On 14th March 2024, the New Delhi Branch of the Income Tax Appellate Tribunal (ITAT) issued decision 2681 & 3377/Del/2023, focusing on the physical presence requirement for a Service PE and a Virtual Service PE.
The case involved a Singaporean tax resident entity providing legal services to multiple clients in India. The taxpayer provided legal services remotely from outside India during the assessment years, but its employees were physically present in India for 120 days. This period included non-service days like vacation, business development, and common days.
Initially declaring nil income, the taxpayer’s assessment led to the conclusion by the assessing officer that it constituted a Service PE based on the physical presence of employees in India. Additionally, a Virtual Service PE was argued by the assessing officer under the belief that the Singapore-India tax treaty did not necessitate physical presence for a Service PE.
The ITAT clarified that physical presence of employees in India is indeed a prerequisite for determining the existence of a Service PE. Consequently, non-service days such as vacation days, business development days, and common days should be excluded from this calculation.
Regarding the Virtual Service PE, the ITAT noted the absence of provisions in the Singapore-India tax treaty for such a PE. Thus, the taxpayer cannot be considered to have a Virtual Service PE in India under the existing treaty provisions.
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