Functional control over core Indian operations constitutes a Fixed Place PE: SC

• In this case, issue before the Supreme Court was whether the Assessee; a tax resident of United Arab Emirates (“UAE”), has a Permanent Establishment (“PE”)  in India under Article 5(1) of the Indo-UAE Double Taxation Avoidance Agreement (“DTAA”), and consequently, whether income derived by the Assessee under the Strategic Oversight Services Agreement (“SOSA”) being in the nature of strategic planning services and Know-how to ensure that hotel was developed and operated as an efficient and a high-quality international full-service hotel would be taxable as business income in India under Article 7  of DTAA.  Further, the Apex Court emphasised over decision made by Delhi High Court in case of the Assessee that profit attribution to a PE in India is permissible even if the overall foreign enterprise has incurred losses.
• The concept of PE is well defined under Article 5 of the DTAA, and similar provisions are found in international models such as the UN Model Double Taxation Convention (2021) and the OECD Model Tax Convention (2017). These model conventions provide an inclusive yet exhaustive definitions of PE, with the precise scope depending upon the terms of the bilateral DTAA. Article 5(1) of the India – UAE DTAA defines a PE as “a fixed place of business through which the business of an enterprise is wholly or partly carried on”. This is consistent with the definition provided in Section 92F(iiia) of the Income-tax Act, 1961.
• Article 7 of the DTAA governs the taxation of business profits. It provides that the profit of an enterprise shall be taxable only in the State of its residence, unless the enterprise carries on business in the other Contracting State through a PE situated therein. In such cases, the profit attributable to that PE may be taxed in the other state, but only to the extent that it is attributable to that PE in the other contracting state.
• In the instant case, principal issue was whether the Assessee, has a PE in India under Article 5(1) of the Indo – UAE DTAA, and consequently, whether its income derived under the SOSA is taxable in India or not?

Brief facts of the Case 

• The Assessee is a company incorporated in Dubai, and is a tax resident of the UAE within the meaning of Article 4 of the Agreement between the Government of India and the UAE for the Avoidance of Double Taxation.
• It is engaged in rendering consultancy services in the hotel sector. On 4th September 2008, it entered into two SOSAs with Asian Hotels Limited (“AHL”) i.e., for Delhi and Mumbai. Under the SOSA, Assessee agreed to provide strategic planning services and “know-how” to ensure that the hotel was developed and operated as an efficient and a high-quality international full-service hotel.
• For the Assessment Year (“AY”) 2009-10, Assessee filed its return of income declaring Nil income and claiming a refund of Rs.87,99,091/-. The Assessing Officer (“AO”) passed a draft assessment order taxing the hotel related services rendered by the Assessee, inter alia on the ground that the Assessee’s activities constituted a business connection under Section 9(1)(i) of the Act, a PE under Article 5 of DTAA, royalties and fees for technical services under Section 9(1)(vi)/(vii) of the Act and royalties under Article 12 of the DTAA.
• The Assessee filed its objections before the Dispute Resolution Panel (“DRP”). However, DRP upheld the Assessing Officer’s findings. Consequently, the Assessing Officer passed a final assessment order for AY 2009-10. Similar orders were passed for AYs 2010-11, 2011-12 and 2012-13.
• The Assessee filed appeal before the Income Tax Appellate Tribunal (“ITAT”). By a common order, ITAT rejected the Assessee’s contention that it did not have a PE in India and dismissed the appeals by relying over the decision held in case of Formula One World Championship Limited v. Commissioner of Income Tax, International Taxation-3, Delhi & Anr (2017) 15 SCC 602. Aggrieved by the said order, the Assessee filed further appeals before the High Court.
• The High Court passed an order dated 22nd December, 2023 by affirming the findings of ITAT. Aggrieved by the said order, the Assessee filed an appeal before the Hon’ble Supreme Court.

