India’s ongoing efforts to attract foreign investment and establish itself as a global hub for services and innovation have recently collided with an innovative and arguably expanding tax interpretation on the concept of Permanent Establishment (PE). The latest Supreme Court judgment in Hyatt International Southwest Asia Ltd. is set to become a potential reference point of stringency in the interpretation of Permanent Establishments, specifically while evaluating Intra-group Services.

In this riveting piece, CA Akshay Kenkre (Founder, TransPrice Tax Group) presents an in-depth analysis of the Hyatt judgment which marks a significant shift in India’s interpretation of PE under the India–UAE DTAA. Outlining the broader implications of this decision, the Author inter alia remarks that the current judgment blurs the line between legitimate group oversight and actual business presence, potentially subjecting many multinational service structures to fresh tax exposure in India, and increasing compliance uncertainty for global investors. Finally, giving insights on how multinationals can proactively mitigate PE risk post-Hyatt, the Author cautions that, “India must ensure that its pursuit of tax revenue does not inadvertently undermine its attractiveness as a destination for global business and innovation.”

“Permanent Establishment in Focus: Supreme Court Lowers Threshold in Landmark Hyatt Case”

Setting the Tone

India’s ongoing efforts to attract foreign investment and establish itself as a global hub for services and innovation have recently collided with an innovative and arguably expanding of the tax interpretation on the concept of permanent establishment. The latest Supreme Court judgment in Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (2025) is set to become a potential reference point of stringency in the interpretation of Permanent Establishments, specifically while evaluating Intra-group Services.

Background and Facts of the Case

Hyatt International Southwest Asia Ltd. (“Hyatt International”) is a company incorporated in Dubai, UAE, and a tax resident of the UAE under Article 4 of the India–UAE Double Taxation Avoidance Agreement (“DTAA”). Hyatt International, as part of the global Hyatt hotel group, entered into Strategic Oversight Services Agreements (“SOSA”) with Indian hotel owners, under which it provided high-level strategic planning, brand oversight, and operational guidance to Hyatt-branded hotels in India.

Crucially, these services were not delivered from a fixed office or branch in India, but through oversight and guidance from Dubai, with occasional visits to India by Hyatt’s employees. Hyatt filed nil returns in India, claiming that its income was not taxable in India as it did not have a PE, and the limited employee presence fell short of the nine-month threshold under Article 5(2)(i) of the DTAA (the “Service PE” provision).

However, the Indian tax authorities contended that the depth of Hyatt’s involvement in the hotel’s management, policy formulation, control over human resources, and the right to assign staff without the hotel owner’s approval constituted a PE in India, triggering tax on its income under Article 7 of the DTAA. The Income Tax Appellate Tribunal (ITAT) and the Delhi High Court both ruled against Hyatt, leading to the present appeal before the Supreme Court of India.

Key Legal Issues

The primary questions before the Supreme Court were:

1. Did Hyatt International have a Permanent Establishment (PE) in India under Article 5(1) of the India–UAE DTAA, even though its employees’ presence did not breach the nine-month threshold under the Service PE clause (Article 5(2)(i))?

2. How should the income received by Hyatt under the SOSA be characterised and taxed?

The Supreme Court’s Verdict

The Supreme Court, in a comprehensive judgment, held that Hyatt International did have a fixed place PE in India and that the income received under the SOSA was taxable in India as Business Profits.

Analysis of Article 5(1): The Fixed Place PE

The Court’s main focus was on Article 5(1) of the DTAA, which defines a PE as “a fixed place of business through which the business of an enterprise is wholly or partly carried on.” The Court observed that similar language appears in the OECD and UN Model Conventions, and that international jurisprudence has generally settled on three essential attributes for a fixed place PE: stability, productivity, and a degree of independence (the “disposal test”).

Importantly, the Court emphasised that exclusive possession or ownership of premises is not necessary; what matters is whether the foreign enterprise has a right to use the premises for its own business. The judgment referenced the earlier Supreme Court decision in Formula One World Championship Ltd. v. CIT [TS-5102-SC-2017-O], which held that even temporary or shared use of a space, if functionally at the disposal of the foreign enterprise, can give rise to a PE.

