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2025-08-19
The recent ruling of the Apex Court in the case of Hyatt International with respect to the scope of Permanent Establishment (PE) sent shockwaves through the industry. The judgement appears to question the long-standing practices and has left many companies scrambling to understand its impact. As the dust settles, one thing is clear i.e., this decision could change the way business is done going forward.
Against this backdrop, Mr. B. Venkat Ramanan (Associate Director, Lakshmikumaran & Sridharan Attorneys) and Ms. Tanya (Associate) dive into the nuances of the SC judgment while throwing light on its aftermath. Highlighting that the aforesaid judgement is a stark reminder for the businesses involving franchisee arrangements/common group reporting structures to have a complete review of the affairs from the perspective of the control which the franchisor/ultimate parent entity has on the business of the franchisee/subsidiary/
“From Strategy to Substance: Apex Court’s take on PE in Franchise & Holding Structures”
The recent ruling of the Apex Court in the case of Hyatt International v. Additional Director of Income Tax[1] with respect to the scope of Permanent Establishment (‘PE’) has sent shockwaves through the industry. The judgement appears to question the long-standing practices and has left many companies scrambling to understand its impact. As the dust settles, one thing is clear i.e., this decision could change the way business is done going forward.
Background of the Judgement
Hyatt International Southwest Asia Ltd, a tax resident of UAE (‘Hyatt UAE’) entered into two Strategic Oversight Agreements (‘SOSA’) with Asian Hotels Limited (‘AHL’), India – one for the hotel operated in Delhi and another for the hotel operated in Mumbai. Under the SOSA, Hyatt UAE agreed to provide strategic planning services to enable AHL to operate an efficient and high quality international full service hotel like other Hyatt brand hotels. The salient features of the SOSA are as under:
1. The SOSA shall remain in operation for a term of 20 years from the effective date and can be extended by 10 years through mutual agreement
2. AHL India will be the owner of the hotels operated by them. If they intend to obtain any financial assistance for construction/use the hotels as a collateral for non-business purposes, they would have to obtain from the lender a non-disturbance and attornment agreement as is acceptable to Hyatt UAE.
3. The hotels are to be operated in accordance with standards prevailing in the international hotels operated by Hyatt UAE, their subsidiaries and affiliates. To this end, Hyatt UAE shall provide strategic plans/policies, processes, proprietary knowledge/skill/experience, associated technologies, guidelines and parameters that need to be adopted/complied with by AHL India.
4. Hyatt UAE has complete control and discretion to develop plans/policies with respect to operation of the hotels including but not limited to human resources, procurement, guest admittance, use of premises, pricing, sales, branding, marketing, product development, operation of bank accounts and daily operations.
5. Hyatt UAE is authorized to identify, recruit and assist in hiring the non-local employees for the hotels i.e., General manager, members of the executive committee and other key personnel who would be operating outside of India. Hyatt UAE may also temporarily assign their own employees to serve as full-time executive staff at the hotel.
6. Hyatt UAE shall provide sales/marketing services and centralized reservation services.
7. Hyatt UAE shall make available their own/their affiliate’s personnel for reviewing plans for addressing operational problems and improving operations.
8. Hyatt UAE shall be paid a consideration calculated as a percentage of income earned from operation of the hotels for the provision of services under SOSA to AHL India.
Additionally, AHL India has also entered into an agreement with Hyatt India for carrying out the day to day operations of the hotels.
In view of the above facts, the Tax Department held that Hyatt UAE had a PE in India through the hotels operated by AHL India. Accordingly, it was held that the consideration paid by AHL India under SOSA is taxable in India as the same is attributable to the said PE. The said finding of the Tax Department was also echoed by the Hon’ble ITAT and the High Court and as a result Hyatt UAE had to approach the Apex Cout for relief.
The Apex Cout also tilted towards the Tax Department’s finding and decided the matter against Hyatt UAE. The basis for such decision is summarized below:
1. Determination of PE involves a fact specific enquiry with regard to the following:
a) an enterprise’s right to a disposal over the premises specifically referring to a right to use the premises to carry on its business activities at their discretion.
b) the degree of control and supervision exercised.
c) the presence of ownership, management and operational authority.
2. Detailed review of the SOSA indicates that Hyatt UAE exercised pervasive and enforceable control over the hotels of AHL India in terms of strategic, operational, and financial dimensions. Specifically, the SOSA vested Hyatt UAW with powers to:
a) Appoint and supervise the General Manager and other key personnel
b) Implement human resource and procurement policies
c) Control pricing, branding, and marketing strategies
d) Manage operational bank accounts
e) Assign personnel to the hotel without requiring the consent of AHL India
These rights go well beyond mere consultancy and indicate that Hyatt UAE was an active participant in the core operational activities of the hotels of AHL India.
1. Hyatt UAE’s contention that the absence of an exclusive or designated physical space within the hotel precludes the existence of a PE, is misconceived. In Formula One[2], it was held that exclusive possession is not essential - temporary or shared use of space is sufficient, provided business is carried on through that space. The actual role of Hyatt UAE is not just advisory in nature but extends to various other administrative roles. The functions performed by Hyatt UAE were core and essential functions, clearly establishing their control over the day to-day operations of the hotels. In this case, the 20-year duration of the SOSA, coupled with the Hyatt UAE’s continuous and functional presence, demonstrates that the hotels in India qualify as a fixed place PE.
