India Cannot Tax Virtual Services of Foreign Firms After Delhi HC ruling 

The world has truly become a global village, where services flow instantly across borders via email, video calls, and cloud platforms, often without anyone setting foot in the customer’s country. The Clifford Chance decision though legally correct—it faithfully applies the India-Singapore DTAA's—but it exposes this mismatch, treating identical services differently based on delivery mode alone. While the Delhi High Court got the law right, it underscores how urgently treaties must evolve to match economic reality.

The concept of permanent establishment in international taxation is significant as it forms the basis for taxing foreign companies in India. One typical type is the Service permanent establishment, addressed in many tax treaties. Usually, the key features of a service permanent establishment are:

• Services exceed the treaty's time threshold (e.g., 90 or 183 days);
• Services occur in the source state via the non-resident's employees or personnel there;
• Services relate to a continuous project or activity.

India's tax treaties featuring service permanent establishment clauses span dozens of treaty partners for example Singapore having a threshold of 90 days; UK - 90 days; UAE having a threshold of more than 9 months in a 12 month period; Mauritius having a threshold of 90 days within a 12 month period; Denmark -183 days; Norway having a threshold of more than 6 months in a 12 month period to name a few.

Traditionally, physical presence of staff was essential. But in today’s world digital shifts challenge this—for example, Saudi Arabia's guidelines now recognise a virtual permanent establishment (PE) or remote services without bodies on ground. India faces the same tension: old rules fit factories, not tech advice or services from afar.

Recently, the Delhi HC in Clifford Chance case upheld the ITAT ruling of no virtual PE without explicit treaty cover. Briefly the facts are that a Singapore law firm, Clifford Chance, advised Indian clients.  Two employees visited India for 120 days total. The question before the HC was whether this created a permanent establishment under Singapore tax treaty?

The HC ruled decisively as below:

• The language used in Article 5(6)(a) of the Singapore tax treaty is ‘within a contracting state’ and ‘through employees or other personnel’. This reveals that rendition of services by employees present within the country would only constitute a Service PE.
• Basis the catena of judgments relied upon by the assessee, the HC affirmed the view that furnishing services ‘within India’ through employees or other personnel is pertinent to constitute a ‘Service PE’,
• Further, the HC observed that language which is not included in the treaty provisions cannot be artificially read into such provisions by way of judicial fiction. As neither the Singapore tax treaty nor the Income-tax Act, 1961 contains any specific clause on this issue, the concept of a ‘Virtual Service PE’ cannot recognised.
• The HC, further, observed that, unless renegotiated, the existing treaty framework does not extend to virtual or digital services provided from abroad.
• The Revenue had contended that the threshold period under the Singapore tax treaty limit tests service continuance, not physical presence, so advisory work done remotely from outside India also created a ‘Virtual Service PE'. The various judgments relied upon by the Revenue were distinguished by the HC on facts.
• Hence, the HC affirmed the judgment of the ITAT and upheld that the assessee neither had any service permanent establishment nor any virtual service permanent establishment in India during the years under consideration. 

The structure underlined in Article 5(6)(a) demands physical presence of personnel in India—its day-count mechanism fails where professionals work remotely, leaving both the numerical threshold and core notion of "furnishing services within India" unmet. Absent explicit treaty text, courts cannot include the ‘virtual permanent establishment’ concept at will.  This mirrors the Supreme Court's famed Vodafone ruling, which refused to stretch the language of the then section 9(1)(i) of the Income Tax Act, 1961 to cover ‘indirect transfers’ of Indian assets without plain statutory language.

This sends a clear message that permanent establishment cannot be used as a blanket tool to tax remote services based merely on Indian customers or market reach. The HC in this decision delivers certainty, mapping safe paths through PE risks under India-Singapore-style treaties. Remote services could result in avoiding permanent establishment risk where staff spend little time in India and contracts/workflows follow treaty day and place rules with robust documentation of precise day-counts, detailed time-sheets etc.

Though, legally impeccable, the ruling sidesteps digital economy truths—cloud, apps, and remote advice evade legacy permanent establishment tests, letting value generated for Indian markets slip untaxed abroad. This risks major revenue shortfalls. India needs a clear roadmap: targeted treaty updates, plus interim reliance on equalisation levy or SEP rules to capture digital footprints fairly.