Delhi High Court rules absent specific DTAA provision, concept of “virtual presence” or “virtual PE” cannot be read in; physical presence required for Service PE under India–Singapore DTAA

The Taxpayer^[1]  is a Singapore-based law firm, engaged in providing legal advisory services to Indian clients. In the tax year 2019-20, two employees were present in India for 120 days (inclusive of vacation and business development days) and in the subsequent tax year (impacted by Covid-19 pandemic), entire services were rendered from outside India. The India-Singapore Double Taxation Avoidance Agreement (DTAA or treaty) provides for time threshold of 90 days within a period of 12 months of presence in India for triggering Service Permanent Establishment (PE) in India. The tax authority alleged that the Taxpayer had a Service PE by way of a virtual service PE for the tax years under consideration since the services were continuously provided within and outside India beyond the threshold period of 90 days and, accordingly, attributed the income to the alleged PE as chargeable to tax in India.

The Delhi Tribunal rejected the concept of virtual PE in absence of any specific provision under the DTAA and held that actual performance of services in India through employees physically present is essential for constituting a Service PE. For tax year 2019-20, vacation days and business development days were excluded as no services were rendered during these days and concluded that services were rendered for less than prescribed threshold of 90 days under the India-Singapore DTAA. Further, for tax year 2020-21, as no employees were present in India; no PE was established.

The Delhi High Court (HC) upheld the Delhi Tribunal decision and emphasized that actual performance of services in India is essential for establishing a Service PE. It noted that as per India-Singapore DTAA, Service PE is established if a taxpayer furnishes services “within” India through employees or other personnel. The term "within" implies a territorial connotation, requiring physical presence for service provision.

While the HC acknowledged the challenges posed by digitalization in taxability, it maintained that the existing treaty language must be strictly interpreted. Thus, in absence of explicit provision for virtual PE in the DTAA, the same cannot be artificially read into the provision by way of judicial fiction. The HC further distinguished various decisions^[2] relied upon by the tax authority by emphasizing on the specific treaty language under the India-Singapore DTAA. More particularly, in the recent ruling of Supreme Court (SC) in the case of Hyatt International Southwest Asia Ltd. v. ADIT^[3],  the SC made certain observations emphasising continuity of business presence in aggregate as distinguished from the length of stay of each individual employee for trigger of Service PE. However, in the present case, the Delhi HC distinguished this ruling on facts, as there is no argument raised with respect to the stay of any one particular individual in India; rather is the aggregate time of stay of employees of the Taxpayer that has been taken into consideration to examine whether the threshold mandated by the DTAA has been reached.

^{[1] [TS-1603-HC-2025(DEL)]
[2] Hyatt International Southwest Asia Ltd. v. ADIT, [2025 SCC OnLine SC 1506];
ABB FZ-LLC v. DCIT, [(2017) 166 ITD 329 (Bang)];
Verizon Communications Singapore Pte Ltd. v. ITO, [(2014) 361 ITR 575 (Madras HC)];
Spain v. Dell, Tribunal Supremo, [STS 2861/2016, Case No. 1475/2016 (Spanish Supreme Court)];
AB LLC and BD Holdings LLC and The Commissioner of the South African Revenue Services, [Case No. 13276 (South African Tax Court)];
[3] [2025 SCC OnLine SC 1506]}