SC: Substance over Form-Hyatt Ruling Strengthens India’s PE Jurisprudence

Ajay Kumar Maggidi 10 Aug 2025 1,494 Views 0 comment Print Income Tax | Articles

What counts as “being in business” in India? When does advisory work cross the line into a taxable presence?

The Hyatt International ruling is more than just another tax dispute. It is a clear reminder that in international taxation, substance prevails over form. The Supreme Court upheld the Delhi High Court’s finding that Hyatt International Southwest Asia Ltd constituted a Fixed Place Permanent Establishment in India under Article 5(1) of the India-UAE DTAA.

Case Overview Hyatt International Southwest Asia Ltd. Vs Additional Director of Income Tax (Supreme Court of India)

Issue: Whether Hyatt had a Fixed Place PE in India under the India-UAE DTAA through its Strategic Oversight Services Agreement (SOSA).
Hyatt’s stand: Claimed only an advisory role from Dubai, with no fixed place in India, and day to day operations managed by Hyatt India Private Limited.
Court’s Position: The SOSA gave Hyatt significant control over staffing, HR, pricing, procurement, marketing, and finances going well beyond consultancy.
Legal principle: Exclusive office space is not required. Continuous operational control and substantive business presence constitute PE.
Ruling: Hyatt had a Fixed Place PE in India and income from SOSA was taxable in India, irrespective of global losses.

Appellant’s Contentions vs. Supreme Court’s Ruling

Appellant’s Contentions	Supreme Court’s Ruling
No PE in India: Services under SOSA were to be rendered from Dubai. Occasional employee visits did not cross the 9month threshold under DTAA.	The PE test is not limited to the 9month rule. The continuous presence and aggregate oversight by employees showed substantive business activity in India.
No fixed place of business: No office, branch, or designated space in India. No control over hotel premises.	Exclusive possession is not necessary. What matters is effective use and control over premises. Hotel space used by Hyatt staff satisfied the “disposal test” (Formula One precedent).
Role limited to strategy and brand guidance: Operational control vested with Hyatt India Pvt Ltd under a separate Hotel Operating Services Agreement.	Legal form cannot override economic substance. SOSA gave Hyatt authority over core functions (staffing, pricing, HR, bank accounts). This went beyond advisory services.
Hyatt India Pvt Ltd is a separate legal entity, and Its operations cannot be attributed to appellant.	Separate incorporation irrelevant if foreign enterprise has real control. Hyatt International’s oversight and authority established that business was carried on through the hotel premises.
Employee visits were short and routine: Spread across multiple hotels, not exclusive or continuous presence.	Frequent, coordinated, and recurring visits indicated continuity of operations. Aggregate presence matters, not just individual employee duration.
No express right in SOSA to use premises: Absence of contractual clause means no disposal of hotel property.	Substance prevails over form. Actual ability to exercise control and enforce compliance equals disposal. Lack of explicit clause does not negate PE.
Services are consultancy, not taxable in India: No specific DTAA article on Fees for Technical Services (FTS).	Not consultancy alone. Hyatt’s involvement was operational. Profit‑linked remuneration structure tied income to hotel’s performance, proving active business presence.
Relied on E‑Funds ruling: Occasional access to client premises does not create PE.	E‑Funds was factually different only back office support there. Hyatt exercised direct and substantive control over hotel operations (staffing, branding, finances).
High Court erred in conflating SOSA with Hotel Operating Services Agreement: Daily management by Hyatt India Pvt Ltd not appellant.	The Court held that both agreements were interconnected, and SOSA itself vested Hyatt International with strategic and operational authority over hotel operations.
Losses at global level: Article 7(1) should not apply as entity had overall losses in relevant years.	Taxability of a PE is independent of global results. Even if parent entity incurs losses, profits attributable to Indian PE are taxable.

Key Takeaways for Businesses

Substance over Form: PE can exist without owning or leasing office space if there is real control over operations.
Long‑Term Contracts Create Risk: Extended agreements with enforceable rights establish permanence and dependence.
Operational Oversight Triggers PE:Control over staffing, HR, pricing, procurement, and finances amounts to doing business in India.
Subsidiary Separation Not a Shield: Courts will pierce corporate structures if the parent exerts strategic or operational authority.
Employee Presence in Aggregate Counts: Continuous and coordinated visits establish presence, even if no single employee breaches thresholds.
Profit Attribution is Independent: Indian PE profits are taxable even if the global enterprise incurs losses.
Revenue‑Linked Fees Heighten Risk: Remuneration tied to revenues or profits indicates active participation in local operations.

SC Substance over Form-Hyatt Ruling Strengthens India’s PE Jurisprudence

Risk Mitigation Strategies

The Hyatt ruling highlights the importance of carefully managing cross‑border arrangements to mitigate exposure to Permanent Establishment risks. Multinational enterprises should adopt the following structured measures:

Contract Drafting: Clearly define the foreign entity’s role as advisory or auxiliary. Avoid clauses conferring operational authority, as these may be interpreted as creating a business presence in India.
Operational Control: Ensure that day to day decisions relating to staffing, procurement, and financial accounts are exercised by the Indian entity. The foreign entity’s involvement should remain at a strategic or policy level.
Fee Structures: Prefer fixed‑fee models over revenue or profit‑linked fees. The latter may be construed as evidence of participation in core business operations, increasing PE risk.
Employee Presence: Monitor the aggregate presence of employees in India. Even where individual visits are short, coordinated and recurring visits may establish continuity of business presence.
Segregation of Agreements: Maintain a clear distinction between brand/strategy support agreements (such as SOSA) and operational agreements (such as HOSA), with minimal overlap.
Documentation of Independence: Preserve robust records evidencing that the Indian entity independently manages operations, and that the foreign entity’s role is limited to strategic oversight.
Periodic PE Reviews: Conduct annual reviews of contracts, employee movements, and operational practices to assess and mitigate potential PE exposure.
Treaty and OECD Alignment: Evaluate contractual arrangements against applicable DTAA provisions and OECD/UN Commentary to ensure compliance with internationally accepted standards.
Advance Rulings and APAs: Where significant exposure exist, consider obtaining advance rulings or entering into Advance Pricing Agreements (APAs) to secure tax certainty.
Global Policy Consistency: Align Indian contractual and operational structures with the group’s global tax policy to ensure coherence and avoid inconsistent positions across jurisdictions.