Article 5(2)(i): The Service PE Threshold

Hyatt International’s principal defence was that its employees’ visits to India never exceeded nine months in any twelve-month period, as specified under Article 5(2)(i) of the DTAA (the Service PE clause). The Supreme Court acknowledged this argument but clarified that the existence of a fixed place PE under Article 5(1) operates independently of the Service PE test. Even if the Service PE threshold is not breached, a PE may still exist if the fixed place of business test is satisfied.

As the judgment noted:

“The limited and occasional presence of its employees in India, did not exceed the threshold of nine months under Article 5(2) of the DTAA, thereby excluding the existence of a PE. However, the High Court, and now the Supreme Court, held that the appellant’s activities still constituted a fixed place of business PE under Article 5(1). ... 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.”

Substance Over Form: The Functional Analysis

Relying heavily on the substance over form principle, the Supreme Court dissected the SOSA to reveal Hyatt’s significant and ongoing control over the Indian hotel’s strategic, financial, and operational decisions. Hyatt had the right to appoint and supervise key personnel, implement HR and procurement policies, frame policies to manage bank accounts, and formulate and enforce brand and operational standards.

According to the Court, these rights “go well beyond mere consultancy and indicate that the appellant was an active participant in the core operational activities of the hotel.” The duration of the SOSA (20 years), Hyatt’s continuous involvement, and the revenue-sharing structure further satisfied the criteria of stability and productivity.

Rejection of “Auxiliary” Argument

The Court held that Hyatt’s actual activities were not limited to setting up a pattern or providing advice, but instead involved ongoing, core operational/active participation that was essential to the functioning and success of the Indian hotels.

Comparative Jurisprudence analysis

Reference to the German “Hotel Manager” Case

The Supreme Court cited the famous Bundesfinanzhof (German Federal Fiscal Court) “Hotel Manager” case (1993), which held that a UK hotel management company had a PE in Germany because it had a dedicated office within the hotel for its General Manager, who was an employee of the UK entity and conducted the company’s core management business from that space. The German court emphasised that the dedicated, exclusive space used by the foreign manager for core business activities was critical in establishing the PE.

Distinguishing Hyatt from the German Case

However, the facts of the Hyatt International case diverge significantly. In the German case, the foreign company not only managed the hotel (on foreign Co payroll) but had a dedicated office at its disposal within the premises, and its employee was present full-time to conduct the company’s primary business—hotel management. By contrast, Hyatt International’s services were rendered under an intra-group agreement for strategic oversight, not as a standalone hotel management business. There was no exclusive office space, no permanent staff in India, and the core business of Hyatt was not to provide SOSA services to unrelated parties, but to offer internal group support globally. This distinction is vital and arguably negates the direct analogy the Indian Supreme Court sought to draw with the German precedent.

The Canadian Perspective: The Dudney Case [covered by Delhi High Court]

Internationally, courts have been careful not to overextend the PE definition to situations where the service provider has only limited, client-specific access to a place of business. The Canadian Federal Court of Appeal in William Dudney v. The Queen (1999) held that a self-employed engineer who had access to a client’s premises solely to perform contracted services—and had no control over the premises beyond regular office hours—did not have a fixed place of business and therefore did not create a PE. The principle applies equally to situations where professionals like Chartered Accountants are provided workspace at a client’s office for specific assignments. As long as the space is used only for the client’s project, and not for general business or serving other clients, it cannot be considered a fixed place of business at the disposal of the service provider. However, in the case of Hyatt International, the Delhi High Court held that the taxpayer does exercise control and the place in India is at the disposal of the taxpayer.

