AI Drafter 
TaxTMI 
TaxTMI 
2025 (12) TMI 501
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....D 3. At the outset we may provide a brief factual background of the controversy. The respondent/assessee is non-resident company engaged in the business of legal advisory services. The assessee company filed its return of income for the A.Y. 2020-21 on 29.12.2020 and for the A.Y. 2021-22 on 07.03.2022, both declaring 'NIL' income. Thereafter, the Assessing Officer (AO) passed draft assessment orders dated 30.09.2022 for AY 2020-21 and 29.12.2022 for AY 2021-22, proposing to make additions of Rs.15,55,45,693/- and 7,97,64,414/- respectively. Aggrieved by the same, the assessee approached the Dispute Resolution Panel (DRP), which dismissed the objections of the assessee, the AO passed final assessment orders dated 28.07.2023 and 29.10.2023 under Section 143(3) read with Section 144C(13) of the Act and assessed a total income of Rs.15,55,45,693/- and Rs.7,97,64,414/- for AYs 2020-21 and 2021-22 respectively. 4. Challenging the final assessment orders, the assessee filed appeals before the Tribunal, which deleted the additions made by the assessing officer and allowed the appeals vide the impugned order, while stating as under: "12.3 Thus applying the provisions of Artic....
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....oes not constitute service PE/virtual service PE in AY 2020-21 and 2021-22. The receipts of Rs. 15,55,45,693/- by the assessee in AY 2020-21 and Rs. 7,97,64,414/- in AY 2021-22 are in the nature of business profits of the assessee not taxable in India in the absence of the PE of the assessee in India in terms of Article 7 r.w. Article 5(6)(a) of the India Singapore DTAA. Accordingly, ground Nos. 5 to 7.1 in AY 2020-21 and ground No. 6 to 8.1 in AY 2021-22 are allowed." 5. It is against this order that the Revenue has come in appeal before us. On 02.09.2025, we admitted the appeals and formed the following questions of law: A. Whether on the facts and in the circumstances of the case, and in law, the Tribunal erred in holding that the assessee does not have a service permanent establishment in India? B. Whether on the facts and in the circumstances of the case, and in law, the Tribunal erred in holding that the assessee does not have a virtual service permanent establishment in India? SUBMISSIONS OF THE APPELLANT- THE REVENUE 6. Mr. Puneet Rai, learned Senior Standing Counsel for the appellant submitted that the Tribunal erred in holding that the assessee ....
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....es for more than 90 days in the AY 2020-21 as well as AY 2021-22 and therefore the existence of service permanent establishment cannot be denied in the present case. It is the continuance of services for the threshold limit of 90 days that matters and not the physical presence of the employees. Reliance is placed on the decision of the Supreme Court in the case of Hyatt International Southwest Asia Ltd. v. ADIT, 2025 SCC OnLine SC 1506, which though given in the context of fixed place permanent establishment, according to Mr Rai is still relevant to the present case. He has relied upon paragraph 21 of the judgment which reads as under: "21. It is undisputed that the appellant's executives and employees made frequent and regular visits to India to oversee operations and implement the SOSA. The findings of the assessing officer, based on travel logs and job functions, establish continuous and coordinated engagement, even though no single individual exceeded the 9-month stay threshold. Under Article 5(2)(i) of the DTAA, the relevant consideration is the continuity of business presence in aggregate - not the length of stay of each individual employee. Once it is found that....
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....ions brought in by technological development by the use of and role of digital information, goods, etc., the foreign enterprise does not need physical presence at all in a country for carrying on business. Hence, we do not think that we need to go in depth in this regard for the reason that we have already given hereinbefore." 12. He also stated that the concept of virtual service permanent establishment was duly recognized by the Bengaluru Bench of the Tribunal in the case of ABB FZ-LLC v. DCIT, (2017) 166 ITD 329 (Bang). The Tribunal while duly recognising the concept of virtual reality in today's era observed that in the present age of technology, services, information, consultancy, management etc., can be provided through various virtual modes like e-mail, internet, videoconference, remote monitoring, remote access, etc. While categorically rejecting the arguments of the assessee therein regarding the condition of stay of employees in India, it held that for establishing permanent establishment, it is rendition of services that is required and not the presence of employees. SUBMISSIONS OF THE RESPONDENT-CLIFFORD CHANCE PTE LTD 13. Per contra, Mr. Ajay Vohra, learned Se....
