SC Defines PE Beyond Physical Presence: Hyatt International Ruling Explained

Hyatt International Southwest Asia Ltd. v. Additional Director of Income-tax, [2025] 176 taxmann.com 783(SC)

In Hyatt International Southwest Asia Ltd. v. Additional Director of Income-tax, [2025] 176 taxmann.com 783 (SC), the Supreme Court addressed the scope of Permanent Establishment (PE) under Article 5(1) of the India-UAE DTAA. Hyatt, a UAE-based entity, provided strategic, operational, and managerial services to Indian hotels under long-term SOSA agreements. The Revenue argued these services created a Fixed Place PE, while Hyatt contended that its presence was occasional, advisory, and preparatory. The Court upheld the Revenue’s position, emphasizing that PE depends on substance, economic presence, and functional control rather than ownership or exclusive premises. Hyatt’s continuous personnel visits, strategic oversight, and core operational involvement established a permanent and meaningful business nexus in India. Even global losses did not negate profit attribution. The ruling broadens PE interpretation for modern business structures, confirming that strategic and profit-linked control within a source country can make foreign enterprises taxable under the DTAA, irrespective of formal contractual arrangements or physical offices.

Permanent Establishment (PE) under Article 5(1) Indo-UAE DTAA

Facts of the Case

1. Hyatt International Southwest Asia Ltd., a UAE-based entity, entered into 20-year SOSA (Strategic Oversight Services Agreements) agreements with Asian Hotels Ltd. for hotels in Delhi and Mumbai.

2. Under the SOSAs, Hyatt provided strategic planning, brand oversight, and operational know-how, covering HR, procurement, financial controls, and management standards.

3. Hyatt filed Return of Income by reporting nil taxable income in India and sought refunds of taxes withheld.

4. The Assessing Officer determined that Hyatt had both a business connection under Section 9(1)(i) and a Fixed Place PE under Article 5(1) of the India–UAE DTAA.

5. Hyatt claimed that it had no fixed office or exclusive presence in India and that services were rendered from abroad, except for intermittent employee visits.

6. Accordingly, the AO held that service fee income under the SOSAs was taxable in India as business profits attributable to the PE.

Proceedings Before the Lower Authorities

1. Assessment Officer and DRP: The AO held that Hyatt exercised significant operational and functional control over the Indian hotels, thereby creating a Fixed Place PE. The DRP upheld this conclusion, relying on Hyatt’s long-term agreements and continuous operational involvement.

2. ITAT: The Tribunal confirmed the AO’s findings, holding that the SOSAs created direct and enforceable influence over day-to-day operations, branding, staffing, and financial decisions. It rejected Hyatt’s contention that its activities were auxiliary or preparatory, and upheld the PE determination.

3. Delhi High Court: The High Court endorsed the ITAT’s view, observing that Hyatt had functional control and maintained a continuous business presence in India through frequent personnel visits and revenue-linked management inputs. It concluded that Hyatt constituted a Permanent Establishment under Article 5(1) of the DTAA.

Contentions Before the Supreme Court

1. Appellant’s Contentions (Hyatt)

• No fixed place or physical presence: Hyatt argued that it had no exclusive office or premises in India; employee visits were occasional and did not meet the Service PE threshold of 9 months under Article 5(2)(i).
• Limited functional involvement: Hyatt contended that it had no ownership, leasehold rights, or operational control over the hotel premises, and its role was confined to strategic guidance and managerial know-how.
• No dependent agent or personnel: Hyatt highlighted the absence of full-time personnel in India under its control, negating both the fixed place PE and agency PE
• Preparatory or auxiliary activities: It relied on Article 5(4)(e), asserting that its activities were auxiliary or preparatory, and therefore outside the scope of PE.
• Global loss position: Hyatt submitted that, even assuming a PE, no profits could be attributed due to its global losses during the relevant years.

2.  Respondent’s Contentions (Revenue)

• Significant operational and strategic control: Revenue asserted that Hyatt exercised pervasive control over HR, procurement, pricing, branding, and financial supervision, reflecting substantive commercial presence.
• Effective disposal of premises: It argued that Hyatt’s personnel had regular access and functional use of the hotel premises, satisfying the disposal test for a fixed place PE.
• Profit-linked remuneration: The revenue- and profit-linked fee structure showed that Hyatt’s functions were core business activities, not auxiliary.
• Long-term contractual relationship: The 20-year SOSA, with provision for extension, established the requisite degree of permanence under Article 5(1).
• Substance over form: Citing Formula One and Morgan Stanley, the Revenue argued that the focus should be on actual control and real economic activities, not the contractual form.

 Decision of the Supreme Court

The Hon’ble Supreme Court upheld the reasoning of the lower authorities and ruled in favour of the Revenue, making the following key findings:

• Fixed Place PE Under Article 5(1): The Court reiterated that the “disposal” test under Article 5(1) does not necessitate ownership rights or exclusive control. What is relevant is effective and functional access that is continuous, regular, and economically meaningful. Since Hyatt’s personnel were carrying out core operational activities from the hotel premises, these locations were considered to be at Hyatt’s effective disposal.
• Nature of Functions – Not Auxiliary: The Court declined Hyatt’s reliance on Article 5(4)(e), observing that Hyatt’s services surpassed simple preparatory or auxiliary functions. Its involvement extended to strategic direction, managerial oversight, and financial supervision, which formed an integral part of the business, rather than being merely supportive tasks.
• Element of Permanence: The long-term 20-year SOSA, along with the regular and purpose-driven visits of Hyatt’s staff, demonstrated the required continuity and permanence. The Court noted that the pattern and objective of such visits clearly indicated active business engagement, not occasional advisory interaction.
• Primacy of Substance and Economic Connection: Following its earlier jurisprudence (Formula One, E-Funds, Morgan Stanley), the Court emphasized that PE determination must rely on substantive conduct rather than contractual form. Hyatt’s authority to influence operations, supervise profitability, and exercise significant control through the SOSA created a real economic nexus justifying taxation in India.
• Profit Attribution Despite Global Losses: The Supreme Court rejected Hyatt’s argument regarding worldwide losses, holding that losses elsewhere do not prevent attribution of income to a PE when key profit-generating functions occur within the source country. Profit attribution must be carried out based on the FAR analysis (functions performed, assets deployed, and risks assumed) in India.
• Relevance for Modern Business Structures: Importantly, the Court observed that even digital or decentralized business models could lead to a PE where essential business activities are orchestrated from within the source jurisdiction. This broadens the PE interpretation beyond the traditional demand for a strict physical presence.

 Final Holding:

The Court conclusively held that Hyatt International Southwest Asia Ltd. had a Fixed Place Permanent Establishment in India under Article 5(1) of the India-UAE DTAA. Consequently, the income earned under the SOSA was attributable to this PE and hence taxable in India.

The Hyatt ruling reinforces that the existence of a Permanent Establishment (PE) depends on substance, economic presence, and functional control, not formal ownership or exclusive physical premises. Even without a dedicated office, consistent and meaningful use of another entity’s premises—combined with strategic, managerial, and profit-linked involvement—can satisfy the “fixed place” and “disposal” tests under Article 5(1). Long-term contracts, continuous personnel visits, and core operational oversight create sufficient permanence and nexus for taxation. The judgment broadens PE interpretation for modern business structures and confirms that income must be attributed to India based on actual functions performed, even if the enterprise has global losses.