2025 (12) TMI 501 - HC - Income Tax

No service PE under Article 5(6) India-Singapore DTAA; vacation days excluded, virtual service PE concept rejected

Commissioner Of Income Tax, International Taxation-1, New Delhi Versus Clifford Chance Pte Ltd.

HC dismissed Revenue's appeal and upheld the Tribunal's finding that the non-resident assessee did not have a service PE in India under Article 5(6) of ... Income deemed to accrue or arise in India - number of days stay in India - assessee have a service permanent establishment in India or not? - physical presence of the employees (of the Singapore enterprise) in India for furnishing services has to be taken into consideration - Whether Tribunal erred in holding that the assessee does not have a virtual service permanent establishment in India? - India-Singapore DTAA - employees of the assessee company, namely, Mr. Rahul Guptan and Mr. Shashwat Tewary were present in India for 120 days during the Financial Year (FY) 2019-20 i.e., AY 2020-21 - Tribunal excluding 36 days from the total of 120 days by treating the same as vacation days and observed that after such exclusion, the number of remaining days would be 84 days for which the employees of the assessee were in India, which is below the threshold limit of 90 days for constitution of permanent establishment HELD THAT:- The law insofar as the present controversy is concerned, is clear and unambiguous. The DTAA, which has been carefully drafted and executed after numerous rounds of bilateral deliberations and negotiations at the highest level, must necessarily be interpreted strictly. If something is conspicuous by its absence, the presumption is that it has deliberately been done so. It is not for courts to read in concepts which are not expressly provided for by the treaty. The guiding principle here is that language which is not explicitly included in treaty provisions cannot be artificially read into such provisions by way of judicial fiction. Article 5(6) of the DTAA only contemplates rendering of services by employees present within the country. If that be so, it is not for this Court to analyse the status or merits of a virtual service permanent establishment which does not find mention either in the DTAA or in the domestic Act. As such, the contention of the Revenue that a virtual service permanent establishment of the assessee has been established for AYs 2020-21 and 2021-22 cannot be accepted. We find that the Tribunal was justified in passing the impugned order. We agree with the reasoning given by the Tribunal and find no reason to interfere with the same. Decided against revenue. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether a service permanent establishment was constituted under Article 5(6)(a) of the India-Singapore DTAA for AY 2020-21 on account of the presence and activities of employees in India. 1.2 Whether a service permanent establishment was constituted under Article 5(6)(a) of the India-Singapore DTAA for AY 2021-22 in the absence of any physical presence of employees in India. 1.3 Whether a 'virtual service permanent establishment' can be inferred or read into Article 5(6) of the India-Singapore DTAA so as to tax services rendered remotely from outside India to Indian clients. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Service PE in India for AY 2020-21 based on employee presence and activities Legal framework (as discussed by the Court) 2.1 Article 5(6) of the India-Singapore DTAA deems an enterprise to have a permanent establishment in a Contracting State if it furnishes services (other than specified excluded services and certain 'technical services') within that State through employees or other personnel, where such activities: (a) continue within that State for a period or periods aggregating more than 90 days in any fiscal year; or (b) are performed for a related enterprise for a period or periods aggregating more than 30 days in any fiscal year. 2.2 The Court relied upon the interpretation of 'service PE' in earlier decisions (including the Delhi High Court and Supreme Court rulings in E-Funds IT Solution and Morgan Stanley) that: (i) services must be furnished 'within' India; and (ii) the foreign enterprise must furnish services in India 'through employees or other personnel' physically present in India. Interpretation and reasoning 2.3 It was undisputed that two employees of the non-resident enterprise were present in India for a total of 120 days during AY 2020-21. The dispute centred on how many of those days counted towards the 90-day threshold in Article 5(6)(a). 2.4 The assessee produced time-sheet records, HR leave records and a declaration to show: (i) 36 days were vacation/annual leave days on which no client services were rendered; (ii) 35 days were 'business development days' devoted to developing the assessee's own business and exploring clientele, with no billable work or services rendered to clients; (iii) 5 days were 'common days' where more than one employee was present on the same calendar day in India, which the assessee treated as a single day of presence for threshold computation. 