Delhi High Court issues notice in IT department's appeal on Clifford Chance India tax liability

The Delhi High Court on Tuesday issued notice in an appeal filed by the Income Tax Department challenging a March 2024 ruling of the Income Tax Appellate Tribunal (ITAT) which held that UK-headquartered law firm Clifford Chance’s Singapore entity did not have a taxable presence in India. [Commissioner of Income Tax (International Taxation) v. Clifford Chance Pte Limited]

A Division Bench of Justices V Kameswar Rao and Vinod Kumar issued was scheduled to hear the appeal but adjourned it, as it did not hold court on the listed date. The case will now be heard on September 12.

The principal question of law before the Court is whether tax can be levied on the assumption that a “virtual permanent establishment” exists in India under the India–Singapore Double Taxation Avoidance Agreement (DTAA).

The ITAT had in March 2024 allowed Clifford Chance’s appeals for Assessment Years (AY) 2020–21 and 2021–22. It held that the firm did not have a permanent establishment (PE) in India under Article 5(6) of the DTAA, as the minimum physical presence threshold was not met.

For AY 2020–21, Clifford Chance disclosed receipts of ₹15.55 crore from Indian clients with tax deducted at source (TDS) of ₹3.32 crore, but declared nil taxable income. In AY 2021–22, the firm again filed a nil return, showing receipts of ₹7.97 crore and TDS credit of ₹82.8 lakh.

The assessing officer had treated these receipts as taxable in India, attributing the entire revenue to an alleged PE and making additional additions of ₹10.87 lakh (ICICI Bank income) and ₹10.23 lakh (interest on an earlier tax refund).

The firm argued that its employees were in India for only 44 days in AY 2020–21 - well below the 90-day threshold in the treaty - and did not visit at all in AY 2021–22. It stressed that all services were rendered from Singapore, and that the assessing officer’s “virtual service PE” theory had no basis in the DTAA.

Clifford Chance also contended that attribution of 100% of revenues to India was inconsistent with Section 9 of the Income Tax Act, 1961 and Article 7 of the DTAA, which require profits to be taxed only to the extent of operations carried out in India.

The ITAT sided with Clifford Chance, ruling that the presence of employees in India beyond 90 days was a prerequisite for a service PE under the DTAA. Since that condition was not met, no PE existed for either year. It rejected the assessing officer’s reliance on the “virtual service PE” concept, holding that the treaty does not recognise such a basis for taxation.

On attribution, the Tribunal found that taxing the gross receipts was unjustified. It also held that entries in Form 26AS could not, by themselves, justify additions without evidence of actual receipts. The levy of interest under Section 234B was also struck down.

The IT department was represented by Advocate Puneet Rai.

Clifford Chance was represented by Senior Advocate Ajay Vohra.