Tax Street – September 2025

Introduction

We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of August 2025.

• The 'Focus Point' elaborates upon a pivotal judgment in case of Hyatt International Southwest Asia Ltd
• Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
• Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
• Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.

We hope you find our newsletter useful and we look forward to your feedback. You can write to us at taxstreet@nexdigm.com. We would be happy to hear your thoughts on what more can we include in our newsletter and incorporate your feedback in our future editions.

Supreme Court of India in case of Hyatt International Southwest Asia Ltd. v/s Additional Director of Income-tax

The concept of Permanent Establishment (PE) lies at the heart of international taxation, defining the nexus between a foreign enterprise and a taxing jurisdiction. Recently, the Supreme Court of India delivered a pivotal judgment in case of Hyatt International Southwest Asia Ltd ([2025] 176 taxmann.com 783 (SC)) that sheds crucial light on the scope and application of PE under the India-UAE Double Taxation Avoidance Agreement (DTAA). This ruling marks a significant evolution in how Indian tax authorities and courts interpret the PE threshold, especially concerning strategic and managerial functions exercised by foreign entities within India.

The Court's judgment emphasizes that the absence of a formal office or branch does not automatically exclude the existence of a PE if the foreign enterprise exercises substantial control and operational involvement in Indian business activities. This decision firmly establishes the principle of "substance over form" in assessing PE, underscoring that strategic oversight and managerial roles, when continuous and integral, can give rise to a taxable presence in India.

Background

The assesse, Hyatt International Southwest Asia Ltd (Hyatt) is a company incorporated in Dubai, UAE. It entered into agreements with AHL India, AHL Delhi, and AHL Mumbai.

• Strategic Oversight Services Agreements (SOSA): Under these agreements, Hyatt provided strategic planning, technical know-how, and managerial oversight to facilitate the efficient development, operation, and management of Hyatt hotels across India.

For the Assessment Year 2009-10, Hyatt declared nil income in India and sought a refund of approximately INR 8.8 million, basing its claim on two principal contentions:

• Non-taxability under DTAA: Hyatt argued that the India-UAE DTAA did not have an explicit provision taxing Fees for Technical Services (FTS), and therefore, its income earned under SOSA was not taxable in India.
• Absence of Permanent Establishment: Hyatt contended that it did not have a PE in India. It lacked a fixed place of business, did not maintain an office or branch, and the visits by its employees to India were occasional, temporary, and below the nine-month threshold specified in Article 5(2) of the India-UAE DTAA.

Despite these arguments, the Indian tax authorities, the Assessing Officer (AO), the Dispute Resolution Panel (DRP), the Income Tax Appellate Tribunal (ITAT), and eventually the High Court, concluded that Hyatt did have a PE in India by virtue of its operational presence and control over the hotel operations through the SOSA.

Assessee's Arguments

Hyatt's defence rested on several legal and factual points:

• No Fixed Place of Business: Hyatt did not have any designated office, branch, or other premises in India exclusively at its disposal. It did not exercise exclusive control over any hotel premises. Further, the visits of Hyatt employees to India were brief, intermittent, and for supervisory purposes only, not sufficient to constitute a fixed place of business.
• Threshold for PE Not Met: The presence of its personnel in India was limited and did not meet the minimum threshold (nine months) under Article 5(2)(i) of the DTAA.
• Distinct Operational Agreements: The High Court, according to Hyatt, wrongly merged the SOSA with the separate Hotel Operating Services Agreement (HOSA), under which Hyatt India Pvt. Ltd. managed day-to-day operations independently.
• Nature of Services: The activities under SOSA were limited to policy formulation, strategic planning, and advisory functions, which did not constitute 'carrying on business' through a fixed place in India.
• Insufficient Physical Presence: The infrequent visits of employees across various hotels, with no fixed physical office, could not establish a PE.

Supreme Court's Analysis and Conclusion

The Supreme Court meticulously examined the facts, the provisions of the India-UAE DTAA, the SOSA, and judicial precedents, including the landmark Formula One judgment and international tax conventions (OECD and UN Model Tax Conventions).

