IT department moves Delhi High Court against ITAT ruling on Clifford Chance’s India tax liability

The Income Tax Department has moved the Delhi High Court against a March 2024 order of the Income Tax Appellate Tribunal (ITAT) which held that UK-headquartered law firm Clifford Chance’s Singapore entity did not have a permanent establishment (PE) in India for Assessment Years (AY) 2020–21 and 2021–22. [Commissioner of Income Tax (International Taxation) v. Clifford Chance Pte Limited]

The matter was listed before a Division Bench of Justices V Kameswar Rao and Vinod Kumar. However, since the Bench did not hold court today, it has been adjourned to another date.

The ITAT had in March 2024 allowed the firm’s appeals against final assessment orders passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961.

For AY 2020–21, Clifford Chance declared nil income but disclosed ₹15.55 crore in receipts from Indian clients, backed by TDS receipts of ₹3.32 crore. For AY 2021–22, it once again filed a nil return, this time with TDS credit of ₹82.8 lakh on ₹7.97 crore of receipts.

The Assessing Officer held that Clifford Chance had a PE in India under Article 5(6) of the India–Singapore Double Taxation Avoidance Agreement (DTAA) and attributed the entire revenue from Indian clients to the alleged PE. For AY 2021–22, the AO also made further additions of ₹10.87 lakh (alleged ICICI Bank income) and ₹10.23 lakh (interest on an income tax refund for AY 2019–20).

Clifford Chance argued that it had no fixed base in India and that its employees were physically present in India for only 44 days in AY 2020–21, well below the 90-day threshold under Article 5(6)(a) of the India–Singapore DTAA. In AY 2021–22, the firm’s employees did not visit India at all, with all services rendered remotely from Singapore.

The firm contended that the Assessing Officer’s reliance on a “virtual service PE” theory was contrary to treaty provisions. It also objected to the attribution of 100% of revenues to India, stressing that profits could only be taxed to the extent of operations carried out within India under Section 9 of the Act and Article 7 of the DTAA.

The ITAT sided with Clifford Chance, holding that the physical presence of employees in India for more than 90 days is a prerequisite to create a service PE under the India–Singapore DTAA. Since this condition was not met in AY 2020–21, and no employees visited India in AY 2021–22, the Tribunal concluded that no service PE existed. It also rejected the Assessing Officer’s reliance on the “virtual service PE” concept, noting that the DTAA does not recognise such a provision.

On attribution, the Tribunal held that taxing the entire gross receipts was unjustified and that entries in Form 26AS - such as those showing ICICI Bank payments and tax refund interest - could not be the sole basis for additions without proof of actual receipt. The levy of interest under Section 234B was also struck down.