Supreme Court Rules That Foreign Firm's Strategic Control Via Indian Entity Creates Taxable PE In Case Of Hyatt International Southwest Asia Ltd

In a landmark ruling in the case of Hyatt International Southwest Asia Ltd. (Hyatt)¹, the Supreme Court has held that a foreign company can be considered to have a Permanent Establishment (PE) in India under the India-UAE Double Taxation Avoidance Agreement (DTAA), even if it does not have a physical office or fixed base in India. The Court highlighted that where the foreign company exercises significant control, oversight, and management of the core functions of the business through employees or personnel based in India for a longer period, a PE can be established even in the absence of profitability or exclusive premises.

Brief Facts

• The taxpayer is incorporated in UAE and is a tax resident in UAE as per India-UAE DTAA.
• The taxpayer entered into Strategic Oversight Services Agreements (SOSAs) with Asian Hotels Limited India (AHL) for providing strategic planning services and know-how.
• These agreements spanned 20 years and involved strategic planning, brand compliance, marketing support, operational oversight, and human resource support for Hyatt-branded hotels in India.
• The Indian Revenue authorities contended that the taxpayer constituted a PE under Article 5 of the India-UAE DTAA and that the profits attributable to such a PE were taxable in India under Article 7.
• The taxpayer argued that it did not have a fixed place of business or exclusive premises in India, and that its employees' visits were merely temporary and irregular.
• However, both the Income Tax Appellate Tribunal (ITAT) and the Delhi High Court rejected the taxpayer's arguments and upheld the Revenue's position, upholding that a PE was constituted and the associated profits were taxable in India.

Taxpayer's contentions

• The taxpayer contended that the income earned by it was not chargeable to tax in India as there was no specific Article under the India-UAE DTAA for taxing Fees for technical services.
• The taxpayer further stated that no PE was constituted under either Article 5(1) (Fixed Place PE) or Article 5(2)(i) (Service PE) of the Indiaâ€"UAE DTAA.
• The taxpayer claimed that it had no legal right or possession over any office or premises in India. Its employees used hotel premises occasionally for meetings and training, but this did not satisfy the 'disposal test' necessary under Article 5(1) of the DTAA.
• The taxpayer highlighted that the SOSA explicitly stipulates that the taxpayer shall render its services from Dubai and is not obligated to send or station any employee in India. Further, the limited and occasional presence of its employees in India were brief and routine in nature and did not exceed the threshold of nine months under Article 5(2)(i) of the DTAA.
• The taxpayer further specified that the day-to-day operations of the hotels were carried out by Hyatt India Private Limited under a separate Hotel Operating Services Agreement (HOSA) entered into with the hotel owner. The taxpayer's role was limited to monitoring compliance with international standards and offering guidance, and not conduct core business activities.

Revenue's contentions

The primary contention of the Revenue was that the taxpayer was deeply involved in the day-to-day operations and strategic functioning of the Indian hotels and exercised continuous operational control. It highlighted that:

• It stated that the taxpayer exercised deep operational control including staff appointment and training, financial oversight, procurement, and daily management primarily through the General Manager, who reported directly to the taxpayer.
• It specified that these activities were not incidental or auxiliary, but core to the taxpayer's business.
• It placed reliance on the Supreme Court's ruling in Formula One World Championship Ltd.², where a foreign enterprise was held to have a PE in India despite limited duration of access, due to effective control and use of the venue during the event period.

Supreme Court's observations

• The Court undertook a detailed factual and functional analysis of the SOSA and noted that the taxpayer exercised significant control over the strategic, operational, and financial affairs of the hotel.
• The Court also stated that the Strategic Fees received by taxpayer for services provided by it is not a fixed fees but dependent on revenue and hotel's operations. The remuneration structure clearly reflects an active commercial involvement.
• The taxpayer had a continuing and enforceable right to implement its policies and ensure compliance in all operational aspects of the hotel. The Court formed a view that the degree of control and supervision exercised by the taxpayer clearly transcends a mere advisory capacity.
• Further, the Court dismissed the taxpayers argument that the absence of a designated or exclusive space within the hotel negated the existence of a PE. Relying on its prior ruling in Formula One, it clarified that the 'disposal test' does not require exclusive possession; what matters is whether the foreign enterprise had functional and regular access to the premises for conducting business. In this case, the sustained and substantive involvement of the appellant in the hotel's management, under a long-term (20-year) agreement with revenue sharing, demonstrated such control and presence.
• Further, the Court ruled that the legal form does not override economic substance in determining PE status while addressing to the taxpayer's contention that the daily management is conducted by Hyatt India Pvt Ltd.
• Referring to the Delhi High Court's decision in Hyatt International, the Court affirmed that profit attribution to a PE can occur even when the foreign entity incurs global losses. It stated that the source country retains the right to tax the profits attributable to the PE based on activities performed within its jurisdiction.
• Accordingly, the Court upheld the High Court's finding that the taxpayer had a Fixed Place PE in India and that the income received under the SOSA was taxable in India.

Our Comments

This judgment acts as a critical alert for foreign entities especially those in hospitality, consulting, and franchising which operate in India through affiliates or franchisees but retain significant control or deploy staff on Indian soil. Avoiding a formal office or written contract alone will no longer shield companies from PE risk. The ruling clarifies that frequent physical presence by personnel engaged in supervisory or advisory roles can establish a Service PE or Fixed Place PE. As a result, Indian tax authorities may allocate profits to such PEs regardless of the enterprise's global financial results. Therefore, it's essential for foreign companies to analyse its contracts, staffing, and service arrangements involving India is now imperative to manage PE exposure. This judgement reiterates the recent judicial precedents trend of looking into the substance over the form of the arrangements. In our view, this judgement may impact many foreign companies who would have mitigated their PE risk through traditional Fixed Place PE tests, which were recommended in OECD model conventions.

Footnotes

1 Hyatt International Southwest Aisa Ltd [TS-954-SC-2025]

2 Formula One World Championship Limited (2017) 15 SCC 602

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