Key observations and conclusions include:

• Definition of PE Under DTAA: The Court affirmed that a PE requires a 'fixed place of business' at the disposal of the enterprise where business activities are wholly or partly carried on. The notion of disposal implies control and availability for conducting business, not necessarily exclusive possession.
• Exclusive Possession Not Mandatory: The Court ruled that having exclusive possession of the premises is not an absolute requirement to establish a PE. Shared or temporary use suffices, as long as business activities are carried out there and the enterprise maintains control.
• Substantive Control and Operational Involvement: The SOSA conferred Hyatt with extensive, enforceable rights over the strategic, operational, and financial aspects of the hotels. The assessee's activities extended well beyond advisory roles to active participation in core operations including staff appointments, policy enforcement, marketing, and financial management.
• Long-Term Stability and Dependence: The 20-year term of the SOSA, coupled with a fee structure tied to hotel revenues, demonstrated stability, productivity, and economic dependence are hallmark indicators of a PE.
• Economic Reality Prevails: The Court underscored the principle that substance prevails over form. Despite the separate legal existence of Hyatt India Pvt. Ltd., the economic substance of Hyatt's operations indicated a PE.
• Reliance on Formula One Case: Hyatt leaned heavily on the Supreme Court's precedent in Formula One World Championship Ltd v. CIT which two essential conditions must be satisfied: (i) the place must be 'at the disposal' of the enterprise, and (ii) the business of the enterprise must be carried on through that place mandates
• Economic Reality Prevails:Taxability Affirmed: Based on these facts, the hotel premises were rightly held to constitute a fixed place of business PE under Article 5(1) of the DTAA. Consequently, the profits attributable to this PE are taxable in India under Article 7.

Thus, the Supreme Court upheld the tax authorities' decision and dismissed Hyatt's appeal.

Our Comments

This ruling represents a watershed moment in India's international taxation jurisprudence, reinforcing the increasingly stringent approach adopted by Indian courts and tax authorities towards the PE concept under DTAA. This decision reinforces the stringent approach of Indian courts and tax authorities on the PE concept under DTAA, particularly:

• The ruling highlights that mere absence of formal lease or exclusive office space does not negate PE, so long as there is effective control and business activity conducted through the premises.
• It stresses that strategic oversight and managerial functions, when coupled with continuous and substantive involvement, can amount to a PE.
• The case draws heavily on the Formula One test emphasizing 'disposal' and 'business carried on' as core elements, showcasing the importance of economic substance over legal form.
• The Court's reliance on OECD and UN Model Convention commentaries reaffirms India's alignment with international tax norms.
• For foreign companies, especially those rendering management, consultancy, or technical services, this ruling serves as a cautionary note on potential PE exposure in India.
• From a practical perspective, foreign enterprises must carefully structure contracts and operational modalities to mitigate PE risks, keeping in mind that long-term control and operational involvement may trigger tax liability in India.

Direct Tax

Whether a Foreign Portfolio Investor can simultaneously claim capital gains exemption under the India–Mauritius DTAA for grandfathered shares and carry forward long-term capital losses on non-grandfathered shares under the Income tax Act?

Atyant Capital India Fund - I [TS-1136-ITAT-2025(Mum)]

Facts

The assessee is a Foreign Portfolio Investor (FPI) and a tax resident of Mauritius. For the relevant Assessment Year 2022–23, the assessee filed its return of income, claiming a carry forward of long-term capital loss. During the year, the assessee also earned long-term capital gains from the sale of listed equity shares that were acquired prior to 1 April 2017 (referred to as grandfathered shares). Relying on Article 13(4) of the India–Mauritius DTAA, the assessee claimed such capital gains as exempt from tax in India. The Revenue accepted this claim of exemption under the DTAA.

In the same year, the assessee incurred long-term capital losses from the sale of listed shares acquired after 1 April 2017 (i.e. non-grandfathered transactions). The assessee claimed the carry forward of these losses under Section 74 of the Income-tax Act, 1961 (ITA). In the intimation issued by the CPC, it disallowed the assessee's claim to carry forward the long-term capital loss and, additionally, adjusted the dividend income declared under the head 'Income from Other Sources' against the capital loss, effectively nullifying both items.

Aggrieved, the assessee appealed to the CIT(A), arguing that the CPC lacked jurisdiction under Section 143(1) to disallow the claim, especially since capital gains exemption under the DTAA was accepted and the capital loss was from a different transaction category. However, the CIT(A) upheld the CPC's action, stating the assessee cannot selectively apply the DTAA to exempt gains while using the ITA to carry forward losses from the same income stream. This selective approach was deemed incorrect and inconsistent, falling within the scope of adjustments allowed under Section 143(1). The CIT(A) emphasized that the choice between the Act and the Treaty must be applied consistently for the entire income stream, not selectively.

