Supreme Court of India in case of Hyatt International Southwest Asia Ltd. v/s Additional Director of Income-tax

The concept of Permanent Establishment (PE) lies at the heart of international taxation, defining the nexus between a foreign enterprise and a taxing jurisdiction. Recently, the Supreme Court of India delivered a pivotal judgment in case of Hyatt International Southwest Asia Ltd ([2025] 176 taxmann.com 783 (SC)) that sheds crucial light on the scope and application of PE under the India-UAE Double Taxation Avoidance Agreement (DTAA). This ruling marks a significant evolution in how Indian tax authorities and courts interpret the PE threshold, especially concerning strategic and managerial functions exercised by foreign entities within India.

The Court’s judgment emphasizes that the absence of a formal office or branch does not automatically exclude the existence of a PE if the foreign enterprise exercises substantial control and operational involvement in Indian business activities. This decision firmly establishes the principle of “substance over form” in assessing PE, underscoring that strategic oversight and managerial roles, when continuous and integral, can give rise to a taxable presence in India.

Background

The assesse, Hyatt International Southwest Asia Ltd (Hyatt) is a company incorporated in Dubai, UAE. It entered into agreements with AHL India, AHL Delhi, and AHL Mumbai.

  • Strategic Oversight Services Agreements (SOSA): Under these agreements, Hyatt provided strategic planning, technical know-how, and managerial oversight to facilitate the efficient development, operation, and management of Hyatt hotels across India.

For the Assessment Year 2009-10, Hyatt declared nil income in India and sought a refund of approximately INR 8.8 million, basing its claim on two principal contentions:

  • Non-taxability under DTAA: Hyatt argued that the India-UAE DTAA did not have an explicit provision taxing Fees for Technical Services (FTS), and therefore, its income earned under SOSA was not taxable in India.
  • Absence of Permanent Establishment: Hyatt contended that it did not have a PE in India. It lacked a fixed place of business, did not maintain an office or branch, and the visits by its employees to India were occasional, temporary, and below the nine-month threshold specified in Article 5(2) of the India-UAE DTAA.

Despite these arguments, the Indian tax authorities, the Assessing Officer (AO), the Dispute Resolution Panel (DRP), the Income Tax Appellate Tribunal (ITAT), and eventually the High Court, concluded that Hyatt did have a PE in India by virtue of its operational presence and control over the hotel operations through the SOSA.

Assessee’s Arguments

Hyatt’s defence rested on several legal and factual points:

  • No Fixed Place of Business: Hyatt did not have any designated office, branch, or other premises in India exclusively at its disposal. It did not exercise exclusive control over any hotel premises. Further, the visits of Hyatt employees to India were brief, intermittent, and for supervisory purposes only, not sufficient to constitute a fixed place of business.
  • Threshold for PE Not Met: The presence of its personnel in India was limited and did not meet the minimum threshold (nine months) under Article 5(2)(i) of the DTAA.
  • Distinct Operational Agreements: The High Court, according to Hyatt, wrongly merged the SOSA with the separate Hotel Operating Services Agreement (HOSA), under which Hyatt India Pvt. Ltd. managed day-to-day operations independently.
  • Nature of Services: The activities under SOSA were limited to policy formulation, strategic planning, and advisory functions, which did not constitute ‘carrying on business’ through a fixed place in India.
  • Insufficient Physical Presence: The infrequent visits of employees across various hotels, with no fixed physical office, could not establish a PE.

Supreme Court’s Analysis and Conclusion

The Supreme Court meticulously examined the facts, the provisions of the India-UAE DTAA, the SOSA, and judicial precedents, including the landmark Formula One judgment and international tax conventions (OECD and UN Model Tax Conventions).

Key observations and conclusions include:

  • Definition of PE Under DTAA: The Court affirmed that a PE requires a ‘fixed place of business’ at the disposal of the enterprise where business activities are wholly or partly carried on. The notion of disposal implies control and availability for conducting business, not necessarily exclusive possession.
  • Exclusive Possession Not Mandatory: The Court ruled that having exclusive possession of the premises is not an absolute requirement to establish a PE. Shared or temporary use suffices, as long as business activities are carried out there and the enterprise maintains control.
  • Substantive Control and Operational Involvement: The SOSA conferred Hyatt with extensive, enforceable rights over the strategic, operational, and financial aspects of the hotels. The assessee’s activities extended well beyond advisory roles to active participation in core operations including staff appointments, policy enforcement, marketing, and financial management.
  • Long-Term Stability and Dependence: The 20-year term of the SOSA, coupled with a fee structure tied to hotel revenues, demonstrated stability, productivity, and economic dependence are hallmark indicators of a PE.
  • Economic Reality Prevails: The Court underscored the principle that substance prevails over form. Despite the separate legal existence of Hyatt India Pvt. Ltd., the economic substance of Hyatt’s operations indicated a PE.
  • Reliance on Formula One Case: Hyatt leaned heavily on the Supreme Court’s precedent in Formula One World Championship Ltd v. CIT which two essential conditions must be satisfied: (i) the place must be ‘at the disposal’ of the enterprise, and (ii) the business of the enterprise must be carried on through that place mandates
  • Economic Reality Prevails:Taxability Affirmed: Based on these facts, the hotel premises were rightly held to constitute a fixed place of business PE under Article 5(1) of the DTAA. Consequently, the profits attributable to this PE are taxable in India under Article 7.

Thus, the Supreme Court upheld the tax authorities’ decision and dismissed Hyatt’s appeal.

Our Comments

This ruling represents a watershed moment in India’s international taxation jurisprudence, reinforcing the increasingly stringent approach adopted by Indian courts and tax authorities towards the PE concept under DTAA. This decision reinforces the stringent approach of Indian courts and tax authorities on the PE concept under DTAA, particularly:

  • The ruling highlights that mere absence of formal lease or exclusive office space does not negate PE, so long as there is effective control and business activity conducted through the premises.
  • It stresses that strategic oversight and managerial functions, when coupled with continuous and substantive involvement, can amount to a PE.
  • The case draws heavily on the Formula One test emphasizing ‘disposal’ and ‘business carried on’ as core elements, showcasing the importance of economic substance over legal form.
  • The Court’s reliance on OECD and UN Model Convention commentaries reaffirms India’s alignment with international tax norms.
  • For foreign companies, especially those rendering management, consultancy, or technical services, this ruling serves as a cautionary note on potential PE exposure in India.
  • From a practical perspective, foreign enterprises must carefully structure contracts and operational modalities to mitigate PE risks, keeping in mind that long-term control and operational involvement may trigger tax liability in India.
Tax Street September 2025