03 Nov 2025
The Supreme Court has reaffirmed that pervasive and enforceable control over operations by a foreign entity can result in the existence of a Fixed Place Permanent Establishment in India, even without exclusive legal rights over premises. This ruling underscores the critical importance of substance-over-form in drafting strategic, management, or franchise agreements to mitigate permanent establishment risk.
Partner: Komal Dani, Associate: U Shreyas
The Supreme Court1 has upheld the decision of the Delhi High Court2 in the case of Hyatt International Southwest Asia Ltd. (Hyatt International), confirming the existence of a Fixed Place Permanent Establishment (PE) in India under Article 5(1) of the India–UAE Double Taxation Avoidance Agreement (DTAA). This decision reaffirms key principles around the determination of a PE3 and the interplay between legal form and economic substance in cross-border arrangements.
Hyatt International, a company incorporated in Dubai and a tax resident of the UAE, had entered into two Strategic Oversight Services Agreements (Oversight Agreement) with Asian Hotels Limited, India (AHL), one each for its Delhi and Mumbai properties. These agreements were designed to provide strategic planning and brand oversight to ensure the hotels were developed and operated on high-quality standards and are internationally competitive. The Oversight Agreement had a term of 20 years, extendable by ten more years. It required the hotel operations to align with the global standards of Hyatt International. Moreover, it granted Hyatt International the authority to formulate policies governing human resources (appointment and training), procurement, guest admittance, use of premises, procurement, pricing, sales, marketing, reservations, and manage hotel operating bank accounts. Hyatt International could assign its own employees (or from affiliates) to the hotel in India without the need for prior approval from the hotel owner or management. However, the strategic fees payable to Hyatt International were variable, calculated as a percentage of room revenue and other income generated from the hotel’s operations.
In parallel, AHL entered into a Hotel Operating Services Agreement (Operating Agreement) with Hyatt India Pvt. Ltd. (Hyatt India), which was responsible for the day-to-day management and operational assistance at the hotels. 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 International’s employees. Hyatt International filed nil returns in India, taking the position that its income was not taxable in India as it did not have a PE. The limited presence of its employees in India did not exceed the threshold under Article 5(2)(i) of the applicable DTAA, as they visited India for less than nine months within any twelve-month period and, therefore, did not constitute a service PE.
The Assessing Officer (AO) contended that strategic fees received by Hyatt International from AHL constituted royalty under section 9(1)(vi) of the Income-tax Act, 1961 (IT Act) and Article 12 of the DTAA. The Indian tax authorities further determined that Hyatt International had a fixed place PE in India under Article 5(1) of the DTAA due to various factors, including pervasive control over operations and human resources, continuous and functional presence in India, and revenue-linked compensation.
Hyatt International contended before the Dispute Resolution Panel (DRP) that such fees should not be regarded as royalties under the IT Act and DTAA. Further, it did not have a PE in India as it did not have legal control over the hotel premises owned by AHL, and therefore, no income is subject to tax in India. The DRP did not accept this contention and upheld the draft assessment order passed by the AO, against which Hyatt International preferred an appeal before the Income Tax Appellate Tribunal (ITAT).
The ITAT considered whether Hyatt International had a PE in India under Article 5(1) of the DTAA. By a common order, it rejected the appellant’s contention that it did not have a PE in India and dismissed the appeals. The ITAT also upheld that the receipts constituted royalty, and the income shall be computed as per section 44DA of the IT Act (royalties and fees for technical services for non-residents).4
Aggrieved by the order of the ITAT, Hyatt International filed an appeal before the Division Bench of the Delhi High Court, which ruled that fees received by Hyatt International did not constitute royalty under the IT Act or the DTAA as the oversight services provided were not in relation to any right, process, or trademark. However, it agreed with the ITAT that Hyatt International had a PE in India. The Delhi High Court referred the question on attribution of profits to the PE in India, where there is a loss at the global level, to a larger bench. The Full Bench of the Delhi High Court subsequently held that profits are attributable to a PE based on a separate entity approach, considering the functions performed, assets employed, and risk assumed by the PE, irrespective of the fact that the entity has sustained a loss at a global level.
Following these decisions, Hyatt International filed an appeal before the Supreme Court challenging the High Court’s finding on the existence of a fixed place PE under Article 5(1) of the DTAA. The question of profit attribution was not a substantive question of law raised by either party, nor was it framed by the Supreme Court for its determination in this matter.
The Supreme Court conducted a detailed review of the Oversight Agreement between Hyatt International and AHL as well as its implementation in India, including the manner in which Hyatt International exercised pervasive and enforceable control over the hotel’s operations. It held as follows:
Central tests for PE: Power of disposal and functional integration
The Supreme Court directly relied on and applied the principles laid out in Formula One, which clarified that for a fixed place PE of an enterprise to exist under Article 5(1) of a DTAA, two essential conditions must be met:
i. The place must be at the disposal of the enterprise; and
ii. The business must be carried on through that place.
