Foreign companies with permanent establishment taxable in India: Supreme Court
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Time of India
2 days ago
- Time of India
Substance vs form: All eyes now on Tiger Global case after SC's verdict on global hospitality leader Hyatt International
Mumbai: After the Supreme Court verdict last week on the global hospitality leader Hyatt International, all eyes are on the high-stake Tiger Global case , whose outcome, expected in August, could sway the fortunes of many foreign investors and force them to change the way they run their shops to bet on India. But, can the Hyatt ruling have a rub-off on the verdict on Tiger? With the same bench of judges that ruled on Hyatt to decide on Tiger-the question has cropped up among legal eagles, tax experts, and MNCs as the battle between Tiger, an offshore investor, and India's tax office nears a closure. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Villas For Sale in Dubai Might Surprise You Dubai villas | search ads Get Deals Undo The question stems from the court's observation that "legal form does not override economic substance". This single observation, according to several practitioners, may link the two cases, even though they pertain to different issues. THE COMMON LINK Live Events The Hyatt feud was over whether the foreign firm, acting as a consultant to an Indian hotel group, had a ' permanent establishment ' (PE) in India. The court-while observing that "legal form does not override economic substance" -said it did as Hyatt was not a typical consultant but was deeply involved in running the hotel in India, thanks to the terms of the deal. A 'PE' status means the foreign party would pay tax here on the portion of its global earnings attributable to India - and not just the tax deducted from its fees. The Tiger case, on the other hand, relates to 'capital gains' on sale of stocks - whether a Mauritius entity could escape tax in India merely on the back of the ' tax residency certificate ' (TRC) it obtained from the Mauritian authorities under the treaty the country has with India. Here is how the 'substance versus form' argument comes up: is TRC, a piece of paper, good enough to avoid tax by a shell entity which has no office, hires few or no employees, and has no power to make decisions? While the TRC gives it 'legal form', in reality, it may just be a paper outfit lacking 'substance'. "The Hon'ble SC regarded utmost importance to 'substance over form principle' and in doing so did a deep dive into the documents to ascertain 'control of operations', actual activities of employees and commercial agreements (like revenue linked service fees) in the Hyatt International matter. Substance over form , control and management and commercial substance are important factors that take centre stage even in treaty eligibility cases and a ruling in the case of Tiger Global is expected soon," said Ashish Mehta, partner at the law firm Khaitan & Co. A COURT REMINDS It's widely believed that armed with TRCs, many overseas private equity houses save tax on sale of shares (acquired before 2017) while foreign portfolio investors avoid tax on profits from equity derivatives as their investing arms are incorporated in treaty jurisdictions like Mauritius and Singapore. Many such arrangements would come unstuck, if the SC points at inadequate substance to rule against Tiger. "Recent rulings, from Formula One to Nestle SA to Hyatt International, demonstrate a consistent judicial approach: for any tax structure, the legal framework must align with the actual, factual substance of the arrangement. If not, the court may not grant tax relief in such cases," said Ashish Karundia, founder of the CA firm Ashish Karundia & Co. He feels that post Hyatt, chances are that non-residents may also be required to satisfy a 'substance' test in addition to holding a TRC when seeking treaty benefits. "Considering the greater scrutiny faced nowadays, it is essential to understand that the degree of reliability assigned to TRC is that of sufficient evidence rather than an irrebuttable evidence. It is sufficient, to begin with, but neither sacrosanct nor infallible!," said Karundia. The tax office had questioned Tiger Global's stand of not paying tax when it sold shares of Flipkart Singapore (holding shares of an Indian company) to another foreign investor (linked to Walmart) on the grounds that Tiger's Mauritius arm (the actual seller owning the Singapore entity) was only a vehicle used to avoid tax. Agreeing on the possibility of the court putting matters under the 'substance' lens, Rahul Garg, managing partner of Asire Consulting, which advises MNCs on tax, finance, assurance, and regulatory matters, said, "The court examined the commercial and operational realities to evaluate the degree of control and supervision by the foreign entity. It reiterated that legal form does not override economic substance. Since it's a fundamental requirement that tax treaties need to be availed in good faith, these observations could further support the Revenue's case if it can prove that the parent was an active participant with significant control and supervision in the decision making on investments by the entity which recorded the capital gains." It isn't the first time the court held substance over form. But that it chose to give a subtle reminder in the Hyatt ruling is lending itself to interpretation.
