In a significant decision with ramifications for international tax structuring and the application of Permanent Establishment (PE) principles, the Supreme Court of India has upheld the existence of a Fixed Place PE of Hyatt International Southwest Asia Ltd. (a UAE resident company)in India under Article 5(1) of the India-UAE DTAA, thereby rendering its India-related income taxable under Article 7(1).
Case Overview
The assessee, Hyatt International Southwest Asia Ltd. (HISWA), entered into Strategic Oversight Services Agreements (SOSAs) with Indian hotel owners (notably Asian Hotels Ltd., Delhi and Mumbai) in 2008 for a term of 20 years. The SOSAs involved providing brand oversight, strategic planning, policy formulation, and quality control services for Hyatt-branded hotels in India.
While HISWA claimed its income was not taxable in India due to the absence of a PE and argued that services were rendered from Dubai, the Revenue asserted that the functional and contractual control exercised by HISWA over hotel operations constituted a fixed place PE in India.
Key Legal Issues
- Whether HISWA had a PE in India under Article 5(1) of the India–UAE DTAA.
- Whether profits attributable to such PE are taxable in India under Article 7(1), despite global losses.
- Whether the oversight services were merely auxiliary or core to the business operations.
Findings of the Court
The Supreme Court, affirming the rulings of the Delhi High Court and ITAT, held:
- Existence of PE: The hotel premises were held to be at the disposal of HISWA, satisfying the “disposal test” as laid down in Formula One World Championship Ltd. v. CIT. The Court emphasized HISWA’s enforceable rights to influence:
- Human resource decisions (including appointment of key personnel),
- Operational policies,
- Strategic marketing and pricing,
- Direct profit-linked compensation.
- Substance Over Form: The SC rejected the argument that since HISWA did not own or lease space in India, no PE existed. Instead, it found that actual functional control and continuity of business activity were determinative.
- Auxiliary vs. Core Functions: The Court ruled that HISWA’s services were not auxiliary or preparatory. They formed an integral part of Hyatt's hotel operations in India and were critical to revenue generation.
- Profit Attribution Valid Despite Global Losses: Citing the High Court's reference judgment, the SC confirmed that profits attributable to a PE are taxable in the source state regardless of overall global profitability. Article 7 permits attribution based on business presence, not just consolidated results.
The Supreme Court’s ruling in the Hyatt case underscores India’s evolving and assertive interpretation of PE norms, guided by economic substance,functional analysis, and the global BEPS discourse. Multinational enterprises operating under similar oversight, management, or franchise structures with Indian counterparts must now reassess their tax positions, PE risk exposure, and documentation to ensure compliance and defensibility.
