Delhi HC Cancels Tax Withholding Order on EY’s ₹1,750-Cr UK Payment

The Delhi High Court has struck down an Income Tax (I-T) Department order requiring Ernst & Young (EY) India to deduct tax before making a large payment to its UK-based affiliate. The court has asked the tax department to reconsider EY’s request for a nil withholding certificate within two weeks, according to a report by The Economic Times.

This comes after the tax department had asked EY India to withhold 5.25% tax on a planned payment of ₹1,750 crore to Ernst & Young (EMEIA) Services, a UK-based entity that provides professional services across Europe, the Middle East, India and Africa (EMEIA) region. The department reportedly denied EY’s application for a certificate saying the payment was business income and taxable in India.

I-T department’s objection was based on a provision in the India–UK Double Taxation Avoidance Agreement (DTAA) that deals with the taxability of business income when a foreign entity has a permanent establishment in India. Under the DTAA, a company can be taxed in India if it has a fixed place of business in the country, such as a branch or office.

In this case, the department reportedly claimed EY UK had a “virtual service permanent establishment” in India, meaning it argued services delivered here were sufficient to attract tax even without a physical office.

EY told the court that in earlier cases, including one involving the India–Singapore DTAA, the court had held that services can give rise to taxable presence only if employees or personnel are physically present in the country. The court agreed with this interpretation, according to the report.

A bench of Justices V Kameswar Rao and Vinod Kumar reportedly said both the India–UK and India–Singapore treaties require actual service delivery within India by employees physically present in the country to establish a permanent establishment service. The judges noted that the idea of a “virtual” permanent establishment has no basis in the treaty language and cannot be read into the agreement.

This means the tax department must reconsider its position based on the court’s interpretation of the treaty.

The ruling comes in the backdrop of international tax law over whether remote or digital services by foreign companies, without a physical presence in India, should create a taxable presence under treaties like the India–UK DTAA.