A Critical Assessment: Comparing Hyatt to Formula One and Global Practice

A fundamental difference in opinion in the Supreme Court’s analysis lies in its reliance on the Formula One precedent, without acknowledging the core difference in business models. In Formula One, the non-resident’s core business was organising racing events, and the race circuit in India was the “heart” of its commercial activity, making a PE finding both logical and consistent with global standards. In contrast, Hyatt International’s primary business is not the provision of SOSA or management services to third parties, but internal support within a multinational group structure.
It is also essential to highlight that the principal business of Hyatt International is not the provision of Strategic Oversight Services Agreements (SOSA) as an independent service offering, but rather the ownership, operation, and management of hotels worldwide. The SOSA is a tool for implementing Hyatt’s global brand standards and management practices across its group entities, including in India. Such intra-group arrangements are standard operating practice for multinational hotel chains, ensuring brand consistency and operational excellence across jurisdictions. Furthermore, the SOSA model is not unique to India—similar agreements are likely to be entered into by Hyatt with group entities and franchisees in various countries.

By equating group-wide strategic oversight services with business operations (Wholly or partly), the Court has risked stretching the PE concept to cover intra-group support arrangements, which, if rendered at arm’s length, are typically recognised as routine in modern global business. Internationally, there is little evidence of major jurisdictions treating such intra-group services as constituting a PE unless there is exclusive space and full operational control akin to running a separate business. Taxation remains a sovereign right, but there is an increasing expectation—especially in a globalised economy—that sovereign measures align with OECD principles and international standards. Departing from this consensus may undermine India’s tax certainty and international credibility.

A Missed Opportunity: Characterisation as Royalty

One of the most notable aspects of the judgment is what it did not do. Instead of focusing on PE, the Supreme Court could have examined whether the fees paid to Hyatt under the SOSA constituted royalties under Article 12 of the DTAA. Hyatt’s principal contribution lay in sharing brand IP, operational manuals, and global standards—hallmarks of royalty or intellectual property income. However, this was not one of the questions under consideration, and the Hon. Delhi High Court had already ruled that such services cannot be considered as Royalty. This aspect was not further pressed or put forth in the Supreme Court.  

Taxing the receipts as royalty would have provided a clear, administratively simple solution, with withholding at a gross rate, as is the global norm. This approach would also have avoided the complex and contentious issue of profit attribution to a PE—especially problematic when the foreign enterprise is in a global loss, as in Hyatt’s case. Notably, the Delhi High Court has inferred on the question of profit attribution to a PE in loss situations in favour of the revenue and held that the activities of the PE should be individually assessed irrespective of the loss.

Broader Implications: Impact on India’s Centre of Excellence Ambitions

The implications of this decision extend far beyond the hotel or hospitality industry. India is actively positioning itself as a Centre of Excellence (COE) for global services, seeking to attract multinational investment, R&D, and innovation hubs. Multinational groups often centralise high-value functions, innovation, or support services in India, with the foreign headquarters providing operational manuals, brand guidelines, and strategic direction. If the PE threshold is interpreted so broadly that even routine intra-group oversight visits or strategic involvement by foreign head offices can trigger a PE, multinational companies may find India a riskier and less predictable jurisdiction for investment.

The critical question becomes: would following group policies and having the foreign parent exercise a degree (some or full) of control over an Indian back office also amount to the office being “at the disposal” of the foreign entity? How could a foreign brand in the hospitality industry ensure that global SOPs and criteria are followed, if every act of a foreign company to bind the subsidiary company would be considered as exercising control over the Indian operations? The current judgment blurs the line between legitimate group oversight and actual business presence, potentially subjecting many multinational service structures to fresh tax exposure in India, and increasing compliance uncertainty for global investors.

International Tax Consensus: The “At the Disposal” Test

It is widely accepted, in both OECD commentary and international case law, that a place of business is only “at the disposal” of a service provider if it is available for its general business—not just to serve a specific client or perform an internal assignment. If a professional is given space in a client’s office solely for the purposes of that client, with no ability to serve other clients or conduct independent business, it cannot be said that a PE exists. The Canadian Dudney case, and even the German “Hotel Manager” case (which hinged on dedicated, exclusive space and core management activities), reinforce this principle.

