Direct Tax Amicus, December 2025

Article

The digital frontier: Navigating the ‘Virtual Service PE’ in international taxation

ByRavi Sawana, Neha Sharma and Apurva Chaudhary

If an enterprise is carrying out its operations through a Permanent Establishment’ (‘PE’) in another country, then the profits of the enterprise which are attributable to the said PE are taxed in that other country itself.Recently, the Indian Tax Authorities have been taking a stand that where the services are rendered by the employees of a foreign enterprise remotely / virtually to the Indian resident, then a ‘virtual Service PE’ is constituted within the meaning of Article 5 of the DTAAs. The authors take note of a recent decision of the Delhi High Court in CIT v. Clifford Chance Pte Ltd., which reaffirms that ‘virtual’ presence cannot be judicially conjured where the DTAA demands physical reality. According to them, for non-residents, this ruling provides strong judicial support for offshore-only delivery models without creating a PE in India, provided personnel do not physically enter India, however, the judgment does not eliminate all risks. They believe that India’s domestic Significant Economic Presence provisions and global trends, such as 2025 Update to the OECD Model Tax Convention and potential DTAA renegotiations, signal an eventual shift toward digital nexus rules.

Notifications & Circulars
 

• Transfer pricing – Tolerance range under Section 92C for AY 2025-26 notified
   
• Protocol amending the India-Belgium DTAA brought into force
   
• Capital Gains Account Scheme amended to enable electronic deposits and withdrawals
   
• Additional banks authorized under Capital Gains Account Scheme, 1988

Ratio decidendi
 

• Transfer pricing – Transfer of intangibles and customer contracts to AE at a value determined based on projections – Arm’s length price not to be recomputed by replacing projections with actual results – ITAT New Delhi
   
• Transfer pricing – Separate benchmarking of Management Fees is impermissible once entity-level TNMM margins are accepted – ITAT Mumbai
   
• No withholding tax obligations arise on payment for International Private Leased Circuits (IPLC) to non-residents, as the same is not ‘Royalty’ – Madras High Court
   
• No disallowance under Section 40(a)(i) of payments made to non-residents on account of non-deduction of tax at source by virtue of non-discrimination clause in DTAA – Madras High Court
   
• Penalty under Section 270A cannot be imposed for mere erroneous claim of excess Foreign Tax Credit – Karnataka High Court
   
• Charitable organization – Providing pro-bono AI transcription services to various courts is ‘charitable’ service – ITAT Mumbai
   
• Loss on conversion of loan into equity shares as part of debt restructuring is a business loss – ITAT Mumbai