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....sidered for computing the threshold limit for creation of a service permanent establishment in India. A service permanent establishment of an enterprise is constituted when such enterprise renders services in a country through its employees present within that country. According to Article 5(6) of the DTAA, furnishing of services by a Singapore enterprise within the other Contracting State (India) through employees present is an essential element for constitution of service permanent establishment of the Singapore enterprise in India. Mere presence of the employees of the Singapore enterprise in India, without services being rendered to the clients/ customers during the period of stay in India would not constitute service permanent establishment in India, in terms of Article 5(6) of the DTAA. In other words, only the days on which services are actually rendered to the clients in India, resulting in earning of income, is to be taken into consideration for computing the threshold limit. 18. He has relied upon the judgment of this Court in the case of DIT v. E-Funds IT Solution, [2014] 364 ITR 256 (Del), wherein it was held that a service permanent establishment would be constitute....
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....iod of their stay in India would be 450 days, which exceeds the total number of days in a year. (iii) Business development days-35 days The days spent by the employees for the purpose of business development activities have rightly been excluded by the Tribunal, since it is evident from the time-sheets of the employees that no billable work was done on those days, i.e., no services were rendered by the assessee to its clients. During such business development days, the employees have rendered services to the assessee for developing its business and exploring new clientele in India; the assessee did not furnish any service to its clients in India resulting in earning of any income. In this regard, he has drawn our attention to the OECD Model Tax Convention 2017 (OECD Commentary), which clarifies that for constitution of service permanent establishment, the enterprise must render services to third parties through its employees; rendition/ furnishing of services by the employee to the employer cannot be considered for determination of service permanent establishment. 22. It is his submission that in view of the above, the question of law (A) needs to be a....
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....t cannot override the provisions of the DTAA. To buttress this argument, he has referred to the judgments in DIT v. New Skies Satellite BV, [2016] 382 ITR 114 (Del)-approved in Engineering Analysis Centre for Excellence (P) Ltd. (supra); and CIT v. Telstra Singapore Pte. Ltd., [2024] 467 ITR 302 (Del). 26. Mr. Vohra stated that as such, the question of law (B) also needs to be answered in the negative and in favour of the respondent. 27. He has prayed that the appeals be dismissed. ANALYSIS AND CONCLUSION 28. Having heard the learned counsel for the parties and perused the record, at the outset, we may state that the issue that arises for consideration is whether the respondent/assessee has a service permanent establishment or a virtual service permanent establishment in India so as to be taxed on the gross total receipt for the two assessment years being AYs 2020-21 and 2021-22 to the extent of Rs.15,55,45,693/- and Rs.7,97,64,414/- respectively for providing legal advisory services to its clients in India. 29. 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 ....
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....roach of the AO to arrive at his conclusion regarding existence of PE on the basis of total duration of the services provided within India. Duration of physical presence of the employees of the assessee is not material. The AO is however directed to verify from the documents and evidences placed on record that the criteria of aggregate duration of rendering of services within India of more than 90 days is satisfied in the instant case, and pass a speaking order in this regard . Ground numbers 1 to 5 are accordingly disposed of." 33. The conclusion drawn by the DRP is that as long as the aggregate period of continuation of service within India is more than 90 days, the constitution of service permanent establishment gets triggered and consequent profits attributable to permanent establishment becomes taxable in India. 34. Allowing the appeals preferred by the assessee against the final assessment orders, the Tribunal has disagreed with the decision of the assessing officer and the DRP, relevant observations whereof have been reproduced by us in paragraph 4 above. The conclusion drawn by the Tribunal as stated above is that as per Article 5(6) (a) of the DTAA, actual performanc....
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...., as in any case the assessee had provided the time sheets for the employees wherein annual leave has been captured, and also the leave record extracted from its HR system. That apart, the assessee has also furnished a declaration that these employees did not work on client projects during their vacation period. All these indicate that if the vacation days are excluded from the total 120 days for which the employees of the assessee were present in India, the number of days would come to 84 days, which is less than the threshold of 90 days provided under Article 5(6)(a) of the DTAA for constitution of a service permanent establishment in India. 39. The Tribunal further held that business development days as well as common days comprising of 35 days and 5 days respectively also need to be excluded while computing the threshold of service permanent establishment. The reasoning given by the Tribunal for such a conclusion is that no services were provided by the employees to customers in India during the time spent on business development and that the computation should not be based on man days by aggregating the common days spent by more than one individual. In effect, the Tribunal ....
