The Delhi High Court has issued notice in an appeal filed by the Income Tax Department challenging a ruling of the Income Tax Appellate Tribunal (ITAT) that went in favour of UK-headquartered law firm Clifford Chance’s Singapore entity. The case raises an important question on whether India can impose tax on the basis of a “virtual permanent establishment” under the India-Singapore Double Taxation Avoidance Agreement (DTAA).
The matter came before a Division Bench of Justices V Kameswar Rao and Vinod Kumar, but the hearing could not proceed as the Bench did not hold court on the listed date. The appeal is now scheduled to be heard on September 12.
The dispute centres on Clifford Chance’s income from Indian clients during Assessment Years (AY) 2020–21 and 2021–22. For AY 2020–21, the firm reported receipts of Rs 15.55 crore with tax deducted at source (TDS) of Rs 3.32 crore but declared nil taxable income. In AY 2021–22, it again filed a nil return, this time disclosing Rs 7.97 crore in receipts and TDS of Rs 82.8 lakh.
The Assessing Officer treated these receipts as taxable in India and attributed the entire revenue to an alleged permanent establishment (PE). Additional additions included Rs 10.87 lakh from ICICI Bank income and Rs 10.23 lakh as interest on a tax refund for AY 2019–20.
Clifford Chance contested this position. It argued that its employees were present in India for only 44 days in AY 2020–21, far below the 90-day threshold prescribed under the treaty for establishing a service PE. In AY 2021–22, its employees did not visit India at all, with all work carried out from Singapore. The firm maintained that services were rendered remotely and that the “virtual service PE” theory had no basis in the DTAA.
The law firm also challenged the attribution of 100 per cent of revenues to India. According to it, Section 9 of the Income Tax Act and Article 7 of the DTAA allow taxation only to the extent of operations carried out within India. Clifford Chance pointed out that receipts shown in Form 26AS cannot be the sole ground for additions without clear evidence of actual income.
The ITAT accepted these arguments in its March 2024 ruling. It held that physical presence in India for more than 90 days is a necessary requirement for creating a service PE under the India-Singapore DTAA. Since that condition was not satisfied, no PE could be established in either year. The Tribunal also rejected the “virtual service PE” approach, noting that such a concept is not recognised in the treaty.
On the issue of attribution, the Tribunal ruled that taxing gross receipts was unjustified. It also struck down the levy of interest under Section 234B.