Assessee’s Contentions

• It is in engaged in rendering hotel consultancy and advisory services from Dubai to hotels in the Hyatt Group of Hotels, including several located in India. These services are rendered under a SOSA entered into with each hotel owner individually.
• It shall render its services from Dubai and is not obligated to send or station any employee in India. However, the agreement permits at the Assessee’s sole discretion, occasional and temporary visits by its employees to India.
• Income is not taxable in India under the provisions of the Act as there is no specific Article in the DTAA enabling taxation of Fees for Technical Services (“FTS”). Further, it does not maintain a fixed place of business, office, or branch in India. The limited and occasional presence of its employees in India, did not exceed the threshold of nine months under Article 5(2)(i) of the DTAA, thereby excluding the existence of a PE.
• High court relied on the judgement of Formula One (supra) by disregarding two conditions which are essential for existence of a fixed place of business PE viz; There must be a specific, fixed, and identifiable physical location in India; and Such location must be at the disposal of the foreign enterprise for use in carrying out its own business activities.
• There was no designated space or office at the hotel premises in Delhi or Mumbai that was either specifically reserved for or placed at the disposal of the Assessee. The Assessee exercised no control or dominion over any part of the premises. Mere involvement in policy decisions or enforcement of brand standards does not amount to a fixed place of business PE. In accordance with the SOSA ownership and operational control of the hotel remained entirely with the Indian entity.
• The role of the Assessee under the SOSA, was limited to strategic guidance, brand compliance, and long-term planning. The day-to-day operations of the hotel were carried out by Hyatt India Pvt. Ltd, under a separate Hotel Operating Services Agreement (“HOSA”) entered into with the hotel owner. The Assessee had no involvement in such daily management.
• High Court erred in conflating two separate agreements, i.e., SOSA entered by the Assessee and HOSA entered into by Hyatt India Pvt. Ltd. and mistakenly attributed the day-to-day control of operations to the Assessee. Hyatt India Pvt. Ltd. is a distinct legal entity, taxable independently under Indian law, and its operational activities cannot be attributed to the Assessee for the purpose of determining PE under the DTAA.
• Visit of employees of the Assessee in India were brief and routine in nature and the same executives visited other Hyatt hotels across India including those in Goa, Bengaluru, Kochi, and Chennai. These oversight visits were intended to ensure brand uniformity and quality compliance. The short duration spread across multiple locations, and lack of exclusive use or control over any space do not satisfy the legal requirement of a fixed place of business PE.
• The tax authorities failed to produce documentary evidence to establish that any such designated space was ever placed at the disposal of the Assessee. High Court incorrectly inferred that the absence of an express prohibition in the SOSA on decision-making by Assessee’s employees during their stay at the hotel implies a right of disposal. In law, a fixed place of business PE cannot be presumed from the mere absence of a restriction; there must be an affirmative grant of a right to use a specific physical location to carry on the enterprise’s own business.

Revenue’s Contentions

• The Assessee had full and effective control over the hotel premises and that the premises were at its disposal for conducting its business. Therefore, the hotel satisfies the definition of a fixed place of business PE under Article 5(1) of the DTAA. Consequently, in terms of Article 7(1) of the DTAA, the profits attributable to such PE are liable to be taxed in India and the Assessee to be taxed in India on the income derived from such activities. This was substantiated by emphasising over below mentioned facts:
• a) The Assessee entered into SOSA with AHL, an Indian company and the owner of the Hyatt Regency Delhi, for providing oversight services in relation to the hotel for a period of 20 years which can be extended for 10 more years through mutual agreement
• b) Under the SOSA, they had more than mere access to the hotel premises, the premises were at the Assessee’s full and unconditional disposal
• c) The Assessee’s business was carried on through the employees stationed at the hotel, thereby satisfying the criteria of a fixed place of business PE under Article 5 of the DTAA.
• d) Assessee’s role extended beyond high-level policy formulation and into the domain of actual implementation. It was involved in the appointment and training of staff, monitoring daily operations, exercising financial oversight, and influencing procurement and operational decisions. These factors demonstrate managerial and functional control, particularly through the General Manager, who reported to the Assessee.
• e) Some individuals remained in India for up to nine months and were involved in substantive hotel operations clearly indicating operational presence in line with the terms of the SOSA.

• Reliance was placed on the pronouncement in case of Formula One (supra) holding that for a fixed place PE to exist, two conditions must be met: (a) there must be a fixed place of business, and (b) through that place, the business of the enterprise must be wholly or partly carried on. The Court emphasised that three key features are eminent to establish a PE i.e., stability, productivity, and dependence.
• The Assessee has entered into a long-term agreement (20 years) under which it enjoys broad and continued control over the hotel’s key functions, including staffing, operations, strategic policy, and financial oversight. This arrangement reflects the three core characteristics of a PE: stability (20-year term), productivity (fee linked to business outcomes), and dependence (reliance on hotel infrastructure and staff to carry out its business).
• On the basis of aforesaid facts, the Assessee’s operation satisfies all conditions for the existence of a fixed place of business PE under Article 5(1) of the Indo-UAE DTAA. The Assessee’s plea of lacking day to-day control is untenable given the pervasive control and continuous nature of its involvement. Thus, the hotel premises constitutes a fixed place of business of the Assessee in India, and in terms of Article 7(1) of the DTAA, the profits attributable to such PE are liable to tax in India.

