The Supreme Court's recent judgment in Hyatt International Southwest Asia Ltd case marks a significant moment for international tax jurisprudence in India, particularly concerning Permanent Establishment (PE). This decision carries significant weight for all foreign companies with an Indian footprint.

In our latest article, the author Mr. Radhakishan Rawal (Senior Advisor, Dhruva Advisors LLP) delves into the nuances of this landmark decision, analyzing the factual findings that led to the PE assertion. The author critically assess the Court's approach to dissecting contractual agreements and the implications of its interpretation regarding "control" and "disposal" of premises. The author reveals the complexities surrounding the Court's reliance on specific agreements, the treatment of multi-entity operations, and the introduction of "domestic tests" like 'stability, productivity, and dependence' for PE determination, which may diverge from international standards. This analysis offers crucial insights into the evolving PE landscape for foreign enterprises in India.

"Hyatt Verdict: Decoding SC's Stance on Fixed Place PE in India"

In the recent case of Hyatt International Southwest Asia Ltd[1], the Supreme Court held that Hyatt International Southwest Asia Ltd (HISWAL) had a fixed place of business in India constituting a Permanent Establishment (PE) in terms of Article 5(1) of the tax treaty between India and UAE. This article contains analysis of certain aspects of the judgment.

Facts and findings

Stated briefly, HISWAL had entered into Strategic Oversight Services Agreements (SOSA) with Asian Hotels Ltd (AHL), India. The judicial authorities found that the role of HISWAL was much beyond mere advisory role and had significant control over the operations of AHL. The hotel premises were at the disposal of HISWAL and hence there existed a fixed place PE in term of Article 5(1).   

Existence of fixed place of business: Question of fact or substantial question of law

Ordinarily, questions such as whether there exists a “place of business”, whether the place is “fixed”, whether the place is at the “disposal” of the non-resident, whether business was carried out through such place etc. can be said to be “questions of fact”.  Answering these questions require critical analysis of the facts and conducts of the parties.

The Supreme Court in the case of CIT v. Morgan Stanley & Co. Inc., [TS-5020-SC-2007-O] held that in ascertaining what would constitute a “permanent establishment” within the meaning of Article 5(1) of the Indo-US DTAA, one had to undertake what is called a functional and factual analysis of each of the activities undertaken by an establishment. Even in the case of Hyatt International, the court observed “In our view, determining whether a Fixed place PE exists must involve a 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.”

However, interestingly, the high court treated the following question as “substantial question of law”:

“(ii)Whether the appellant has Permanent Establishment in India within the meaning of the Double Taxation Avoidance Agreement?”

Taking together the observations of the Supreme Court and the question framed by the high court leads to an assertion that what is essentially question of fact has been treated as substantial question of law by the high court and adjudicated by the high court and Supreme Court.

Yet it becomes difficult to assert whether the judgment is based on correct facts. In addition to SOSA, AHL had also signed HOSA (Hotel Operation Services Agreement) with an Indian affiliate (Hyatt India) of HISWAL and Hyatt India was required to provide support on day to day functioning of the hotels. Before the Supreme Court HISWAL had argued that the High Court erred in conflating the two separate legal agreements – the SOSA entered into by the appellant and the HOSA entered into by Hyatt India Pvt. Ltd. – and mistakenly attributed the day-to-day control of hotel operations to the appellant.

While there is reference to documentary evidences, the text of the Supreme Court judgment suggests that this complaint / argument of HISWAL is not getting adequately answered. The Court appears to have placed lot of reliance on the SOSA and asserted PE. Whether the day to day operational activities were performed by HISWAL or Hyatt India does not appear to be getting analysed or analysed adequately.

The SOSA suggested that HISWAL had significant control over the formulation and implementation of strategies, policies, operations etc of the hotel. It may be possible to exercise such control remotely if Hyatt India, the Indian entity contracted to get involved in day to day functioning of the hotel under HOSA, strictly adheres to the instructions of HISWAL. However, the role played by Hyatt India does not seem to be adequately getting examined. The High Court order observes that HOSA was not even there on records.  The revenue structure may suggest an active commercial involvement, but that may not automatically lead to presumption of physical presence.