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....titute a service permanent establishment. 43. Mr. Rai has vehemently contended that receipts on account of virtual services rendered by the assessee must be held to be amenable to taxation in India, since a 'virtual service permanent establishment' has been established. We find that no such eventuality is contemplated by the DTAA. The concept of a virtual service permanent establishment does not find mention anywhere in the DTAA. In the absence of any such provision, the argument of Mr. Rai would be at variance that the express provisions of the DTAA which we have already interpreted above. 44. At this juncture, we find it necessary to acknowledge that the Revenue may potentially be justified in raising concerns regarding taxability of foreign entities in the increasingly open global virtual economy, and the diminishing requirement of physical presence of non-resident employees to furnish services. However, taxability of entities in such instances, as always, remains subject to the applicable provisions of law-both treaty and domestic. 45. The law insofar as the present controversy is concerned, is clear and unambiguous. The DTAA, which has been carefully drafted and execu....
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....t of physical presence of employees to constitute a service permanent establishment. However, the same has not been administratively recognised by India, and in the absence of any changes made to the treaty provisions of the DTAA, such developments do not alter the interpretive constraints imposed by the wordings of the DTAA, which is applicable on all fours to the instant case. In fact, until Article 5(6) of the DTAA is renegotiated or supplemented, the existing treaty framework does not extend to virtual or digital services provided from abroad. 50. It is apposite to note that the OECD Interim Report of 2018 itself in paragraph 354, states "However, in the absence of any amendments to the tax treaty provisions themselves, these measures run the risk of being challenged by taxpayers before Courts.", which would also suggest that tax treaty provisions need to be amended for the recommendations stated in the Report to have a binding statutory effect. 51. The case set up by the Revenue is premised on the ratio of the order of the Bangalore Bench of the Tribunal in ABB FZ-LLC (supra) wherein, according to Mr. Rai, the concept of a virtual service permanent establishment was reco....
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....ndered the services through its three employees and their stay was for 25 days; and (b) As is clear from the second reply, the assessee has rendered the services on various occasions from January to March 2010. 54. The providing of services for a period of nine months is stipulated in the period of 12 months. In our view, once the activity of the assessee commenced only in the month of January, 2010, then the argument of completing 9 months service before March, 2010, is preposterous, implausible and against the common sense. It is not expected to complete 9 months between January, 2010 to March, 2010. The completion of 9 months activities by the enterprise was only conceived in a period of 12 months. However is not disputed by the assessee before us that the enterprise/assessee continues to render the services with effect from January, 2010 and thereafter also in the subsequent assessment year. ... 56. Thus respectfully following the path shown by the Apex Court (supra), in our view, the requirement of fixed place of business is not applicable to the clauses (2), (4) and (5). Clause (i) of Article 5(2) which provides the service PE, is not depen....
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....hat the services rendered by the assessee would be treated as FTS and also as 'royalty' under the DTAA therein as well as the domestic Act. The Tribunal distinguished Articles 5(1) and 5(2) of the India-UAE DTAA, to hold that while a fixed place of business is necessary for a permanent establishment under the former provision, the latter one, which contemplates services rendered, is rather inclusive and does not require the assessee to have a fixed place of business. As such, it dismissed the argument of a fixed place of business raised by the assessee by observing that in the present age of technology, services can be rendered even without the physical presence of employees in India and held that by furnishing services, the assessee clearly established a service permanent establishment, by virtue of Article 5(2) of the DTAA therein. 54. Suffice it to state, the instant case is palpably different from the above. This is neither a case concerning FTS nor has any argument of requirement of a fixed place of business been raised. That apart, unlike that case, the issue at hand is squarely covered by the express provision of Article 5(6) of the DTAA, which we have already interpreted....
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....esence in the aggregate and not the stay/duration of any particular individual. In other words, once continuity of business operations is established, the "intermittent presence or return of a particular employee becomes immaterial and insignificant" for constituting a permanent establishment. This judgment is distinguishable on facts, as there is no argument raised before us with respect to the stay of any one particular individual in India; rather is the aggregate time of stay of employees of the assessee that has been taken into consideration to examine whether the threshold mandated by the DTAA has been reached. 58. Mr. Rai has drawn our attention to a judgment of the South African Tax Court at Johannesburg in AB LLC and BD Holdings LLC and The Commissioner of the South African Revenue Services, Case No. 13276 decided on 15.05.2015, to contend that (i) even if part of services are rendered from a place different to that contemplated by the DTAA, it would still comply with the definition of permanent establishment; and (ii) 'double counting' of days is permitted while computing the threshold for permanent establishment. On a perusal of the judgment, we find that the reliance ....