Permanent Establishment post SC Judgement
Permanent Establishment (PE) is the key concept for taxability of multinational foreign enterprises (MNEs) operating in/through India. As India is more and more globalized, businesses are being conducted either through fixed places in India or remotely in virtual mode. In this article, let us explore the nuances of the legal provisions in the light of recent Supreme Court judgement in Hyatt International Southwest Asia Ltd vs Additional Director of Income Tax (Civil Appeal No. 9766 of 2025).
Legal Provisions: Here, there are sections in Income Tax Act as well as OECD Articles, which provide the architecture for taxability.
Section 9 (1)(i) of Income Tax Act elucidates the deeming provisions for taxability. It states that income is deemed to accrue or arise through any business connection in India or property, assets, source of income or transfer of capital assets in India. The taxability is determined to the extent of reasonably attributed to the operations in India.
Article 5 of OECD states the various types of PE like fixed place, construction PE or service PE or dependent agent PE.
Article 9 of OECD explains the profit attribution in the source state, and through arm’s length price attribution and through Transfer Pricing Methods.
Traditionally, the PE is interpreted as fixed place of business. However, as the technology advances, so mode of business operations have undergone massive changes. There may not be physical place of business, but the business is effectively controlled and run through virtual mode or through temporary stay at hotels with regular control being exercised.
In the aforesaid case of Hyatt International, the Supreme Court of India has given landmark judgement with far reaching tax consequences for many MNEs operating and doing business in India.
Facts: A Singapore based hotel company entered into an agreement with another group hotel in India and the officers in the Indian hotel provided continuous operating guidance.
Court findings:
- Effective control and continuous direction are sufficient to constitute a fixed place PE. The court adopted a purpose driven substance over form approach.
- In this case, factual findings into degree of effective control of permanence and functional integration demonstrated that the physical presence test has given way to effective control. The Hyatt group company in Singapore was operating through regional managers in Indian hotel premises and provided continuous operating guidance. The operational continuity amounted to functional nexus between overseas enterprise and Indian operations. This finding has bigger implications for foreign managers/employees who operate from India under group control.
- Substantive control and continuity doctrine was further amplified by referring to OECD Commentary. The place of business includes any premises at the disposal of the Indian entity. The effective authority over brand standards, vendor approval and pricing policies demonstrate that there was constant direction. So, the Indian entity was not functionally independent. Again, this should to be watched by MNEs with regional hubs in India or shared work places in India, executing commercial functions.
- Place of business and virtual control: The expansive interpretation of place of business was in line with BEPS and OECD trends. If the business operations are habitually directed from any place in India, then it will be assumed to be fixed place of business. Thus, the virtual PE principle is recognized.
- Once PE test is satisfied, then the profit attributable to that PE can be taxed in India. Profit attribution can follow two step approaches: (a) identify the FAR through PE; (b) attribute the profit as if it is distinct and separate enterprise. Thus, the convergence of PE and TP principles are established.
Practical Tips:
- Review all inter-company contracts between Indian entity and foreign group company and limit the conclusion of contracts in India for and on behalf of foreign group entity.
- Reporting of local Indian managers to Indian officers.
- Check digital footprints of approvals.
- Risk assessments to be carried on regular/annual basis.
- Maintain proper transfer pricing documents
- The GST invoicing must be checked.
- Governance documents like minutes should show the autonomy.
- Use of advance pricing agreements to seek clarity and certainty.
- High risk sectors like IT, consultancy and GCCs must take proactive steps.
In case you are planning for setting up GCCs in India or engaged in India business by MNEs, need any international taxation related clarity, you may like to connect with us.
*****
Abhinarayan Mishra FCA, FCS, LL.B, IP, RV; Partner, SAM Law Associates LLP; KPAM & Associates, Chartered Accountants, New Delhi ;+91 9910744992; ca.abhimishra@gmail.com; samlawassociates18@gmail.com
Author Bio