Hindustan Times
5 days ago
- Hindustan Times
Operational control enough to tax foreign firms in India, says SC
The Supreme Court on Thursday held that a multinational company may be taxed in India so long as it exercises significant operational control over such premises, even if it has no employees staying here for a period longer than the threshold typically used to assess whether the company is a so-called Permanent Establishment. Operational control enough to tax foreign firms in India, says SC The ruling , which has significant implications for MNCs operating in India, came as a setback to Dubai-based Hyatt International Southwest Asia Ltd, which had challenged its tax liability in India for advisory and management services rendered to Hyatt hotels across the country between 2009 and 2018. A bench of justices JB Pardiwala and R Mahadevan affirmed a 2023 Delhi High Court judgment that recognised Hyatt's presence in India as a Permanent Establishment (PE) under Article 5(1) of the India-UAE Double Taxation Avoidance Agreement (DTAA). The court concluded that Hyatt's active control over the day-to-day hotel operations in India through long-standing agreements established a fixed place PE, making it liable to pay tax in India. Typically, only branch offices, factories, mines etc are considered PEs, although there is also a stipulation related to the time employees spend in India. At the centre of this case was a Services and Operating Services Agreement (SOSA) signed by Hyatt with hotel owners in India, under which the Dubai-based entity provided hotel advisory and consultancy services. Hyatt contended that it operated solely from Dubai, was not obliged to station staff in India, and only permitted occasional visits by its personnel to Indian hotels. It further argued that the SOSA contained no clause allowing it to conduct business from within the hotels, nor did it maintain any office or branch in India. But the top court rejected these submissions, holding that the 'disposal test' for identifying a PE did not require exclusive possession or formal rights over premises, but a fact-specific inquiry into the foreign enterprise's ability to conduct core business functions from the premises. 'The appellant's contention that the absence of an exclusive or designated physical space within the hotel precludes the existence of a PE, is misconceived, said the court, relying on its earlier precedent in Formula One World Championship Ltd ()2017. 'Temporary or shared use of space is sufficient, provided business is carried on through that space,' it added. In this case, the bench found that Hyatt exercised 'pervasive and enforceable control' over the hotel's strategic, operational, and financial aspects. This included the authority to appoint and supervise key personnel, implement HR and procurement policies, control pricing and branding, operate bank accounts, and assign staff to the hotel without the owner's approval. 'These rights go well beyond mere consultancy and indicate that the appellant was an active participant in the core operational activities of the hotel,' said the court, noting that Hyatt's control extended to everyday affairs and not just high-level decisions. Amit Baid, Head of Tax at BTG Advaya law firm, said that the ruling could set a precedent for PE determinations in cases involving frequent employee travel to India. 'The judgment provides a clear conceptual framework for determining PE thresholds -- frequent, regular visits by employees, rather than the duration of individual stays, is the key factor. Once continuity of business presence is established, the return or rotation of individuals becomes irrelevant; and operational control, oversight, and income linked to core functions establish a commercial nexus necessary for a PE,' Baid added. The judgment meanwhile stressed that the 20-year duration of the agreements, combined with continuous and structured involvement of Hyatt's executives in India, satisfied the three-pronged test of stability, productivity, and dependence that governs the recognition of a PE. Further, the court ruled that even though no single Hyatt employee exceeded the 9-month threshold under Article 5(2)(i) of the DTAA, the aggregate and continuous presence of various employees, verified through travel logs and operational duties, fulfilled the requirement of a PE. The court clarified that the legal form of presence is secondary to the economic substance of business functions being carried out in India. 'The appellant's ability to enforce compliance, oversee operations, and derive profit-linked fees from the hotel's earnings demonstrates a clear and continuous commercial nexus and control with the hotel's core functions,' the bench said, calling the hotel premises the 'situs of the appellant's primary business operations.' Importantly, the Supreme Court clarified that under the India–UAE Direct Taxation Avoidance Agreement, the lack of a specific article allowing taxation of Fees for Technical Services (FTS) would not override the existence of a PE under Article 5(1), particularly where core business functions are carried out through a fixed place.
Deccan Herald
5 days ago
- Deccan Herald
Foreign companies with permanent establishment taxable in India: Supreme Court
A bench of Justices J B Pardiwala and R Mahadevan dismissed the appeals by Hyatt International Southwest Asia Ltd, while affirming the findings of the Delhi HC that Hyatt had a fixed place PE in India within the meaning of Article 5(1) of the DTAA (Double Tax Avoidance Agreement).
