In a landmark judgment with far-reaching implications for multinational corporations operating in India, the Supreme Court of India (SC) has upheld that Hyatt International Southwest Asia Ltd., a Dubai-based entity, has a Permanent Establishment (PE) in India. The Court ruled that the income attributable to this PE is taxable in India under the India–UAE Double Taxation Avoidance Agreement (DTAA).
Case Background
Hyatt International had entered into Strategic Oversight Services Agreements (SOSA) with Indian hotel owners for a 20-year term beginning in 2008. These agreements covered a wide range of services, ranging from strategic planning, branding, and pricing control, to staffing, procurement, and operational management. In return, Hyatt earned a fee linked to the gross operating revenue of the Indian hotels.
The Indian tax authorities assessed this arrangement as constituting a Fixed Place PE under Article 5(1) and a Service PE under Article 5(2)(i) of the India–UAE DTAA, thereby bringing the income to tax in India. Hyatt challenged the ruling, ultimately leading to the Supreme Court.
SC’s Key Observations
1. Fixed Place PE Established (Article 5(1))
The Court emphasized that although Hyatt did not own or lease any physical space in India, the control it exercised over the hotel premises through its management agreements fulfilled the “disposal test” as laid down in the case of Formula One decision.
The Court found that Hyatt’s role extended well beyond advisory capacity, it functioned as a manager with effective control over core operations, including:
- Appointment of key personnel
- Monitoring of daily operations
- Control over pricing and branding decisions
- Access to and use of the hotel premises
- Direct interface with vendors and customers
This commercial nexus satisfied the requirement for a Fixed Place PE.
2. Service PE Confirmed (Article 5(2)(i))
The Court also confirmed that Hyatt’s frequent and regular deployment of executives and staff to India even though no single employee stayed for over 183 days constituted a Service PE under the DTAA.
It held that the aggregate continuity of services rendered through these visits was the determining factor:
The travel logs, job profiles, and project coordination records were sufficient to prove continuity and coherence of Hyatt’s operations in India.
Income Attribution: Taxable in India
Hyatt had argued that its global operations were loss-making, and thus no income should be attributable to its Indian PE. The Supreme Court rejected this, stating that under Article 7 of the DTAA, the PE must be treated as a separate and independent entity.
Hence, profit attribution is to be done based on Indian operations, irrespective of global financial performance.
Why This Ruling Matters
The ruling offers critical clarifications for foreign companies operating in India:
- Substance over Form: Mere contractual disclaimers or absence of physical premises do not prevent a PE; what matters is effective control and presence.
- Disposal Test Reaffirmed: Use of premises through operational control can fulfill the “disposal” requirement for Fixed Place PE.
- Aggregate Employee Presence Counts: Frequent but short visits by different employees can cumulatively trigger a Service PE.
- Profit Attribution is Independent: Losses at the global level do not shield Indian PE income from taxation.
Conclusion
In an ever-evolving global and economic landscape, the use of new terminologies and complex arrangements as a means to evade tax obligations has become increasingly common. However, the Indian government and judiciary have consistently demonstrated their resolve by thoroughly examining such structures and ensuring they are appropriately taxed. The Supreme Court’s recent judgment in the Hyatt International case marks a significant step in reinforcing this principle. It challenges us to look beyond conventional frameworks and rigorously test even unfamiliar or novel arrangements. This verdict will undoubtedly prompt companies and boardrooms across the country to reevaluate their policies, contracts, and business models to ensure compliance and transparency.
While India remains open and welcoming to investments, it firmly upholds the sanctity of its tax base and is committed to preventing erosion of its revenue. This judgment thus sends a clear message: investments are encouraged, but not at the expense of India’s fiscal integrity.
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