The buzzword ‘Permanent Establishment’ has significantly created ripples among the tax fraternity over last few days, post the Supreme Court’s judgement in Hyatt’s case and rightly so. Considering the current scenario, where services can be delivered entirely online from the employees’ home country, it becomes quite interesting to see how a Fixed Place PE would trigger in complete absence of travel to the country of the customer.

In this insightful article, Mr. Simachal Mohanty (Chartered Accountant) analyses the sharper points, compliance of which might have helped the assessee being out of the PE conundrum. The Author inter alia signs off with a word of caution, i.e., “Substance is the only source of truth. It must be adhered to in spirit while making any strategic arrangements and paying the taxes thereby a taxpayer focuses on the business effectively rather than getting entangled in avoidable litigations.”

“Unfixing a Fixed Place PE – How Far Is Too Far”

The buzzword ‘permanent establishment’ has significantly created ripples among tax fraternity over last few days post Hon’ble Supreme Court’s (SC) judgement in Hyatt’s Case [TS-954-SC-2025] and rightly so. This article analyses the sharper points, compliance of which might have helped the assessee being out of the PE conundrum.

• The Background:

Hyatt International, a company incorporated in Dubai (“Hyatt Dubai” / ”Assessee” / ”taxpayer”), was a tax resident of UAE. On 4^th September 2008, it entered two agreements i.e. Strategic Oversight Service Agreement (SOSA) with Asian Hotels Limited, India, one for Delhi and another for Mumbai. Under the SOSA, Hyatt Dubai agreed to provide strategic planning services and “know-how” to ensure that the hotel was developed and operated as an efficient and a high-quality international full-service hotel.

For the previous year 2008-09, the Assesse filed return of income treating its income under SOSA as non-taxable as there is no specific article under the DTAA for taxing Fees for Technical Service (Article 12 deals with ‘Royalty’ only).

The Assessing Officer (AO) held that activities constituted

1. Business Connection under Sec.9(1)(I) of the Act
2. PE under Article 5 of DTAA
3. Royalty & FTS u/s 9(1)(vi)/(vii) of the Act
4. Royalty under Article 12 of DTAA

Further, AO determined net profit at 25% of the gross receipt and sought to levy tax @10%  

Hyatt Dubai did not accept the above contention of AO and ultimately the matter travelled to Hon’ble SC after the ruling of ITAT and the High Court did not find favour with the taxpayer.

Hon’ble SC ruled that Hyatt Dubai had a Fixed Place PE in India under Article 5 of India UAE DTAA.  

• The ‘Fixed Place’

Hyatt International Southwest Asis Ltd, the assesse, a tax resident of UAE (“Hyatt Dubai”) had deputed its employees to AHL in India under SOSA. Such employees were senior in the organization ranging from Managing Director, Director of Finance, Director of HR, Director of Sales and marketing, Director of Revenue Management and Internal Auditor.  

Their role included strategic guidance, brand compliance, long term planning and also identification, recruitment and assistance in appointment of hotel employees (General Manager, key personnel, Executive committee member) on behalf of AHL.

The deputed employees visited India and stayed in hotel premise during the relevant year for performance of their services.

Since the right to use the hotel premise was at the disposal of Hyatt’s deputed employees, it constituted a Fixed Place PE.

• Revenue Earning Model

Another factor led Hon’ble SC to rule as Fixed Place PE is the revenue earning model under SOSA. As part of SOSA arrangement, Hyatt Dubai was entitled to “Strategic Fees” for the services provided which was calculated as a percentage of room revenue and other revenues and income – whether directly or indirectly derived from the hotel’s operations – as well as cumulative gross operating profit.

This was an added factor in substantiating carrying on of business in India culminating into creation of PE.

• Longevity of the SOSA arrangement

SOSA was entered for a period of 20 years with a possibility of extension of 10 years subject to mutual agreement.

Such a longer period of business agreement on revenue sharing satisfies the test of stability, productivity and dependence and hence creates PE in India.

• Nature of Activity

Hon’ble SC held that Hyatt Dubai created a PE in India since the control, strategic decision making, influence exercised by it established that the business was carried on through the hotel premise.

• Independence of AHL

SOSA terms indicated that AHL could not reject or defy any guidelines or directions issued by the Assessee in respect of running the Hotel. This leads to the understanding that major control was exercised by Hyatt Dubai and their role was not auxiliary in nature.

Lets analyse the above factors in a different context as to what actions of the taxpayer might have helped him being out of PE conundrum.

• Fixed Place vis-à-vis Digital presence.

A Fixed Place PE comes to the fore when a fixed place of business is present in a country and business of the taxpayer is carried on through that place.

As per my reading of the judgement ‘carrying on of business’ carries higher importance over ‘fixed place of business’.

Hon’ble SC ruled “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.” 

Today’s globe is changing rapidly due to advent of technology. In today’s context, it is quite possible to render the entire service online from the country where the employees are located rather than travelling to the country of the customer. In that situation, it becomes quite interesting to see how a Fixed Place PE would trigger in complete absence of travel to the country of customer.

Of course, the time threshold for service PE needs to be satisfied in order to avoid attraction of service PE.

• Revenue earning Model.

Revenue sharing model is not uncommon in dealing with third party contracts. When success of an asset which is acquired is either highly valuable or even when its success is uncertain, the seller agrees for a revenue sharing model. However, in case of a third party situation, the amount agreed is always deemed to be at arms length and further profit attribution is not warranted. In a revenue sharing model between related parties the risk /rewards of the success of the product is shared between the parties. A service provider on a fixed fee does not participate in risk/reward sharing model with its contractor, When such service provider participates in risk /rewards revenue model, that means he participates in the business of the contractor.

In this Hyatt’s case, Fixed fee model, instead of revenue sharing model would have mitigated the presence of PE to good extent.

• Deputation of employees

One of the main reason of the conclusion about Fixed PE is the key role played by the six senior employees deputed by Hyatt Dubai to AHL under SOSA.

At the same time , another agreement namely Hotel Operating Service Agreement (HOSA) was entered by AHL with Hyatt India Pvt Ltd (Hyatt India) for carrying out day to day operation of the hotel. Had these six employees would have been transferred from Hyatt Dubai to Hyatt India and the strategic service fees would have been paid by AHL to Hyatt India, the issue of fixed place PE would not have arisen.

• Indian Tax even in Global Loss situation

Hon’ble Supreme Court has further ruled that attribution to PE in India is permissible even if overall foreign enterprise has incurred losses. This judgement is given based on the fact that the taxability is based on business presence and not based on global profitability of the enterprise.

As per transfer pricing principle, the least complex party should be made a tested party and generally such party is entitled to a fixed remuneration and remainder profit, or loss accrues to the entrepreneurial entity.

In Hyatt’s case, in prima facie, it appears that such analysis is absent. It is unclear whether the Indian PE (as alleged by tax dept) played an entrepreneurial role for Hyatt Dubai. If so, upon profit attribution principle, it would have to bear the global loss. A Function Asset Risk analysis would have added lot of significance to the argument on profit attribution principle.

• Embrace PE when required

PE is not a stigma. A taxpayer tries to avoid the incidence PE as far as possible since the profit attribution parameters are not laid down clearly. In absence of any alternative, if PE needs to be embraced, one must undertake proper FAR analysis, pay the tax on the profit attributed to the PE.

• Substance

Substance is the only source of truth. It must be adhered to in spirit while making any strategic arrangements and paying the taxes thereby a taxpayer focuses on the business effectively rather than getting entangled in avoidable litigations.  

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Views expressed by the author is personal in nature.