In a culmination of a long-drawn litigation, the recent Apex Court ruling proved to be a crowing blow for Hyatt International Southwest Asia Ltd. (Hyatt UAE) wherein it held that business activities undertaken by the Hyatt UAE for the branded hotels in India constituted a Fixed Place permanent establishment (PE) in India. SC ruling proved to be a capper in determination of a Fixed Place PE in India wherein it upheld the principle of intrinsic value over external characterization of transactions/structures.

Against this backdrop, Mr. Dhiren Shah (Senior Vice President, Tax, Adani Group), Mr. Rohit Sharma (General Manager) and Mrs. Bhagyashree Mehta (Associate Manager), while examining the landmark ruling delivered by SC, unravel the evolving contours of the concept of Fixed Place PE. The Authors inter alia highlight that this ruling has made abundantly clear that substance over form is of critical importance and a read-through approach must be adopted to decipher contractual agreements to evaluate actual operational activities undertaken by the foreign entities for determining PE status. While signing off, they quip, “Revenue Authority’s approach to re-open assessments for foreign entities (having substantial operational activities in India) in view of this SC ruling needs to be awaited.”

“Deciphering Fixed Place PE Concept in Light of SC’s Dictum in Hyatt International”

In a culmination of a long-drawn litigation, the recent Hon’ble Supreme Court (‘SC’) [TS-954-SC-2025] ruling proved to be a crowing blow for Hyatt International Southwest Asia Ltd. (‘Hyatt UAE’) wherein it held that business activities undertaken by the Hyatt UAE for the branded hotels in India constituted a Fixed Place permanent establishment (‘PE’) in India. SC ruling proved to be a capper in determination of a Fixed Place PE in India wherein it upheld the principle of intrinsic value over external characterization of transactions/structures.

This verdict is expected to give a shot in the arm of the Indian Revenue Authorities to re-look PE presence of foreign entities with significant operational involvement in Indian operations and/or advisory/consultancy services being rendered by the foreign entities coupled with other support functions.

Case facts in brief:   

During FY09, Hyatt UAE, a UAE tax resident, entered into two long-term Strategic Oversight Services Agreement (‘SOSA’) with the Asian Hotels Limited (‘AHL’), an Indian hotel owner, to render strategic planning services and ‘know-how’ to develop and operate Hyatt branded hotels (based in Delhi and Mumbai).

The Assessing Officer (‘AO’) held that Hyatt UAE activities constituted a business connection u/s 9(1)(i) of the Indian Income Tax Act, 1961 (‘IT Act’) and a PE under Article 5 of India-UAE tax treaty. The AO order was subsequently upheld by the Dispute Resolution Panel (‘DRP’) and the Delhi Tribunal as well. Following a subsequent appeal by the Hyatt UAE, the Delhi High Court (‘HC’) determined that a fixed place PE of Hyatt UAE exists, citing relevant SOSA clauses. The HC found that Hyatt UAE role was not confined to high-level decision making but extended to substantive operational control and implementation.

The question of law before the SC was determination of PE of Hyatt UAE (in the form of a fixed place) in India under India-UAE tax treaty.

Key arguments of Tax Payer (i.e., Hyatt UAE) defending absence of fixed place PE in India before the Hon’ble Delhi HC and SC:

Arguments put forth by the Senior Counsel of Hyatt UAE to defend absence of fixed place PE were:

• Hyatt UAE only provided hotel consultancy and advisory services from Dubai and its role is limited to strategic guidance, brand compliance and long-term planning;

• No obligations for Hyatt UAE to send or station their employees in India – SOSA only permits occasional and temporary visits by its employees in India (at the discretion of the Hyatt UAE);

• Temporary visit of employees of Hyatt UAE in India did not exceed threshold of 9 months, prescribed under Article 5(2) of India-UAE tax treaty;

• Day-to-day operations of the hotels were carried out by its Indian subsidiary company named - Hyatt India Pvt. Ltd. under Hotel Operating Services Agreement (‘HOSA’);

• Reliance by Hon’ble Delhi HC on SC ruling in Formula One [TS-5102-SC-2017-O]  and E-Funds IT Solutions Inc[1] [TS-5212-SC-2017-O] is misplaced – which provides that for a fixed place PE, there must be specific, fixed and identifiable physical location in India and availability of such place for carrying out its business activities.

