Hyatt a 'permanent establishment' under DTAA; must pay tax in India: Supreme Court

The Supreme Court on Thursday held that a foreign company with significant operational control through local subsidiaries in India constitutes a Permanent Establishment (PE) making its income taxable in India even while globally incurring losses. [Hyatt International Southwest Asia Ltd. vs. Additional Director of Income Tax]

The Bench comprising Justices JB Pardiwala and R Mahadevan made the observation while dismissing the appeals by UAE based Hyatt International Southwest Asia Ltd. and confirming that its activities under a Strategic Oversight Services Agreement (SOSA) with Indian hotels created a taxable PE.

The Court explained that a PE exists when a foreign enterprise has a fixed place of business in India through which it conducts core business activities. It found that Hyatt’s extensive control over hotel operations, including staffing, pricing and financial oversight made it a PE in India.

The case originated from tax assessments for the years 2009-10 to 2017-18.

Hyatt, a company incorporated in Dubai, entered into SOSAs with Asian Hotels Limited (now Asian Hotels (North) Limited) in 2008 for hotels in Delhi and Mumbai. The agreements tasked Hyatt with providing strategic planning and know-how to ensure high-quality hotel operations.

For the assessment year 2009-10, Hyatt filed a return declaring no taxable income, claiming it had no PE in India as it lacked a fixed place of business and its employees’ visits did not exceed nine months.

The Assessing Officer disagreed and issued a notice under the Income Tax Act, 1961 and concluded that Hyatt’s activities constituted a PE under Article 5 of the DTAA (Double Taxation Avoidance Agreement) and a business connection under Section 9 of the Act.

The officer also classified the income as royalties and fees for technical services. The Dispute Resolution Panel upheld these findings and the Income Tax Appellate Tribunal (ITAT) dismissed Hyatt’s appeals.

Hyatt then approached the Delhi High Court. The High Court ruled in Hyatt’s favor on the issue of royalties but held that it had a PE in India due to its operational control over the hotels.

The Court referred the question of taxability despite global losses to a larger bench. The larger bench later answered this question in the affirmative, holding that profit attribution to a PE is permissible regardless of the enterprise’s global financial losses. This prompted Hyatt to approach the Supreme Court.

In the Supreme Court, Hyatt argued that it provided only consultancy services from Dubai, with no fixed place of business in India. It claimed its employees’ brief visits did not meet the nine-month threshold for a PE under Article 5(2) of the DTAA.

The revenue countered, arguing that Hyatt’s role extended beyond advisory services and involved active control over hotel operations, supported by the long-term SOSA and employee presence.

The Court rejected Hyatt’s arguments, noting that the SOSA granted it extensive powers, including appointing key personnel, setting policies and managing finances.

The Court clarified that exclusive possession of a physical space is not required for a PE - temporary or shared use suffices if core business is conducted.

The Court emphasised the legal standard for a PE under Article 5(1) of the DTAA, which defines it as a fixed place of business through which an enterprise’s business is wholly or partly carried on.

It referred to its ruling in Formula One World Championship vs. Commissioner of Income Tax, International Taxation stating that a PE requires stability, productivity and dependence, all of which were met by Hyatt’s 20-year agreement and operational involvement.

“In view of the foregoing analysis, we affirm the findings of the High Court that the appellant has a fixed place PE in India within the meaning of Article 5(1) of the DTAA, and that, the income received under the SOSA is attributable to such PE and is therefore taxable in India,” the Court said.

The Court also upheld the High Court ruling on the referred question, noting that taxability of a PE depends on its business presence in India, not the enterprise’s global profitability.

“On an overall consideration of the above, we come to the firm conclusion that the submission of global income being determinative of the question which stood referred, is wholly unsustainable. The activities of a permanent establishment are liable to be independently evaluated and ascertained in the light of the plain language in which article 7 stands couched,” the Court said, quoting the High Court's larger bench.

The top court clarified that foreign enterprises with significant control over Indian operations, even without a dedicated office, can be taxed in India if they meet the PE criteria despite the parent company suffering losses globally.

Hyatt was represented by Senior Advocate S Ganesh along with advocates Ujjwal A Rana, and Himanshu Mehta from Gagrat And Co.

The IT department was represented by Additional Solicitor General N Venkatraman, Senior Advocates Arijit Prasad and Rupesh Kumar along with advocates Raj Bahadur Yadav, Shashank Bajpai, V Chandrashekhara Bharathi, Santosh Kumar and Diwakar Sharma.

[Read Judgment]