Hyatt faces India tax blow as Supreme Court confirms ‘Permanent Establishment' status

Mint

5 days ago

In a crucial ruling with broad implications on how multinational companies are taxed in India, the Supreme Court on Thursday held that UAE-based Hyatt International Southwest Asia, which provides hotel advisory services in India, has a taxable Permanent Establishment (PE) in the country.
A bench comprising Justices J.B. Pardiwala and R. Mahadevan upheld Delhi High Court's earlier decision, which had ruled that Hyatt's Indian PE must be treated as a distinct taxable entity.
The judgment is significant as it clarifies that multinational companies can be taxed in India if they exercise substantial operational control here, even without long-term employee presence. The court held that a PE should be treated as a separate taxable entity, meaning India can tax profits attributable to the PE even if the foreign parent company incurs overall global losses.
The apex court noted that Hyatt's executives and employees made frequent and regular visits to India to supervise operations and implement business decisions.
While no single employee stayed beyond the nine-month threshold under Article 5(2)(i) of the India-UAE Double Taxation Avoidance Agreement (DTAA), the assessing officer's findings proved a continuous and coordinated business presence.
Hyatt had approached the Supreme Court challenging the September 2024 Delhi High Court Full Bench judgment, which had held that Hyatt's Indian PE was taxable regardless of the company's global profitability.
The top court agreed with the High Court's conclusion that Hyatt's role extended beyond high-level decision-making to substantial operational control and implementation in India. Its ability to enforce compliance, oversee hotel operations, and earn profits linked to hotel revenues established a clear and continuous commercial nexus with its Indian operations, satisfying the fixed place PE conditions under the DTAA.
Hyatt had argued that under Article 7 of the India-UAE DTAA, India could tax the PE's profits only if the foreign enterprise as a whole was profitable.
However, tax authorities maintained that the PE should be assessed as a separate and independent entity, regardless of the parent company's global financial performance.
'The judgment provides a clear conceptual framework for determining PE thresholds—frequent, regular visits by employees, rather than the duration of individual stays, are the key factor. Once continuity of business presence is established, the return or rotation of individuals becomes irrelevant. Operational control, oversight, and income linked to core functions establish the commercial nexus necessary for a PE. This ruling could set a precedent for PE determinations in cases involving frequent employee travel to India,' said Amit Baid, head of tax at BTG Advaya, a disputes and transactional law firm.
Under Double Taxation Avoidance Agreements (DTAAs), a Permanent Establishment (PE) is a fixed place of business, such as a branch, office, factory, or dependent agent, through which a foreign company operates in another country.
Article 5 of the India-UAE DTAA defines what constitutes a PE, including fixed place PE, agency PE, and service PE.
Having a PE in India gives Indian tax authorities the right to tax profits attributable to that PE, treating it like a local entity, irrespective of the parent company's global results. Article 7 allows India to tax only the profits linked to the PE's activities, calculated as if it were an independent enterprise. Foreign enterprises without a PE in India are not taxed here on business profits.
The Hyatt PE taxation case originated when Indian tax authorities assessed that Hyatt had enough presence in India to be taxed, as its executives frequently visited and controlled hotel operations, despite no single employee staying long-term. These assessments dated back to 2011 onwards.
Hyatt challenged the findings in the Delhi High Court in 2020, arguing that under the tax treaty, India could tax the PE only if the global enterprise was profitable.
In January 2023, a Division Bench of the High Court referred the matter to a Full Bench for deeper examination.
In September 2024, the Full Bench ruled that Hyatt did have a PE in India because of its continuous operational involvement and held that the PE should be taxed as a separate entity. Hyatt then appealed to the Supreme Court, leading to Thursday's ruling.