2. As regards the aspect of service PE it was noted that the travel logs and job functions establish that there was continuous and coordinated engagement on part of the employees of Hyatt UAE despite no single individual employee exceeding the 9 month threshold. The length of stay of the individual employee is not relevant and that the important consideration for deciding the existence/otherwise of a service PE will be with reference to continuity of business presence in aggregate.
3. Accordingly, the High Court was correct in concluding that Hyatt UAE’s role was not confined to high-level decision making, but extended to substantive operational control and implementation. Hyatt UAE’s ability to enforce compliance, oversee operations, and derive profit-linked fees demonstrates a clear and continuous commercial nexus and control with the hotels’ core functions. Thus, the existence of a fixed place PE through the said hotels is said to have been fulfilled.
Aftermath of the Judgement
The business model dealt with in the judgement bears semblance to that of a classic franchise arrangement prevalent in industries such as food & beverages, retail, health & fitness, hospitality, etc. Likewise, these arrangements can also be found in any multinational enterprise wherein the ultimate parent entity provides services similar to the ones contemplated in the SOSA (executed by Hyatt UAE), to their subsidiaries/affiliates; further the provision of such services would also entail creation of common reporting structures for the group as a whole/in part, say for example, a group CFO/CTO whose role is to supervise/administer the financial/technical functions for the group to developing and implement uniform policies and procedures.
The judgement, in the authors’ opinion, would definitely provide a shot in the arm to the tax department to question the existence of PE in the aforestated business models. Having said, the authors feel that the underlying reason for the Apex Court to conclude the existence of a fixed place PE is on account of certain peculiarities in the facts i.e., Hyatt UAE being able to 1) manage operational bank accounts, 2) appoint general manager and other key personnel, 3) depute employees at their own will to work as full time executive staff of AHL India and 4) framing policies for daily operation of the hotels; these facts coupled with the other services rendered in the SOSA made the Court come to a conclusion that Hyatt UAE virtually controlled the operations of the hotels of AHL India and thereby, creating a business presence (in the form a fixed place PE) through such hotels. Further, a reading of the said judgement suggests that had Hyatt UAE been involved purely in undertaking a strategic oversight function and not involved themselves in the day to day operations of the hotels of AHL India, the Court could have come to a different conclusion.
At this juncture, it is pertinent to refer to the landmark decision of the Apex Court in the case of Vodafone International Holdings[3]. The said judgement while dealing with the aspect of taxation of capital gains arising from indirect transfer of assets, to counter the Revenue’s contention that parent and subsidiary companies are one and the same entity observed as follows:
1. Both for the purpose of corporate and tax laws, a company is always regarded as a separate person distinct from their shareholders.
2. It is generally accepted that the group parent company is involved in giving principal guidance to group companies by providing general policy guidelines to group subsidiaries. 3. However, the fact that a parent company undertakes the said function does not generally imply that the subsidiaries are to be deemed residents of the State in which the parent company resides. Further, if a company is a parent company, that company's executive director(s) should lead the group and the company's shareholder's influence will generally be employed to that end. This obviously implies a restriction on the autonomy of the subsidiary's executive directors. Such a restriction, which is the inevitable consequences of any group structure, is generally accepted, both in corporate and tax laws.
4. However, where the subsidiary's executive directors' competences are transferred to other persons/bodies or where the subsidiary's executive directors' decision making has become fully subordinate to the holding company with the consequence that the subsidiary's executive directors are no more than puppets then the turning point in respect of the subsidiary's place of residence comes about.
Thus, whether a transaction is used principally as a colourable device for avoiding taxes is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. There are many circumstances, apart from the one given above, where separate existence of different companies, that are part of the same group, will be totally or partly ignored as a device or a conduit.
If one has to read the judgement of Hyatt International through the lens of the observations made in Vodafone International, he will be able to note that in the former the reason why the Supreme Court held there is a creation of fixed place PE is because 1) Hyatt UAE is virtually controlling the hotels of AHL India, and 2) the hotels are nothing more than an extended arm of Hyatt UAE. Extending further, if one carries the findings related to pervasive control in the judgement of Hyatt International to its logical end, then applying the decision of Vodafone International, he will be able to infer that the hotels of AHL India do not have any independent existence and therefore, the other consequences such as lifting of corporate veil, application of the doctrine of substance over form, issues surrounding beneficial ownership and alter ego will follow suit.
Thus, the judgement of Hyatt International is a stark reminder for the businesses involving franchisee arrangements/common group reporting structures to have a complete review of the affairs from the perspective of the control which the franchisor/ultimate parent entity has on the business of the franchisee/subsidiary/affiliate. Further, it is incumbent upon such businesses to maintain clear documentation demarcating the functions carried out by each of the entities which would help in proving that the franchisee/subsidiary/affiliate is not an extended arm and that it is an entity having independent existence from that of the franchisor/ultimate parent entity. Undertaking this review and documentation will help businesses to mitigate the adverse consequences discussed in the preceding paragraph.
[3] Vodafone International Holdings B.V. v. Union of India, [TS-23-SC-2012]
