In the Indian context, the Permanent Establishment (PE) incidence entails a lot of disputes between the non-residents and Indian tax authorities wherein Indian Tax authorities seek to establish a taxable nexus in in the form of a PE for enabling taxation of business profits of non-resident entities. One of the forms of PE which finds place in most Indian treaties is ‘service PE’ which broadly requires the presence of employees of the non-resident in the source country.
The decision involved a Singapore resident entity providing legal advisory services to several international clients including in India wherein such services were largely rendered remotely from outside India. However, the tax authorities held that assessee constituted service PE/ virtual service PE in India and consequently attributed the entire receipts to such service PE/ virtual service PE in India.
The concept of ‘virtual PE’ has gained importance with the advent of the digital economy and some jurisdictions have started doing away with the physical presence requirement to suggest a non-resident will have a ‘service PE’ even if it provides services through employees or other personnel who are offshore and not physically present in the source state.
In this regard, the Delhi Tax Tribunal[1] examined whether service PE would be constituted as per India-Singapore Double Tax Avoidance Agreement (DTAA) even if the services are provided remotely and after taking into cognizance the underlying facts and applying Article 5(6)(a) of DTAA observed as under:
- To constitute a service PE actual performance of service in India is essential placing reliance on observations in Hon’ble Supreme Court in the case of ADIT vs. E-Funds IT Solution Inc.[2] that requirement of service PE is that services must be furnished ‘within India’.
- Only when the services are rendered by the employees within India with their physical presence during the financial year relevant to the AYs under consideration shall be taken into account for computing threshold limit for creation of a service PE of the assesee in India.
- No provision regarding establishment of virtual service PE is enshrined in the India-Singapore Tax treaty. The concept of virtual service PE mentioned in OECD Interim report (2018) under the OECD/G20 BEPS Project titled ‘Tax challenging arising from Digitalisation’ has not been endorsed by India and even such report specifically mentions that in absence of any amendments to the tax treaty, such measures can be challenged by the taxpayers.
This is a welcome decision for the taxpayers as it brings clarity and certainty on the service PE concept and incidence in the Indian context. It would be interesting to observe how the tax laws evolve with respect to the concept of virtual PE in India and in the international tax landscape.
[1] Clifford Chance PTE Ltd. v. Assistant Commissioner of Income-tax [2024] 160 taxmann.com 424 (Delhi – Trib.)[14-03-2024]
[2] 86 taxmann.com 240 (SC)