In a significant ruling on July 24, the Supreme Court ruled that, even in cases where a foreign corporation does not have exclusive possession of the office space, it may still be required to pay income tax in India if it operates through a PE. Hyatt International Southwest Asia Ltd. appealed this ruling, but the Delhi High Court’s ruling was upheld when the appeal was denied.
According to Indian tax law, a PE can be created by the temporary and/or concurrent use of business premises with substantive operational control, as explained by the Supreme Court bench made up of Justices J.B. Pardiwala and R. Mahadevan. For international businesses operating in India under management or service agreements, this sets a significant precedent on the subject.
Context of the Case: Strategic Oversight Agreements with Hyatt
• Asian properties Ltd., an Indian company that owns and runs Hyatt-Branded properties in India, and Hyatt International have inked Strategic Oversight Services Agreements (SOSA). on the course of these 20-year agreements, Hyatt was able to exert significant control on hotel operations.
• According to Hyatt’s reasoning, it requested that its status under Indian tax law and the India-UAE DTAA not be that of a PE because it lacked the exclusive right or control over an office, a permanent workforce, and a fixed place of business in India.
It was contested by the Court.
• The Court’s Remark: Substantive Control, Beyond Advisory Role
The Supreme Court also emphasized the scope of Hyatt’s operational and administrative control over the hotel operations in India by ruling that the company’s role was anything but advisory. The author of the decision, Justice Mahadevan, concluded that Hyatt had a perpetual and enforceable right under the SOSA to enforce its international standards and manage every facet of the hotels’ operations.
• The Court stated, “It is clear from the contractual stipulations described above that the appellant’s involvement was not limited to merely policy drafting.” “It is evident that the appellant’s level of control and supervision goes beyond a purely advising role and is consistent with the requirements for a Fixed Place PE under Article 5(1) of the India–UAE DTAA.”
Hyatt’s claim that there are no physical premises is refuted
• Hyatt had argued that PE could not exist without exclusive or permanent physical space in the hotel; in other words, it did not conduct “business” on the property and had very little influence over strategic decision-making and policy enforcement.
• Based primarily on the precedent established in Formula One World Championship Ltd. v. Commissioner of Income Tax (2017) 15 SCC 602, which found that exclusive possession of premises is not a requirement to constitute a PE, the Court rejected the claim and declined to accept it.
• “This Court clearly held that exclusive possession is not needed in Formula One, and temporary or shared use of space is adequate, provided commerce is carried on through that area,” the ruling stated.
Activity Type Affecting Tax Liability
• The presence of PE is tied to the type and volume of business operations carried out through the premises, not to ownership or tenancy, the law court emphasized.
• Hyatt was described as having a core and vital operational presence due to its ongoing control, administration, enforcement of policies, and agreements surrounding income sharing. The Court observed that these operations were essential to the smooth operation and financial success of the Indian hotel industry, not just ancillary.
• “The Court further stated and clarified that it could not be said that the appellant was merely performing ‘auxiliary’ functions due to the nature of the functions they carried out,” adding that “the functions performed were essential, continuous, and all in conformity with the elements for PE.”
Importance of the Decision
• This historic decision upholds the fundamental rule that foreign companies cannot evade Indian taxes by drafting contracts that do not result in the actual possession of property in India. A foreign corporation will be considered to have a permanent establishment and subject to taxes if it significantly and consistently controls business operations conducted in India, even from shared or temporary premises.
• Multinational corporations and international service providers operating in India as managers, franchisees, or technical service providers are likely to be impacted by the verdict and will need to reevaluate their risk assessments and tax arrangements.
According to the Court, Hyatt had a direct and ongoing business relationship with the hotel’s primary duties, which included monitoring daily operations, prosecuting rights violations, and collecting fees for services rendered that were tied to the hotel’s revenue in accordance with Article 5(1) of the DTAA.
“The High Court was correct to rule that the appellant’s involvement went beyond high-level approval. According to the Supreme Court, “there was pretty comprehensive substantive operational control and implementation involved.”
In light of this, the Court granted Hyatt International Southwest Asia Ltd.’s appeal, overturning the High Court’s ruling that the foreign company was liable for income tax in India for profits from operations conducted through Indian facilities.
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