The long-running debate over how foreign professional service firms are taxed in India has taken a fresh turn, as the Income Tax Department moved the Delhi High Court against a ruling of the Income Tax Appellate Tribunal (ITAT) that favoured UK-headquartered Clifford Chance. The case will test how India interprets its obligations under the India–Singapore Double Taxation Avoidance Agreement (DTAA) in an era when cross-border work is increasingly performed without physical presence.
The ITAT had, in March 2024, set aside assessment orders for Assessment Years (AY) 2020–21 and 2021–22, holding that Clifford Chance’s Singapore entity did not have a “permanent establishment” (PE) in India. For the tax authorities, this was a significant loss, as the firm had declared nil income despite recording receipts of over ₹23 crore from Indian clients across the two years.
Data Protection and DPDP Act Readiness: Hundreds of Senior Leaders Sign Up for CDPO Program
Dispute Over ‘Service PE’ and Virtual Presence
At the heart of the dispute lies Article 5 of the India–Singapore DTAA, which defines when a foreign enterprise can be said to have a permanent establishment in India. The Assessing Officer argued that Clifford Chance met the criteria through what was described as a “service PE,” and further sought to apply the concept of a “virtual PE” given that work was rendered remotely from Singapore. This interpretation allowed the department to attribute 100 per cent of the firm’s India-sourced revenues to a deemed presence in the country.
Clifford Chance countered that its lawyers were physically present in India for only 44 days in AY 2020–21, well below the treaty’s 90-day threshold, and did not travel to India at all in AY 2021–22. The firm argued that the treaty does not recognize the notion of a virtual permanent establishment, and that profits can only be taxed to the extent activities are carried out in India under both Section 9 of the Income Tax Act, 1961 and Article 7 of the DTAA.
The Tribunal agreed, finding that the physical presence requirement was a prerequisite under the treaty, and rejected the Assessing Officer’s expansive reading of “virtual service PE.”
Implications for Cross-Border Taxation
The ITAT ruling also curtailed the tax department’s reliance on third-party information. Additions based on entries in Form 26AS, such as ICICI Bank payments and interest on a prior tax refund, were disallowed absent proof of actual income. The levy of interest under Section 234B was similarly struck down.
The Income Tax Department’s appeal before the Delhi High Court now raises the prospect of judicial scrutiny over how far India can stretch treaty definitions to capture revenue from foreign firms operating without a permanent base in the country. Legal observers note that the case could influence not only law firms but a wide range of professional service providers whose India-linked revenues are routed through offshore offices.