Formula One emphasised that exclusivity is not necessary and shared or temporary use of a space can suffice, provided the enterprise has a sufficient degree of control and can conduct its business activities from that place. The PE must exhibit the attributes of stability, productivity, and dependence.
The broad rights given to Hyatt International covering personnel, operational control, branding, and the right to assign staff and control major commercial functions aligned with the Formula One criteria for what constitutes a PE. The Supreme Court accordingly concluded that Hyatt International had a fixed place PE in India.
Degree of control depends on the nature of the business; no formal legal right required
The Oversight Agreement explicitly authorised Hyatt International to appoint and supervise key personnel and staff, govern human resource and procurement policies, manage operational bank accounts, and station its employees or its affiliates’ employees at the hotel without needing approval from the hotel owner.
The Supreme Court observed that these rights extended Hyatt International’s role beyond mere consultancy to that of an active, ongoing participant in the core operational activities of the hotel. This degree of control was essential to the conclusion that Hyatt International had a fixed place PE in India. The Court reaffirmed the principle from Formula One that the test is not whether a formal right of use is granted, but whether, in substance, the premises were at the disposal of the enterprise for conducting its core business functions.
Activities of Hyatt International not preparatory or auxiliary in nature
The judgment emphasised that Hyatt International’s involvement was not limited to policy-level advice. It had enduring and enforceable rights to implement policies and ensure compliance in all key aspects of hotel management. The Supreme Court characterised this as substantive operational control and implementation, not limited to high-level decision-making.
The Court observed that Oversight Agreement was structured to last twenty years (optionally extendable), with Hyatt International’s control and involvement present throughout. It held that this long duration, coupled with ongoing operational responsibilities, demonstrated that the control was stable, productive, and dependent and will constitute a PE.
Emphasis on substance over form
Hyatt International had contended that daily operations were handled by Hyatt India under the Operating Agreement, implying it had no operational role in India. The Supreme Court rejected this, affirming that economic substance overrides legal form in PE determination. Hyatt International’s strategic and operational involvement in the human resource, procurement, marketing functions, etc., clearly demonstrated that business was being conducted from the hotel premises.
Risk of PE characterisation in service and franchise arrangements
The ruling clarifies that multinational enterprises entering long-term strategic, management, or franchise agreements that retain control over the operations may be exposed to PE risks, even absent exclusive office space or formal rights of use.
To mitigate this risk, service and franchise agreements must be carefully drafted to allocate control and responsibilities in a manner that does not portray excessive control over Indian operations.
Profit attribution remains an open issue
The Supreme Court merely reproduced the observations of the Delhi High Court Full Bench5 regarding how profits are attributable to a PE, even amidst a global loss. However, it did not endorse these observations as a definitive ruling, primarily because the issue of profit attribution in a global loss scenario was not a question of law presented before it. Consequently, the Court did not decide whether profits can be attributed to an Indian PE when the entity has suffered an overall global loss, nor did it address the specific quantum of profits attributable to the PE. This matter remains unsettled, and cases with complex functions, assets and risk profiles may still undergo further litigation.
In this context, it is relevant to note that under the Additional Guidance on the Attribution of Profits to Permanent Establishments (BEPS Action 7), the profit attribution is determined by treating the PE as a hypothetical, separate and independent enterprise, performing functions, assuming risks, and owning assets as if it were a distinct entity. Applying this approach, one possible view is that the fees earned by the overseas entity from the Indian entity in exchange for operating services rendered may be treated as profits attributable to the Indian PE and taxed accordingly.
Need for early risk assessment
Entities operating under similar business models should review their arrangements and, if necessary, consider redrafting or modifying the agreements. Any such revisions must be synchronised with transfer pricing provisions.
Standard operating procedures (SOP) must also be put in place outlining pre-agreed, standardised terms and processes.
This ruling is significant as it applies the substance over form test for PE determination. It establishes that long-term strategic agreements retaining control over day-to-day operations, coupled with revenue-linked fees and functional oversight, may be sufficient to trigger a Fixed Place PE, even without an exclusive office or formal right of use. Multinational enterprises entering long-term strategic service or management agreements, particularly where control over day-to-day operations is retained, must carefully evaluate whether such arrangements create a PE risk in India.
In the absence of the Supreme Court’s examination of the quantum of profit attribution, a cautious approach may be considered. Indian rules permit the option of applying the arm’s length standard, besides the traditional taxable profit apportion approach using a specified formula, to determine the profits attributable to a PE. In cases like Hyatt International, where the functions, assets and risks of the PE may itself be subject to debate, profit attribution may lead to another round of litigation. Accordingly, to assess the PE risk fully, profit attribution would also have to be undertaken by the companies to determine the extent of restructuring that may be warranted.
[1] 478 ITR 238 / C.A. No 9766 of 2025
[2] 464 ITR 508
[3] Articulated by the Supreme Court in Formula One World Championship Limited v CIT, International Taxation, 394 ITR 80 / [2017] 80 taxmann.com 347 (SC)
[4] ITA No. 579/Del/2013
[5] 472 ITR 53
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