Only actual days of services to be considered in computing threshold for constitution of PE

Only days on which actual services rendered by company to be considered in computing threshold for constitution of permanent establishment (PE)

In a recent judgment, Delhi High Court has upheld exclusion of business development days and common days and only the days on which actual services were rendered by the employees of the assessee need to be considered while computing the threshold limit of 90 days for constitution of permanent establishment (PE) under India-Singapore DTAA

ABCAUS Case Law Citation:
4917 (2025) (12) abcaus.in HC

In the instant case, the Revenue had challenged the order passed by the ITAT in holding that the assessee does not have a service permanent establishment in India.

The respondent/assessee was non-resident company engaged in the business of legal advisory services. The Assessing Officer (AO) for the relevant Assessment Years passed draft assessment orders proposing to make additions. Aggrieved by the same, the assessee approached the Dispute Resolution Panel (DRP), which dismissed the objections of the assessee, the AO passed final assessment orders under Section 143(3) read with Section 144C(13) of the Act making the said additions.

On appeal by the assessee, the Tribunal observed that to constitute a service PE actual performance of service in India is essential and only when the services are rendered by the employees within India with their physical presence during the relevant AYs shall be taken into account for computing threshold limit for creation of a service PE of the assessee in India.

Before the Hon’ble High Court, the Revenue contended that Tribunal erred in excluding some days by treating the same as vacation days to compute the threshold limit of 90 days for constitution of permanent establishment as stipulated under Article 5(6)(a) of the India-Singapore Double Taxation Avoidance Agreement (the DTAA).

It was contended that although employees of the assessee were not physically present in India, however, there is no mention of the word “physical presence” of employees for constitution of permanent establishment under the DTAA.

The Hon’ble High Court noted a threshold of 90 days has been provided under Article 5(6)(a) of the India-Singapore DTAA for constitution of service PE of the assessee in India.

The Hon’ble High Court further noted that two employees of the assessee were present in India for a total of 120 days. It was the case of the assessee that they had rendered services only for a total of 44 days, since they spent rest of days in vacation and on business development, and common days when the stay of both the employees coincided.

The Hon’ble High Court also noted that assessee had provided the time sheets for the employees wherein annual leave had been captured, and also the leave record extracted from its HR system. That apart, the assessee had also furnished a declaration that these employees did not work on client projects during their vacation period.

The Hon’ble High Court opined that it was only logical that only the days on which actual services were rendered by the employees of the assessee need to be considered while computing the threshold limit. In fact, the Revenue themselves raised a submission that what matters while examining the constitution of a permanent establishment is not the presence of the employees, but the actual services rendered by the assessee. 

Accordingly, the Hon’ble High Court held that Tribunal was justified in holding that no permanent establishment of the assessee was constituted in relevant Assessment Year.

The revenue also contended that though the assessee did not have physical presence of any employees in India, services were still provided virtually by the assessee to its clients in India, and as such, it constituted a virtual service permanent establishment in India.  

The Hon’ble High Court observed that Article 5(6)(a) of the DTAA stated that an enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes service within a Contracting State through employees or other personnel. The Hon’ble High Court opined that the words “within a Contracting State” and “through employees or other personnel” contemplated rendition of services in India by the employees of the non-resident enterprise, while mandating a fixed nexus; a physical footprint within India. The term “within‟ has a certain territorial connotation and in the absence of personnel physically performing services in India, there can be no furnishing of services “within‟ India.

Although the Hon’ble High Court acknowledge that the Revenue may potentially be justified in raising concerns regarding taxability of foreign entities in the increasingly open global virtual economy, and the diminishing requirement of physical presence of non-resident employees to furnish services. However, taxability of entities in such instances, as always, remains subject to the applicable provisions of law- both treaty and domestic.

Accordingly, the appeal of the Revenue was dismissed.

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