Delhi High Court Rules Against 'Virtual Service PE' Concept for Denial of Section 195 Nil Withholding Certificate

The Delhi High Court recently delivered a significant judgment regarding the interpretation of "Service Permanent Establishment" (Service PE) under Double Taxation Avoidance Agreements (DTAA). In the case of Ernst And Young LLP Vs ACIT, the Court addressed whether the Revenue Department could deny a Nil Withholding Certificate based on the theory of a "Virtual Service Permanent Establishment."

The Court set aside the certificate and order issued by the Income Tax Department, reinforcing that physical presence is a prerequisite for constituting a Service PE under the India-UK DTAA.

Background of the Dispute

The writ petition was filed by the assessee, Ernst And Young LLP, challenging a certificate and order dated 17.09.2025, issued under Section 195 of the Income Tax Act 1961.

The assessee had approached the Assessing Officer (AO) seeking a "Nil Withholding Certificate" for prospective payments totaling Rs. 17,50,00,00,000/- to be made to a UK-based group entity, Ernst & Young (EMEIA) Services Limited, for the period ending 31.03.2026.

Instead of granting the Nil certificate, the AO authorized the payments subject to a withholding tax rate of 5.25%. The AO's decision was grounded on the premise that the recipient entity had a "Virtual Service Permanent Establishment" in India under Article 5(2)(k) of the India–UK DTAA, thereby making the payments taxable as business income in India.

Contentions of the Assessee

The legal counsel for the assessee argued that the rejection of the Nil Withholding Certificate was legally unsustainable. The primary arguments presented were: