Delhi HC quashes I-T order to EY on withholding tax

New Delhi: The Delhi High Court on Wednesday quashed an Income Tax Department decision asking Ernst & Young (EY) to withhold tax at 5.25% on a proposed payment of ₹1,750 crore to UK-based Ernst & Young (EMEIA) Services.

The court directed the tax department to decide afresh the company's request for a "nil withholding certificate" in two weeks for a prospective payment of ₹1,750 crore to the UK entity.

The department had rejected EY's plea for the certificate on the grounds that it constituted the business income of Ernst & Young (EMEIA) and was chargeable to tax, since there was a virtual service permanent establishment of the UK firm in India as per Article 5(k) the India-UK Double Taxation Avoidance Agreement (DTAA).


The article specifies when rendering services in one country by an entity of the other creates a taxable presence.

EY argued that the high court, while interpreting a similar treaty provision earlier in the context of the India-Singapore DTAA (in the case of Clifford Chance), said the provision only contemplated rendering of services by employees present within the contracting country.

Favouring the firm, a division bench comprising Justices V Kameswar Rao and Vinod Kumar said both India-UK DTAA and India-Singapore DTAA contemplate rendition of services in India by the employees of non-resident enterprises.

"Since the words "within the contracting state" has a territorial connotation, in the absence of personnel physically performing services in India, there can be no rendering of services within India, the bench said. Therefore, there can be no virtual service permanent establishment as contended by the revenue department, more so when such a concept is not contemplated by the DTAA or the domestic Act, it said.