The Delhi High Court has clarified that foreign entities offering services to Indian clients from outside the country cannot be regarded as having a ‘permanent establishment’ in India under the India–Singapore Double Taxation Avoidance Agreement (DTAA), unless their employees or personnel are physically present in India while rendering those services.
A division bench of Justice V Kameswar Rao and Justice Vinod Kumar ruled that Article 5(6)(a) of the treaty expressly requires services to be furnished within India through employees or personnel for a service permanent establishment (PE) to arise. The court said the provision demands a tangible territorial nexus — that is, a physical footprint within India — and that the notion of a ‘virtual service PE’ has no basis in either treaty interpretation or domestic tax law.
The ruling came while dismissing appeals filed by the Income Tax Department, which had challenged the Income Tax Appellate Tribunal’s decision in favour of a Singapore-based legal services firm. The Revenue Department had contended that the assessee’s virtual and digital mode of providing advisory services to Indian clients constituted a taxable presence in India.
The court rejected this view, holding that tax liability under the DTAA cannot be extended through judicial innovation merely because of technological advancement. It said that treaty provisions, negotiated between sovereign states, must be applied as written and cannot be expanded to cover concepts like virtual presence without express inclusion.
The bench further observed that while the rise of remote and digital service delivery has blurred traditional notions of physical presence, taxability under international treaties remains contingent on explicit statutory or treaty-based conditions. Since no employee or representative of the assessee had visited India during the relevant assessment years, the requirement under Article 5(6)(a) remained unsatisfied.
Consequently, the High Court affirmed the Tribunal’s finding that no service PE existed and that the income earned by the assessee from services rendered entirely outside India could not be taxed in India. The Revenue’s appeals were dismissed.
An tax expert said, the court has delivered an important ruling on how permanent establishment rules must be interpreted in a digital world. Unless a tax treaty specifically provides for a concept like virtual presence or virtual PE, authorities cannot expand the definition on their own, he said.
“The judgment reaffirms that tax treaties must be interpreted strictly based on their current wording. It also clarifies that cross-border services delivered remotely do not create a taxable presence in India unless the treaty explicitly provides for it,” he explained.
