revenue's appeal and affirmed the Tribunal's decision in its entirety. In doing so, the Court undertook a detailed examination of the treaty language, factual record and applicable jurisprudence.
6.1 Exclusion of Vacation Days
The Court accepted the taxpayer's evidence in support of the exclusion of vacation days. It noted that the taxpayer had furnished employee time-stamp sheets, leave records extracted from its internal HR system, and declarations confirming that no client-related work was performed during vacation periods.
On this basis, the Court held that days on which no services were rendered could not be included while computing the 90-day threshold under Article 5(6). The Revenue's objection on the absence of documentary evidence was therefore rejected.
6.2 Business Development Activities and Common Days
The Court agreed with the Tribunal that days spent on business development activities could not be treated as days on which services were furnished to clients. Such activities were internal in nature, aimed at developing future business, and did not result in billable services or income from clients.
Similarly, the Court rejected the Revenue's attempt to double-count common days on which more than one employee was present in India. It observed that counting the same calendar day multiple times merely because multiple employees were present would lead to illogical and absurd results. Only actual calendar days on which services were rendered could be considered for the Service PE threshold.
6.3 Physical Presence as a Treaty Requirement
The most significant aspect of the judgment lies in the Court's interpretation of Article 5(6). The Court emphasised that the phrase "services rendered within a Contracting State through employees or other personnel" carries a clear territorial connotation. The word "within" necessarily implies physical performance of services in India.
The Court held that in the absence of employees physically present in India rendering services, there can be no furnishing of services "within" India for the purposes of Article 5(6). Services rendered remotely from outside India, even if benefiting Indian clients, fall outside the scope of the Service PE provision as currently drafted.
- Rejection of the "Virtual Service PE" Concept
The Court categorically rejected the Revenue's attempt to read a virtual Service PE into the treaty. It observed that tax treaties are the result of careful bilateral negotiation and must be interpreted strictly in accordance with their text. Courts cannot introduce concepts that are conspicuously absent from the treaty language.
While acknowledging that modern business models increasingly rely on virtual modes of service delivery, the Court held that taxability must still be determined in accordance with existing legal provisions. Any expansion of PE concepts to cover virtual services would require express legislative or treaty amendments, not judicial reinterpretation.
- OECD Reports and Judicial Precedents Distinguished
The Court also addressed the Revenue's reliance on the OECD Interim Report and earlier judicial decisions. It noted that OECD reports, while informative, do not have binding force unless incorporated into domestic law or treaty provisions. Significantly, the OECD Interim Report itself recognises that treaty amendments are necessary to give effect to its recommendations.
The Court further distinguished the decisions relied upon by the Revenue. The Verizon Communications ruling dealt with royalty taxation and did not involve PE determination. The ABB FZ-LLC case arose under a different treaty and factual context. The Hyatt International decision concerned a fixed place PE rather than a Service PE. None of these authorities justified importing a virtual Service PE concept into the India–Singapore DTAA.
- Final Outcome
The Delhi High Court answered both substantial questions of law against the Revenue. It held that the taxpayer did not have a Service PE in India for FY 2019–20, as the 90-day threshold was not met after excluding non-service days. It further held that no PE of any kind existed in FY 2020–21, when no services were rendered in India at all.
Consequently, the fees earned by the taxpayer from Indian clients were held to be not taxable in India under the treaty.
- Key Takeaways and Practical Implications
The Clifford Chance ruling provides critical guidance for international law firms and other professional service providers operating in India. It reinforces the principle that physical performance of services remains central to the Service PE analysis under existing treaties. Remote or virtual services, by themselves, do not create a tax nexus in the absence of express treaty provisions.
The decision also underscores the importance of robust documentation. Detailed records of employee travel, time-sheets, nature of activities, business development efforts and leave periods proved decisive in this case and will be equally important for other foreign enterprises facing PE scrutiny.
- Conclusion
The Delhi High Court's decision in CIT v. Clifford Chance Pte Ltd is a landmark ruling in Indian international tax jurisprudence. It strikes a careful balance between recognising the realities of a digital economy and respecting the legal limits imposed by treaty text.
By reaffirming that taxability must flow from clear legislative or treaty authority, the Court has provided much-needed certainty to cross-border professional service providers. Until India renegotiates its tax treaties or introduces explicit provisions addressing virtual service delivery, physical presence will continue to be the cornerstone of Service PE determination.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