2.5 The Assessing Officer and DRP had treated the full 120 days as relevant, taking the view that: (i) the critical test under Article 5(6) is the 'aggregate duration of provision of services within India' exceeding 90 days, not physical stay of employees as such; and (ii) services could be provided from outside India with the help of technology, so the duration of 'provision of services' in/for India was said to be more than 90 days. 2.6 The Court held that Article 5(6) must be read literally: the enterprise must furnish services 'within' India 'through employees or other personnel'. This creates a territorial and personal nexus requiring: (i) physical presence of employees/personnel in India; and (ii) actual performance of services to clients in India on the days counted. 2.7 On 'vacation days', the Court accepted the Tribunal's finding that the assessee's time-sheets, HR leave records and declaration were adequate evidence that no client services were rendered during those days. Excluding 36 vacation days from 120 days led to 84 days, which is below the 90-day threshold. 2.8 On 'business development days', the Court agreed with the Tribunal that such days are not to be counted because: (i) time-sheets showed no billable work for clients on those days; and (ii) the employees were rendering services to their employer (developing business and clientele), not furnishing services to third-party clients in India, which is required for constituting a service PE. 2.9 On 'common days', the Court endorsed the Tribunal's reasoning that counting each employee's presence separately on the same calendar day as multiple 'days' would lead to an untenable 'man-days' approach (capable of exceeding the number of days in a year). For the Article 5(6)(a) threshold, only calendar days of actual service performance 'within' India are relevant, not an aggregate of man-days across employees. 2.10 The Court noted that even on the Revenue's own conceptual stance-that what matters is 'actual services rendered' rather than mere physical presence-only the days with actual client services in India could be considered. On the evidence, those days were 44 in total. 2.11 Reliance placed by the Revenue on the plea that sufficient documentary evidence for leave/business development was not produced was rejected. The Court accepted the Tribunal's appreciation of the evidentiary record (time-sheets, HR data, declarations) as sufficient to establish non-rendering of client services on those excluded days. Conclusions 2.12 Only days on which employees physically present in India actually furnished services to clients in India count for the 90-day threshold under Article 5(6)(a). 2.13 Vacation days, business development days (with no client services) and overlapping 'common days' cannot be included in the computation for Article 5(6)(a). 2.14 On the established facts, services were furnished in India on only 44 days in AY 2020-21, below the 90-day threshold, and hence no service permanent establishment was constituted in India for that year. Issue 2: Service PE in India for AY 2021-22 in absence of physical presence Legal framework (as discussed by the Court) 2.15 The same Article 5(6) of the India-Singapore DTAA applied, requiring furnishing of services 'within' India 'through employees or other personnel', with a 90-day (or 30-day, where applicable) threshold. Interpretation and reasoning 2.16 It was undisputed that in AY 2021-22 none of the enterprise's employees were physically present in India; all legal advisory services to Indian clients were rendered from outside India. 2.17 The Revenue argued that Article 5(6) does not use the expression 'physical presence'; it only requires that services 'continue within' the contracting State, and that such services can be rendered virtually from outside India. Thus, according to the Revenue, the aggregate duration of services provided to Indian clients exceeded 90 days, establishing a service PE. 2.18 The Court rejected this reading and reiterated that: (i) the words 'within a Contracting State' and 'through employees or other personnel' in Article 5(6)(a) necessarily imply rendition of services by personnel physically present in that State; and (ii) absent such physical presence, services rendered from abroad-even to Indian clients-cannot be characterised as services furnished 'within' India for purposes of Article 5(6)(a). 2.19 The Court held that the DTAA's plain language mandates a physical footprint: it is the performance of services in the source State by employees/personnel located there that triggers a service PE. Conclusions 2.20 In AY 2021-22, in the absence of any employees or personnel physically present in India, no services were furnished 'within' India through employees or other personnel as required by Article 5(6)(a). 