Emphasising that the provisions of the India-UK Double Taxation Avoidance Agreement (DTAA) and the India-Singapore DTAA, relevant to the constitution of a Service Permanent Establishment (PE), are pari materia, the Delhi High Court has clarified that the phrase “within a Contracting State” has a distinct territorial connotation, which mandates a physical footprint of the non-resident enterprise’s employees or personnel within India for services to be furnished “within” India.
The High Court observed that in the absence of personnel physically performing services in India, there can be no furnishing of services “within” India, and consequently, a service PE cannot be constituted. A DTAA must be interpreted strictly, and concepts that are not expressly provided for in the treaty, such as a “virtual service permanent establishment”, cannot be read into its provisions by way of judicial fiction.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar reiterated that the words “within a Contracting State” and “through employees or other personnel” contemplates rendition of services in India by the employees of the non-resident enterprise, while mandating a fixed nexus; a physical footprint within India. Reference was made to the decision in the case of Commissioner of Income Tax, International Taxation-1, New Delhi vs. Clifford Chance Pvt Ltd [2025:DHC:10838-DB].
As the concept of a virtual service PE is not contemplated by the DTAA or the domestic Income Tax Act, the Bench rejected the Department’s contention of the establishment of a PE. The Bench therefore, concluded that Article 5(2)(k) of the DTAA does not merely requires furnishing of services through employees or other personnel within the Contracting State and rather, mandate physical presence.
The Bench also set aside the nil tax withholding certificate issued under Section 195 of the Income Tax Act, and remanded the matter back to the Assessing Officer for a fresh decision.
Briefly, the petitioner, Ernst and Young LLP, filed a petition challenging the certificate and order issued by the Assistant Commissioner of Income Tax, that authorised the petitioner to make payments to Ernst & Young (EMEIA) Services Limited, a UK-based entity, subject to withholding tax at a rate of 5.25%, treating the payment as business income.
Even though the petitioner had sought a “nil withholding” certificate for prospective payments amounting to Rs. 1750 crores for the period up to March 31, 2026, the Department based its decision on the premise that the recipient, EMEIA, had a Virtual Service Permanent Establishment (PE) in India as per Article 5(k) of the India-UK DTAA, making its income taxable in India. This conclusion was derived from the assessment order of the recipient for the Assessment Year 2022-23
Case Relied On:
Commissioner of Income Tax, International Taxation-1, New Delhi vs. Clifford Chance Pvt Ltd [2025:DHC:10838-DB]
Appearances:
Advocates Kamal Sawhney, Arun Bhadauria, and Nishank Vashishta, for the Petitioner/ Taxpayer
Advocates Indruj Singh Rai, Sanjeev Menon, and Gaurav Kumar, for the Respondent/ Revenue
