No Tax on Virtual Legal Services Under India–S’pore Treaty: Delhi HC

The Delhi High Court has ruled that virtual legal services provided by a foreign law firm without any physical presence in India cannot be taxed under the India–Singapore Double Taxation Avoidance Agreement (DTAA). The judgment came in Commissioner of Income Tax, International Taxation v Clifford Chance Pte Ltd, which involved one of the world’s leading international law firms.

 

A Division Bench of Justices V Kameswar Rao and Vinod Kumar held that the DTAA does not recognise the idea of a “virtual service permanent establishment (PE)”, and therefore the Income Tax Department cannot impose such an interpretation. The treaty, the Court emphasised, clearly requires services to be performed within India by employees or personnel of the foreign enterprise in order to trigger tax liability.

 

Quoting Article 5(6)(a) of the DTAA, the Bench noted that the terms “within a Contracting State” and “through employees or other personnel” establish the need for a fixed physical nexus in India. Since the agreement does not envisage a virtual presence as a PE, the Court declined to read new concepts into the treaty.

 

The judges further stated that the language of the DTAA is “clear and unambiguous” and must be interpreted strictly. “If Article 5(6) only contemplates services rendered by employees present in the country, it is not for this Court to analyse the status or merits of a virtual service permanent establishment,” the order said. Accordingly, the Revenue’s argument that Clifford Chance had a virtual PE for AYs 2020–21 and 2021–22 was rejected.

 

The Court consequently dismissed two appeals filed by the Income Tax Department, which sought to overturn a March 2024 tribunal ruling that deleted additions of ₹15.55 crore (AY 2020–21) and ₹7.97 crore (AY 2021–22).

 

The tax authorities had argued that digitalisation allows companies to render services in India without a physical footprint and referred to OECD materials and foreign decisions to justify taxing such income. However, the Court declined to accept this broader interpretation.

For AY 2020–21, the department also claimed that Clifford Chance’s employees had exceeded the 90-day threshold for a service PE by staying in India for 120 days. The firm countered with detailed time sheets demonstrating that only 44 of those days involved actual client work; the rest related to vacation, business development, or overlapping non-service days. The Court accepted this breakdown, ruling that only days of actual service delivery count towards the threshold.

 

With these findings, the High Court fully rejected the Revenue’s appeals.

 

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