Indian tax tribunal held that the concept of Virtual service PE (presented in the OECD Interim Report 2018) shall not apply until it is officially endorsed by India.

Brief background

• The taxpayer, being a tax resident of Singapore is engaged in providing legal advisory services to several international clients including in India.
• For the subject tax fiscal year, the taxpayer had rendered services remotely outside India while employees travelled to India when situations required for rendering services. The tax authorities held that the taxpayer constituted Service PE based on the physical presence of employees in India.
• Further, it constituted virtual service PE on the grounds that aggregate duration of provision of services by the non-resident within India is the important consideration and duration of physical presence of the employees in India is immaterial.

Key excerpts from Ruling

• The Tax Tribunal observed that no provisions of virtual service PE are yet present in the India-Singapore DTAA and hence, “the present service PE provision under the India-Singapore DTAA which requires physical rendition of service in India should only be applied”.
• The Tax Tribunal also held that the taxpayers employees were present in India for less than 90 days after excluding vacation period, business development days and common days spent by more than one individual.
• The Tribunal relied on Indian Apex Court ruling in the case of E-Funds wherein it was held that “to constitute a service PE actual performance of service in India is essential and accordingly only when the services are rendered by the employees within India with their physical presence during the financial year shall be taken into account for computing threshold limit for creation of a service PE of the taxpayer in India.”
• Therefore, concludes that the taxpayer has no service PE in India.

Please note this is an important ruling in the context of Service PE from an India perspective and will be relevant to MNE’s rendering services in India (either to its Indian subsidiary or a third party) from a PE evaluation standpoint.