Supreme Court Lays Down Important Principles For Determining Fixed Place PE

The Supreme Court (‘SC') of India has delivered a landmark judgement on the issue related to constitution of a Fixed Place Permanent Establishment (‘PE') under Article 5(1) of the India UAE Double Taxation Avoidance Agreement (‘DTAA') in the case of Hyatt International Southwest Asia Ltd.¹ (‘Taxpayer' or ‘Hyatt').

BRIEF FACTS OF THE CASE¹

• The Taxpayer, a company incorporated in Dubai and a tax resident of the UAE, was engaged in providing strategic planning, brand oversight, and operational consultancy services to hotels globally, including several located in India.
• In 2008, it entered into two long term Strategic Oversight Services Agreements (‘SOSA') with Asian Hotels Ltd. for Hyatt Regency hotels in Delhi and Mumbai. Under these agreements, the taxpayer was to provide strategic planning, brand management, and operational oversight to Asian Hotels Ltd. These agreements were valid for 20 years (which could be extended by further 10 years by mutual agreement).
• During the course of the assessment, the Assessing Officer concluded that Hyatt exercised substantial control over hotel operations in India including staff appointments, policy formulation, and on-site presence. Thus, the Taxpayer's activities constituted a PE in India. Accordingly, the income received by the Taxpayer under SOSA is attributable to such PE and is therefore taxable in India.
• The Taxpayer's objections were dismissed by the Dispute Resolution Panel and subsequently by the ITAT. Further, the Delhi High Court upheld the findings of ITAT and confirmed the existence of PE in India, noting Hyatt's role was operational, not merely advisory.
• Aggrieved by the order passed by the High Court with regard to existence of PE under Article 5(1) of the India UAE DTAA, the Taxpayer filed further appeal before the SC.

TAXPAYER'S CONTENTIONS:

• The Taxpayer contended that its role was limited to strategic guidance, brand compliance and long-term planning and it was not involved in the daily management of hotels, which was taken care by another Indian Company.
• There was no specific or reserved space or office at the hotel premises for the employees of the Taxpayer. Mere involvement in policy decisions or enforcement of brand standards should not constitute a PE in India.
• The SOSA explicitly stipulated that the Taxpayer shall be rendering its services from Dubai and its employees may visit India occasionally and temporarily, merely for ensuring brand uniformity and quality compliance. However, no employees had stayed in India exceeding 9 months threshold as specified under the India UAE DTAA.

REVENUE'S CONTENTIONS:

• The department argued that the taxpayer had entered into a long-term SOSA of 20 years, thus granting it unconditional access and full and effective control over the hotel premises.
• The Taxpayer's role extended into the actual implementation of the policies formulated. It had extensive control over the various management and functional activities of the hotel such as appointment and training of staff, overseeing daily operations, managing finance, procurement and operational decisions etc.
• Additionally, the Taxpayer had operational presence at the Hotel as some of the Taxpayer's employees visiting the hotel remained in India for up to nine months and were involved in substantial hotel operations.
• Further, reliance was placed on Hon'ble Supreme Court's decision in case of Formula One World Championship Limited² to contend that the SOSA as entered by the Taxpayer with the right to have broad and continued control over the hotel's key functions, also reflected the three core characteristics of a PE, that is:
  • Stability (20-year term),
  • Productivity (fee linked to business outcomes) and
  • Dependence (reliance on hotel infrastructure and staff to carry out its business).
• Since, the operational control and presence were evident, the revenue submitted that Hyatt's operations clearly met all conditions of having a PE in India under Article 5(1), and the income attributable to such PE should be taxable in India.

SUPREME COURT'S OBSERVATIONS:

• The SC highlighted there is no standard formula applicable to all cases for the determination of a Permanent Establishment. The determination of existence of a PE is a fact-specific exercise, wherein several factors must be evaluated, including the enterprise's right of disposal over the premises, the degree of control and supervision exercised, the presence of ownership, management, or operational authority.
• The SC noted that in terms of SOSA, the Taxpayer is vested with some of the following powers:
  • Appoint and supervise the General Manager and other key personnel
  • Implement human resource and procurement policies
  • Control pricing, branding and marketing strategies
  • Manage operational bank accounts
  • Assign personnel to the hotel without requiring the owner's consent
  • Profit linked fees from the hotel's earnings
• All these above functions suggested that the Taxpayer's role was not confined to mere policy formulation or high-level decision making but extended to substantive operational control and implementation. Thus, the Taxpayer exercised pervasive and enforceable control over the hotel's strategic, operational and financial dimensions.
• The SC placed reliance on its decision in the case of Formula One, wherein it was held that a Fixed Place PE requires
  
  
  1. A fixed place of business, and
  2. Business operations carried out through that place.
  
  It emphasized that exclusive possession is not essential. Even temporary or shared use of premises may suffice, depending on commercial and operational realities. Further, the Court highlighted that determination of disposal test may vary based on the nature of business and cannot be applied uniformly to all cases. It needs to be determined whether in substance, a place is at disposal of the entity for carrying out core business functions, rather than there being a mere grant of a formal right of use a particular space. The Court thus reaffirmed that the key test is whether the place is effectively at the disposal of the enterprise to conduct its core business activities.
  
  
• Further, the fact that daily operations of the hotels in India were handled by an Indian Company, which is a separate legal entity, does not decisively support that the Taxpayer does not have a PE in India as one will need to look at the economic substance over legal form. In the given case, the extent of control, strategic decision making and influence exercised by the Taxpayer indicates that the business of Taxpayer was carried on through the hotel premises.
• Furthermore, it held that the length of stay of each individual employee is immaterial for determining PE where there is continuity in the business operations. Once it is found that there is continuity in business operations, the intermittent presence or return of employees becomes immaterial.
• The SC upheld its principles of its decision in Formula One that a PE must demonstrate three key characteristics that is (a) Stability; (b) Productivity; and (c) Dependence. The SC noted that in the facts of this case, the 20-year duration of the SOSA, coupled with the Taxpayer's continuous and functional presence, satisfies the tests of stability, productivity and dependence.
• The Taxpayer's ability to enforce compliance, have supervision over operations and derive profit linked fees established a clear and continuous commercial nexus and control over the hotel's core functions for constitution of a Fixed Place PE.
• Further, the SC also observed that the determination of profit attributable to PE is to be undertaken basis the premise that the PE is an independent entity and accordingly the Taxpayer will be liable to pay tax on the income attributable to its PE in India even if the overall foreign enterprise has incurred losses.

AURTUS COMMENTS

• The SC has reiterated that determination of the existence of a PE is a fact specific inquiry, not governed by a standard formula, and must focus on the commercial and operational substance of the arrangement over its legal form.
• The Court outlined key indicators such as the enterprise's right of disposal over premises, degree of control and supervision exercised, and the presence of managerial or operational authority, in deciding whether a fixed place PE exists.
• It would be imperative for businesses to revisit their current structures in light of the parameters analyzed by the Supreme Court in this case which included Taxpayer's power to appoint the key personnel, implement HR policies, control pricing and marketing strategies, manage operational bank accounts, assign personnel to the hotel without requiring owner's consent, profit linked fees from the hotel's earnings pursuant to the 20 year-long arrangement etc.

Footnotes

1. Hyatt International Southwest Asia Ltd. Vs. ADIT [2025] 176 taxmann.com 783 (SC)

2. Formula One World Championship Ltd. v. CIT [(2017) 394 ITR 80 (SC)

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