The Delhi High Court has set aside a Section 195 withholding certificate that treated cross-border group services as taxable business income in India on a “virtual service permanent establishment” footing, and has sent the matter back for a fresh decision in line with Clifford Chance.  

Issue of Law
Whether the Assessing Officer could deny a nil-withholding certificate and require withholding at 5.25% by holding that the UK group entity had a “virtual service PE” in India under Article 5(2)(k) of the India–UK DTAA, despite the Delhi High Court’s interpretation in Clifford Chance that the “within the contracting State” language requires physical presence of personnel.  

Facts Referred
Ernst & Young LLP challenged a certificate and order dated 17.09.2025 issued under Section 195 of the Income-tax Act, 1961, which authorised withholding at 5.25% on proposed payments to Ernst & Young (EMEIA) Services Limited (UK) by characterising them as business income taxable in India due to an alleged “virtual service PE”.  
The petitioner argued that the sole basis for rejection was the “virtual service PE” premise, and that the issue stood settled against the Revenue by the ITAT and by the Delhi High Court’s dismissal of the Revenue appeal in Clifford Chance, interpreting pari materia service-PE language as requiring employees/personnel physically performing services in India.  
The Revenue defended the 5.25% withholding as protective under Section 195(2) and relied on its assessment position for AY 2022–23 of the recipient entity, including profit attribution assumptions, also arguing that physical presence was not mandated.  

Judgment
The Court held that the relevant service-PE language in the India–UK DTAA is pari materia to the provision construed in Clifford Chance, and reiterated that “within the contracting State” carries a territorial connotation: absent personnel physically performing services in India, a “virtual service PE” cannot be accepted, particularly when such a concept is not contemplated by the DTAA or domestic law.  
Accordingly, the Court set aside the impugned certificate and order dated 17.09.2025 and remanded the Section 195 application to the Assessing Officer for a fresh order within two weeks (outer limit) from receipt of the Court’s order.  

Read the official judgement/order here
 

Case title: Ernst and Young LLP v. Assistant Commissioner of Income Tax, International Circle-1-2-2, New Delhi  
Case number: W.P.(C) 16158/2025 & CM APPL. 66147/2025  
Bench: Justice V. Kameswar Rao; Justice Vinod Kumar  
Dates: Reserved 23.12.2025; Delivered 14.01.2026