In today’s fast-paced world, where virtual work arrangements are increasingly common, tax authorities are seeking to claim a share of revenue by alleging that such arrangements constitute a Permanent Establishment (‘PE’) of a foreign enterprise in India.

In a recent case, the High Court of Delhi^[1] (‘Delhi HC’), while upholding the decision^[2] of the Income Tax Appellate Tribunal (‘ITAT’) dismissed the appeal filed by the Income-tax Authorities and held that the assessee did not constitute a PE due to non-satisfaction of the conditions laid down under Article 5(6)^[3] of the India-Singapore Double Taxation Avoidance Agreement (‘DTAA’). The Delhi HC also clarified that the term ‘within’ as used in Article 5(6) requires a physical footprint in India. Furthermore, the Delhi HC held that unless and until Article 5(6) of the DTAA is renegotiated or supplemented, the exiting framework does not extend to virtual or digital services provided from abroad.

ITAT, while setting aside the order of the assessing officer, had held that for Article 5(6)(a) of the DTAA to apply, actual performance of services within India is essential, and only those services rendered by employees within India through their physical presence during a financial year shall be considered for computing the threshold limit for the creation of a service PE. Thus, after excluding vacation days, business development days (non-billable days), and common days, it was determined that the employees of the assessee had spent only 44 days working in India, which was less than the 90 day threshold. Accordingly, it was held that the assessee did not constitute a service PE or a virtual service PE.

This decision provides the much needed clarity for foreign enterprises operating in India through virtual means. Further, the foreign enterprises providing services to India should carefully track the physical presence of their employees in India to ensure compliance with the DTAA. Until the DTAA is amended to address digital or virtual service provision, physical presence remains the determinative factor for the creation of a service PE.

[1]   CIT (IT) v. Clifford Chance Pte Ltd. in ITA Nos. 353 and 354 of 2025.

[2]   Clifford Chance Pte Ltd. v. ACIT in ITA Nos. 2681 and 3377 of 2023 (Del).

[3]   “An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12, within a Contracting State through employees or other personnel, but only if:

(a) activities of that nature continue within that Contracting State for a period or periods aggregating more than 90 days in any fiscal year; or

(b) activities are performed for a related enterprise (within the meaning of Article 9 of this Agreement) for a period or periods aggregating more than 30 days in any fiscal year.”