Be it as it may, what can be asserted from the Supreme Court judgment is that fixed place PE will be constituted in such fact pattern and this may be like restating the obvious.

Other business activities from the hotel premises

Para 92 and 93 of the High Court order dealing with this issue are reproduced:

“The Assessee is correct in its submission that there is no provision in the SOSA, which entitled the Assessee to carry on any activity or business in respect of any other hotel from the premises of the Hotel. However, there is no specific bar that proscribed the Assessee's employees from making decisions or issuing policies in respect of management of other hotel while they were stationed or visiting the Hotel Premises in connection with rendering services under the SOSA. Since the Hotel premises were at the disposal of the Assessee in respect of its business activities, we find no infirmity with the Arbitral Tribunal's decision holding that an Assessee had a PE in India in the form of a fixed place through which it carried on its business.

Given the nature of the Assessee's business, it is difficult to accept that the Assessee's senior employees deputed in India would completely be insulated from addressing the issues of other hotels under the management of the Hyatt Group, while they were at the Hotel. “

Whether the hotel premises of AHL was actually utilised for other business purposes does not seem to be actually examined and if that’s the case, the judicial authorities have decided the issue based on assumed facts!

Deputation of employees

While the text of the judgments takes note of deputation of employees by HISWAL or its affiliates, there is no discussion about under whose supervision and control these deputed employees operated.

International language, global standards and domestic tests!

“Fixed place of business” is an internationally recognised concept under the tax treaties and is also backed by robust Commentaries of OECD and United Nations.  The Indian representatives play active roles in both the forums. The views of the Indian authorities on the OECD Commentary on Model Convention are well documented.

The judgment of the Supreme Court extensively refers to the OECD Commentary but then also refers to the three tests of “stability, productivity and dependence”.  The Supreme Court has noted satisfaction of “stability, productivity and dependence” tests referred to by the court in the earlier decision of Formula One. Interestingly, there is nothing in the OECD Commentary on Article 5(1) which suggests that “stability” is one of the tests for determination of Article 5(1) PE. As regards “productivity”, it may be possible to read the Commentary to mean that “productivity” is not relevant for Article 5(1) but absence thereof may perhaps suggest application of Article 5(4). Similarly, “dependence” is not a test for fixed place but it is relevant for Agency PE. Additionally, what constitutes “stability, productivity and dependence” itself may also be open to subjective interpretations.

The above para does not suggest that OECD Commentary is binding on the courts.

The court may have used certain tests in the context of facts of one case but applying these tests in the context of all the cases involved Article 5(1) may not give desirable results. Especially when such tests are not internationally recognised. Most MNEs may ordinarily refer to the existing settled standards for PE determination at the time of structuring and emergence of new tests and parameters at a subsequent stage may create uncertainties. Such tests may be a means to an end (ie. Interpretation of “fixed place of business”), however at may happen that due to frequent usage such tests may become an end in itself.

Somewhere in 1980s, in the case of Vishakhapattanam Port Trusts case the Andhra Pradesh high court used the words “virtual projection” i.e.  It should be of such a nature that it would amount to a virtual projection of the foreign enterprise of one country into the soil of another country.”. Fortunately, based on this, a PE does not seem to have been alleged where business is often conducted using Zoom or Teams call where an individual participating from outside India participates “virtually”! With advancement of technology the words “virtual projection” may have another meaning.

The minority judge in the case of Nokia Networks OY v. JCIT [TS-7166-ITAT-2018(Delhi)-O] introduced the concept of “alter ego” for PE determination. Its not sure whether the alter ego concept is subsequently utilized for PE determination. 

Judicial PE tests – Concept akin to judicial GAAR?

Until recently, the Indian tax law did not have codified GAAR provisions and that may have justified existence of judicial GAAR (anti-abuse rules based on judicial precedents) for long. The parameters set by the judicial authorities for determination of Article 5(1) PE can be said to be “judicial PE standards” on the lines of judicial GAAR.

Conclusion

With the advancement of technology, one may be tempted to say that the concept of Permanent Establishment has become outdated. However, interesting interpretations of Article 5(1) continue to emerge even for the brick-and-mortar economy. In addition to the set international standards, one also must be careful about the emerging domestic tests / characteristics for PE determination.

[1] [TS-954-SC-2025]