Held

The ITAT held in favour of the assessee, observing that the assessee had correctly applied the provisions of the India–Mauritius DTAA and the ITA in respect of two distinct and independent sources of income. It was noted that the assessee claimed exemption under Article 13(4) of the DTAA for capital gains arising from the grandfathered transactions and separately claimed a carry forward of long-term capital loss under Section 74 of the Act for non-grandfathered transactions. The ITAT rejected the CIT(A)'s view that the DTAA or Act must be applied uniformly to the entire stream of income, holding instead that each capital transaction constitutes a separate source of income. Therefore, the assessee was entitled to claim benefit of the DTAA in respect of exempt gains from grandfathered transactions and simultaneously claim carry forward of loss under the Act for taxable post-2017 transactions.

Further, the Tribunal clarified a fundamental principle of international tax law that tax treaties do not themselves levy taxes but only provide relief where taxability arises under domestic law. In this case, while Article 13(4) of the DTAA allocated taxing rights for pre-2017 shares to Mauritius (resulting in exemption in India), Article 13(3A) applied to post-2017 shares, giving India taxing rights. Since the sale of such post-2017 shares resulted in a long-term capital loss, the assessee rightfully claimed carry forward of the same under Section 74 of the Act. The Tribunal also held that dividend income declared under the head 'Income from Other Sources' could not be adjusted against capital losses, as such adjustment is not permissible under the law. Accordingly, the AO was directed to allow the carry forward of long-term capital loss of INR 17,96,11,994 to subsequent years.

Our Comments

The case underscores that tax treaties and Indian tax law apply independently to different capital gains transactions, ensuring consistent and fair tax treatment. It reinforces the fact that treaties allocate taxing rights but do not themselves impose taxes.

Whether a Foreign Tax Credit claim can be denied solely on the grounds of delayed filing of Form 67 and procedural deficiencies, even when the assessee has filed a valid revised return, paid the foreign taxes, and furnished supporting documents?

Krishna Dalal [TS-1204-ITAT-2025(Bang)]

Facts

The assessee, an individual, originally filed his income tax return for the Assessment Year 2018-19 on 31 August 2018, declaring a total income of INR 3,12,400 comprising long-term capital gains and bank interest. Subsequently, he discovered that foreign income in the nature of bank interest amounting to INR 10,23,166 and dividend income of INR1,54,460 earned from the USA had been inadvertently omitted. To rectify this, he filed a revised return on 30 January 2019, including the foreign income and claiming Foreign Tax Credit (FTC) of INR 1,85,150/- for taxes paid in the USA. Prior to filing the revised return, he also submitted Form 67 on 24 January 2019 as prescribed under Rule 128 of the Income Tax Rules.

The revised return was processed under Section 143(1) of the ITA, and the claim for FTC was disallowed without providing any reasons or prior intimation. A rectification application filed under Section 154 was also rejected. On appeal, the CIT(A) upheld the disallowance, citing failure to file supporting documents required under Rule 128(8)(ii), and noted that Form 67 was not submitted within the due date of filing the original return under Section 139(1). Aggrieved by this, the assessee filed the present appeal, contending that there was substantial compliance with the law, that Form 67 was filed prior to the revised return, and that the denial of FTC on technical grounds without giving an opportunity to be heard violated the principles of natural justice.

Held

The Tribunal reviewed submissions and evidence, including the assessee's paper book, which showed foreign tax paid in the USA and a revised return claiming Foreign Tax Credit (FTC) of INR 1,85,150. It noted that Form 67 was submitted before the revised return, fulfilling procedural requirements. The lower authorities had denied FTC due to lack of documentation, but the Tribunal found valid proof, such as the US Tax Return and payment voucher. Emphasizing substance over procedure, the Tribunal ruled that FTC should not be denied for technical lapses, especially when proper documents were later provided, and referred to legal precedents treating the Form 67 deadline as directory, not mandatory.

Accordingly, the Tribunal held that the assessee was entitled to claim the FTC of INR 1,85,150 as per law. It directed the Assessing Officer to verify the documents submitted (Federal Tax Payment Voucher and US Tax Return) and to allow the FTC claim upon satisfaction. As a result, the assessee's appeal was allowed, subject to this verification. The order was pronounced on 26 August 2025.

Our Comments

This ruling highlights the importance of substantial compliance over mere procedural technicalities in claiming Foreign Tax Credit. It reinforces that genuine payment of foreign taxes and timely furnishing of relevant documents, even if delayed, should not deprive an assessee of the credit. The decision also underscores the need to uphold principles of natural justice by providing opportunity before denying such substantive benefits.

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