How Multinationals Can Proactively Mitigate PE Risk Post-Hyatt

While it is great to have a technical discussion on the topic, which could seem never-ending and non-conclusive, given the wider net cast by the Supreme Court in the Hyatt ruling, multinationals must now approach their India structures with both diligence and strategic intent. Here are the top 5 considerations that Multinationals should consider to navigate the complex maze of permanent establishment.

1. Re-examine Contract and Control

Revisit how your intra-group contracts are drafted and, more importantly, how they play out in practice. Avoid granting the foreign parent or regional HQ any operational control over the Indian business—oversight is fine, but day-to-day decisions, hiring, and local strategy should remain with the Indian entity. Keep the contracts running for a year and then renew or extend the period. This clear separation helps demonstrate that India’s operations are independently run and not an extension of the foreign business, and with a lesser degree of permanency.

2. Use appropriate TP Models and Justify – don’t aim at oversimplification with a percentage-based model

When pricing intra-group services, be deliberate about your choice of methodology. If using a cost-plus model, ensure the mark-up reflects market reality and is well-documented—don’t default to a simple percentage of sales unless it truly mirrors the economic value being delivered. The more robust and transparent your benchmarking and price-setting documentation, the easier it will be to defend the arrangement in an audit.

3. Limit Physical Presence and Avoid Exclusive Space

Deploy clear policies around visits by foreign personnel. Visits should be infrequent, short, and have a well-defined agenda—never allow exclusive office space or resources to be reserved for foreign staff. Where foreign experts are needed, their work should be time-bound and always under the direction of the Indian company. Maintain clear records so you can demonstrate that control and business presence remain with the local team.

4. Foster a Culture of Compliance and Awareness

Equip your teams—both in India and abroad—with practical training on what does and doesn’t constitute a PE. Encourage open communication, periodic compliance reviews, and prompt consultation with advisors if any changes in group operations or strategy are contemplated. It’s not just about documentation, but about building the right behaviours and awareness across the organisation. Substance over form.

5. Engage in Proactive Dialogue with Tax Authorities

Given the evolving jurisprudence, MNEs may benefit from seeking advance rulings or entering into bilateral or unilateral Advance Pricing Agreements (APAs) with Indian tax authorities to lock in certainty on transfer pricing and PE issues. Proactive, transparent engagement can help manage expectations and reduce the risk of future litigation.

Summing it up

The Supreme Court’s Hyatt International decision marks a significant lowering of the bar for PE in India, with the potential to bring a wide array of intra-group and oversight arrangements within the tax net. While the goal of taxing genuine commercial activity by foreign entities in India is legitimate, the Court’s reasoning risks capturing routine, arm’s length intra-group services that are an integral part of modern multinational business.

Policymakers and tax administrators should take note of international practice and ensure that India’s tax regime remains predictable, competitive, and aligned with global standards. A more balanced approach would foster certainty and support India’s ambition to be an international business hub.

Ultimately, it is essential to recognise that the most fundamental issue that was covered above, i.e. whether profits can be attributed to a PE in India even when the overall foreign enterprise has incurred global losses, has been adjudicated by the larger bench of the Delhi High Court and remains undisposed before the Supreme Court. If the eventual answer to this question is answered in the negative by the Supreme Court, it would render the earlier Supreme Court’s ruling in the Hyatt case largely academic in terms of actual tax liability, since no profits could be attributed to the Indian PE in the absence of overall profits. However, the legal principles and broader interpretation of what constitutes a PE, as laid down in this judgment, will continue to have far-reaching consequences. This precedent could set the tone for more conservative PE interpretations across the Indian service sector, impacting a broad spectrum of multinational service and support arrangements, irrespective of whether any tax ultimately becomes payable.

India must ensure that its pursuit of tax revenue does not inadvertently undermine its attractiveness as a destination for global business and innovation. As always, clarity, consistency, and international alignment are the hallmarks of a world-class tax regime.