2.21 No service permanent establishment arose under Article 5(6) of the DTAA for AY 2021-22. Issue 3: Recognition of a 'virtual service permanent establishment' under the DTAA Legal framework (as discussed by the Court) 2.22 The Court examined: (i) Article 5(6) of the India-Singapore DTAA, which refers only to services furnished 'within' a Contracting State 'through employees or other personnel' and is silent on 'virtual' or 'digital' presence; (ii) Section 90(2) of the Income-tax Act, 1961, which gives primacy to DTAA provisions where more beneficial to the assessee; (iii) The concept of 'Significant Economic Presence' introduced in domestic law, and India's expressed views and comments in OECD work; (iv) OECD Model Tax Convention Commentary and the OECD Interim Report 2018, particularly paragraph 354, noting that absent treaty amendments, measures expanding PE concepts risk being successfully challenged. Interpretation and reasoning 2.23 The Revenue argued that, due to rapid digitisation, services can be provided without any physical presence, and that the assessee's continued remote provision of services to Indian clients for more than 90 days created a 'virtual service PE' taxable in India. Reliance was placed on: (i) OECD Interim Report 2018 and examples of certain countries (e.g., Saudi Arabia, Israel, Kuwait) adopting broader PE concepts in a digital context; (ii) A Bangalore Bench Tribunal ruling (ABB FZ-LLC) purportedly recognising that services can be rendered without physical presence; and (iii) Certain foreign and domestic decisions, as analogies, including Verizon Communications Singapore (Madras High Court), a South African Tax Court decision (AB LLC/BD Holdings), and a Spanish Supreme Court decision (Spain v. Dell). 2.24 The Court held that the concept of 'virtual service permanent establishment': (i) finds no expression or definition in the India-Singapore DTAA; (ii) cannot be judicially read into Article 5(6) which clearly predicates a PE on services being furnished 'within' India 'through employees or other personnel'; and (iii) would contradict the express treaty wording requiring physical presence and territorial performance of services. 2.25 The Court emphasised that a DTAA is a negotiated international instrument and must be strictly construed. If a concept is absent from the text, it is presumed to be deliberately excluded. Courts cannot insert new concepts, such as 'virtual PE', by judicial innovation. 2.26 The Court acknowledged global policy concerns about taxation in the digital economy and India's own policy direction (including SEP), but held that: (i) unilateral domestic amendments cannot override or expand treaty definitions in the absence of corresponding treaty renegotiation; (ii) until Article 5(6) of the DTAA is amended or supplemented, the existing framework does not extend to virtual or digital services rendered entirely from abroad; and (iii) comments or minority views in OECD reports, or practices of other jurisdictions, cannot be used to circumvent the clear treaty language applicable between India and Singapore. 2.27 With respect to the authorities cited by the Revenue: (i) ABB FZ-LLC (Bangalore ITAT): The Court held the reliance misplaced; that ruling dealt with the India-UAE DTAA, with core issues of Fees for Technical Services and royalty where the treaty had no separate FTS article, and related to the dependence of service PE on fixed place PE. The factual and treaty context differed materially from the present case and did not justify importing a 'virtual service PE' concept into Article 5(6) of the India-Singapore DTAA. (ii) Verizon Communications Singapore: The Court noted that the Madras High Court in that case dealt with characterization of payments as 'royalty', and no substantive arguments on permanent establishment were advanced. Any observations about virtual presence were treated as obiter dicta and not binding authority on PE issues. (iii) Hyatt International Southwest Asia Ltd.: The Supreme Court decision concerned fixed place PE under a different DTAA (India-UAE) and focused on continuity of business presence, not virtual services. It did not support the proposition that services rendered entirely offshore create a service PE absent physical presence. (iv) Foreign decisions (South African and Spanish cases): The Court held that those cases turned on distinct treaty language (fixed place PE, dependent agent PE, rolling 183-day tests, etc.) and could not be transplanted to interpret Article 5(6) of the India-Singapore DTAA, which contains different wording and structure, and does not address aggregation across years or virtual presence. 2.28 The Court reiterated that while policy evolution in the digital economy is recognised, any corresponding change in PE standards must occur via treaty amendment, not judicial expansion beyond the text. Conclusions 2.29 The India-Singapore DTAA does not recognise or provide for a 'virtual service permanent establishment'. 2.30 Article 5(6) cannot be interpreted to cover services rendered entirely from outside India without employees or other personnel physically performing services in India. 2.31 Domestic law concepts such as Significant Economic Presence, or positions reflected in OECD reports or foreign practice, cannot override or expand the specific PE definition contained in the DTAA absent renegotiation or amendment of the treaty. 2.32 Consequently, no 'virtual service permanent establishment' existed in India for AYs 2020-21 or 2021-22, and the receipts in question were not taxable in India in the absence of a PE under Article 7 read with Article 5(6) of the DTAA.