• In the given facts and circumstances, no such specific place was demarcated for Hyatt UAE and its personnels in any of the hotels; and

• No control over any hotel premises – ownership and operation control of hotels remained entirely with the Indian entity (i.e., AHL).  

SC’s Observations:

The SC examined the roles and responsibilities of Hyatt UAE basis SOSA clauses (mentioned below) and concludes with an epilogue that Hyatt UAE exercised pervasive and enforceable control over hotel’s strategic, operational and financial aspects of hotels:

• Ability to appoint General Manager and other key personnels;

Control pricing, branding and marketing strategies;

• Manage operational bank accounts;

• Assign personnels to the hotel without requirement of owner’s consent;

• Obligation of Hotel owners to sign ‘Non-disturbance and attornment agreement’ with the • Lender in case of borrowings availed – to ensure Hyatt UAE rights are not adversely affected;

In view of the above relevant SOSA clauses, SC held that activities undertaken by the Hyatt UAE constituted a fixed place PE in India and made following critical observations:

• The SC ratio in Formula One ruling i.e., test of stability, productivity and dependence being met by Hyatt UAE;

• Stability – SOSA tenure being 20 years plus further extendable for 10 years;

• Productivity – Variable payouts for Hyatt UAE basis hotel’s performance;

• Dependence – Reliance on hotel infrastructure & staff by Hyatt UAE to perform its activities;

• Reaffirmed SC ruling in Formula One that exclusive legal ownership or occupation of premises are not necessary to establish a fixed place PE. Even shared or temporary access to a fixed place utilized for business activities would be sufficient.

• Premises were at the disposal of Hyatt UAE personnels.

• Presence of a Subsidiary entity in India (to oversee day-to-day hotel operations) will not be sufficient ground to negate PE presence, as substance of entire commercial arrangement is critical to evaluate (over its legal form) PE presence.

° Hyatt UAE’s control, strategic decision-making and influence exercised over hotel is critical to assess conduct of Hyatt UAE’s business via hotel premises;

• SC emphasized that once a fixed place PE is established, intermittent employee presence becomes immaterial, effectively making the service PE test redundant.

° Short duration of individual employee presence in India is not to be seen on an isolated basis – continuity of business operation in aggregate is relevant;                 

• Establishment of clear and continuous commercial nexus and control with the hotel’s core function.

° Hyatt UAE’s ability to enforce compliance, overseas operations and derive variable fees from the hotel’s demonstrates that functions being performed is not auxiliary in nature to fall outside the ambit of Article 5 of the India-UAE tax treaty.

°Distinguished facts of SC ruling in case of E-Funds IT Solutions Inc with Hyatt UAE to state that E-funds was primarily rendering back-office support services vis-à-vis core business operations.

• Concurs with larger bench ruling of Hon’ble Delhi HC (in the same matter) that attribution of profits to PE is based on business presence and global profitability of the enterprise is of no relevance and hence, profits attributed to PE would be taxed irrespective of losses at global level of the foreign enterprises;

Conclusion:

This SC ruling has made abundantly clear that substance over form is of critical importance and a read-through approach must be adopted to decipher contractual agreements to evaluate actual operational activities undertaken by the foreign entities for determining PE status.

Foreign entities (having substantial operational activities in India) would need to go to the drawing board and re-assess their business and operational structures in India coupled with review of documentation sets to ensure that commercial intent, actual operations and documentation are synonymous.

Revenue Authority’s approach to re-open assessments for foreign entities (having substantial operational activities in India) in view of this SC ruling needs to be awaited.

[1] [TS-5212-SC-2017-O]