The SC’s decision in Hyatt International and its PE tax implications for US Businesses in India

Introduction

Permanent Establishment [“PE”] is a tax principle that allows a State [“Source State”] to tax the global income of a non-resident foreign enterprise in the Source State under specific circumstances. These circumstances determine whether a foreign enterprise [US Company] has a Permanent Establishment in a source country [India] involving not just trading with a source country but also having a substantial business presence in it through which it accrues profits.

The law concerning PE in India, apart from drawing from the Indian Income Tax Act directly flows from Article 5 of the Double Taxation Avoidance Agreement [‘DTAA’], a tax treaty, between the United States and India. Article 5 of the DTAA defines a PE as “a fixed place of business through which the business of an enterprise is wholly or partly carried on”.

Types of PE under the DTAA: US enterprises that hire contractors in India can potentially fall under three types of PEs.

Fixed Place PE: A fixed place PE is constituted when a foreign enterprise [“Nomi USA”] has a fixed place of business such as an office or branch or factory in the source State [India]. The fixed place of business does not have to be rented or under legal possession of the foreign enterprise. It is sufficient that it is at the disposal of the enterprise and the enterprise’s business is carried out through that place.

Services PE: A Services PE is one where a US enterprise provides services in India through its employees or personnel, especially to its related enterprise such as its Indian subsidiary. A services PE can be constituted without a physical presence in the source State and applies if the employment is more than ninety days.

Agency PE: Where a contractor or agent has the authority to conclude contracts on behalf of a foreign enterprise and habitually exercises it, then an agency PE is constituted. Further, in the event the contractor works wholly or almost wholly for that enterprise [i.e., is not independent], a dependent ‘agency PE’ is created.

Exception to fixed place of business PE: A fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research or for other activities which have a preparatory or auxiliary character, does not constitute a fixed place PE. Preparatory or auxiliary is not precisely defined but has been interpreted by the Indian Supreme Court to mean something that is “aiding or supporting” main functions. In this regard, the Courts have held that merely processing information or running a data processing center for a foreign enterprise is an auxiliary function.

Factual Background

In Hyatt International Southwest Asia Ltd. v. CIT, (2025) 478 ITR 238, the Court considered a case wherein the appellant, Hyatt International Southwest Asia Ltd., was held to be a PE, after a close examination of the Strategic Oversight Services Agreements [“SOSA”], and the economic activities of the appellant. The appellant entered into two SOSAs to provide technical and strategic planning services for the development and efficient operation of the two hotels. The appellant stated that its income is not taxable on the following grounds:

1. There is no specific Article under the India-UAE DTAA for taxation of technical services.

2. The appellant did not have a fixed place of business, office or branch in India, and therefore, does not have a Permanent Establishment as defined under Article 5 (1) of the DTAA.

3. The presence of the employees of the appellants did not exceed the nine-month threshold in the previous year, as required under Article 5(2) of the DTAA.

In light of the above reasons, the appellant contended that the business income was not taxable under Article 7 of the DTAA. Multiple assessment orders were challenged before the ITAT, all of which were dismissed, and on appeal to the Delhi High Court, it held that the appellant had a PE in India, as a fixed place of business, and hence its income was taxable. On appeal, the SC took into consideration whether the appellant was a PE.

Permanent Establishment Defined

The Court examined the DTAA, the Indian Income Tax Act and other international instruments such as UN Model Double Taxation Convention (2021) and OECD Model Tax Convention (2017) to arrive at a definition of PE. On examining the relevant provisions and the decision of the Court in Formula One World Championship Ltd. v. CIT, (2017) 15 SCC 602, the essentials of a PE were laid down:

13. … 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. The Court further held that a PE must demonstrate the three core attributes of: stability, productivity, and a degree of independence. Among these, the “disposal test” is pivotal, meaning thereby the enterprise must have a right to use the premises in such a way that enables it to carry on its business activities. This test is to be applied contextually, taking into account the commercial and operational realities of the arrangement.

The disposal test is “fact-specific inquiry, including: the enterprise’s right of disposal over the premises, the degree of control and supervision exercised, and the presence of ownership, management, or operational authority.” While considering the ‘disposal test’, presence of an exclusive or designated place is not necessary, and the Court held that “temporary or shared use of space is sufficient, provided business is carried on through that space.”

On applying this test, the Court was of the opinion that Hyatt International Southwest Asia Ltd. was a PE. The appellant had powers of appointment and supervision of key personnel, management of finances, assign personnel without owner’s consent, etc. Therefore, the Court held that the appellant “exercised pervasive and enforceable control over the hotel’s strategic, operational, and financial dimensions”. The Court was of the view that this goes beyond mere consultancy rights or advisory roles or policy formulation.

Substance over Form

The appellant had contended that the daily operations of the hotels were carried out by Hyatt India Pvt. Ltd, which had a separate contract with the hotels in question; Hotel Operating Services Agreement (HOSA). It was contended that the SOSA and HOSA were conflated by the High Court. However, the SC held that the SOSA agreement need not have a formal cause permitting conduct of business, but it is sufficient if in substance, the premises was being used to conduct core business functions. The Court in essence held that the substance of the economic activities takes precedence over the legal form:

19. … It is well established that legal form does not override economic substance in determining PE status. The extent of control, strategic decision-making, and influence exercised by the appellant clearly establish that business was carried on through the hotel premises, satisfying the conditions under Article 5(1).

Similarly, the Court rejected the contention of the appellant that Article 5(2) of the DTAA does not apply as none of the appellant’s employees exceeded 9 months. Article 5(2)(i) stipulates that a foreign entity is a PE if “the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period.” The Court held that it is the continuity in business operations that must be considered, and not the length of stay:

21. … Under Article 5(2)(i) of the DTAA, the relevant consideration is the continuity of business presence in aggregate – not the length of stay of each individual employee. Once it is found that there is continuity in the business operations, the intermittent presence or return of a particular employee becomes immaterial and insignificant in determining the existence of a permanent establishment.

Taxability based on Business Presence

The Court also considered the question of whether a business which incurs loss in the relevant previous year is subject to taxation. This question was referred to a Larger Bench by the Delhi High Court while passing the impugned order. The Court took note of the decision of the Larger Bench and affirmed it, holding that even when the foreign entity’s overall business is running at a loss, the relevant profit of the PE is taxable:

23. At this juncture, we also note the reference made to a larger Bench of the Delhi High Court in Hyatt International Southwest Asia Ltd. v. Addl. DIT [(2025) 472 ITR 53 (Delhi) [FB]; 2024 SCC OnLine Del 6546.] , where it was held that profit attribution to a permanent establishment in India is permissible even if the overall foreign enterprise has incurred losses. Accordingly, question (iv) referred to was answered in the affirmative, reinforcing the principle that taxability is based on business presence and not the global profitability of the enterprise.

Implications

1. The definition of PE is arrived at after an examination of the SOSA agreement, and any clauses that indicate any form of pervasive control over the administrative and financial aspects establishes the existence of a Permanent Establishment.

2. Article 5(2)(i) of the DTAA is not to be interpreted strictly, but rather the existence of continuous business engagement must be considered, irrespective of the length of stay.

3. Temporary or shared place is sufficient to be categorized as a PE, there need not be an exclusive or designated place.

4. The actual economic activities of the entity are taken into consideration, and overrides any legal contract which may imply otherwise. Contracts may not stipulate the running of day-to-day activities, however, if the actual activities of the entity imply otherwise, they are considered a permanent entity.

5. Taxability is strictly based on business presence and not on the profitability of the business on a global scale. The fact that an entity is incurring losses at the global level does not absolve the PE of tax liability on the profits generated in India.