Observations of the Hon’ble Supreme Court

• The Apex Court affirmed the judgement of High Court that the Assessee has a fixed place PE in India within the meaning of Article 5(1) of the DTAA, and the income received under the SOSA is attributable to such PE and is therefore taxable in India.
• On the basis of detailed review of the SOSA executed between the Assessee and AHL, it was demonstrated that the Assessee exercised pervasive and enforceable control over the hotel’s strategic, operational, and financial dimensions. These rights go well beyond mere consultancy and indicate that the Assessee was an active participant in the core operational activities of the hotel. i.e.,
• Appoint and supervise the General Manager and other key personnel,
• Implement human resource and procurement policies,
• Control pricing, branding, and marketing strategies,
• Manage operational bank accounts,
• Assign personnel to the hotel without requiring the owner’s consent.
• The 20-year duration of the SOSA, coupled with the Assessee’s continuous and functional presence, satisfies the tests of three important key features of PE i.e., stability, productivity and dependence.
• From the nature of functions carried out by the Assessee, it cannot be said that they were performing merely “auxiliary” functions. Rather, the functions performed by the Assessee through its staff operating from the hotel premises, were not just limited for setting up a pattern of activities for the hotel, but were core and essential functions, clearly establishing their control over the day to-day operations of the hotel. Moreover, they were to be continuously performed over a period of twenty years, under an agreement that included revenue sharing. Therefore, the hotel premises clearly satisfy the criteria required to be classified as a fixed place of business or PE.
• Absence of a specific clause in the SOSA permitting the conduct of business from the hotel premises negates the existence of a PE is also without merit. By referring decision of Formula One, it held that the test is not whether a formal right of use is granted, but whether, in substance, the premises were at the disposal of the enterprise and were used for conducting its core business functions.
• The Apex Court negated the Assessee’s submission that daily operations were handled by Hyatt India Pvt Ltd., a separate legal entity and stated that it does not decisively support the Assessee’s case. It is well established that legal form does not override economic substance in determining PE status. The extent of control, strategic decision-making, and influence exercised by the Assessee clearly establish that business was carried on through the hotel premises, satisfying the conditions under Article 5(1).
• Assessee’s executives and employees made frequent and regular visits to India to oversee operations and implement the SOSA. Once it is found that there is continuity in the business operations, the intermittent presence or return of a particular employee becomes immaterial and insignificant in determining the existence of a PE. Thus, High Court was correct in concluding that the Assessee’s role was not confined to high-level decision making, but extended to substantive operational control and implementation.
• The Assessee’s ability to enforce compliance, oversee operations, and derive profit-linked fees from the hotel’s earnings demonstrates a clear and continuous commercial nexus and control with the hotel’s core functions. This nexus satisfies the conditions necessary for the constitution of a Fixed Place PE under Article 5(1) of the Indo – UAE DTAA.
• The Apex Court also noted the reference made to a larger bench of the Delhi High Court in case of High Court’s judgment wherein it was held that that Profit attribution to a PE in India is permissible even if the overall foreign enterprise has incurred losses.

Concluding Remarks

• The Hon’ble Supreme Court has reaffirmed that PE determination is a fact driven, functional analysis, where substantive control over Indian operations even in the absence of exclusive physical space or extended employee presence may give rise to a PE. The Court clarified that exclusive possession of premises is not essential for the disposal test; even temporary or shared use may suffice if the foreign entity carries on business through that space. Further, the duration of stay of individual employees is not conclusive, what matters is the continuity and substance of business presence, the nature of services rendered, and the degree of operational control exercised by the foreign entity.
• Emphasised that stability, productivity and dependence are three core characteristics of a PE.
• The ruling emphasizes the substance-over-form principle in international tax and affirms that PE exposure may arise even where services are rendered offshore or the foreign entity incurs global losses, so long as profits are attributable to the Indian PE.

Article 5 of Indo-UAE DTAA define Permanent Establishment as under: –

1.For the purposes of this Agreement, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially :

 (a) a place of management ;

(b) a branch ;

(c) an office ;

(d) a factory ;

(e)   a workshop ;

(f)    a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ;

(g)   a farm or plantation ;

(h)   a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months ;

(i)    the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period.

3. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include :

(a) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise ;

(b) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery ;

(c) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ;

(d) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise ;

(e) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.

4. Notwithstanding the provisions of paragraphs (1) and (3), where a person – other than an agent of independent status to whom paragraph (5) applies – is acting on behalf of an enterprise and has, and habitually exercises in a Contracting State an authority to conclude contracts on behalf of the enterprise, that enterprise shall be deemed to have a permanent establishment in that State in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to the purchase of goods or merchandise for the enterprise.

Article 7 of Indo-UAE DTAA defines Business Profits as under: –

(1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.”