On July 24, in a major pronouncement, the Supreme Court held that a foreign entity may be made liable to pay income tax in India if it is operating through a PE, even in the absence of exclusive possession of the office space. This judgment is in appeal by Hyatt International Southwest Asia Ltd., and it has dismissed the appeal, thus upholding the Delhi High Court decision.
The Supreme Court bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan clarified that temporary and/or concurrent use of business premises with substantive operational control is enough to constitute a PE under Indian tax law. This constitutes a big precedence on the matter for foreign companies engaged in India under management or service agreements.
Background of the Case: Hyatt’s Strategic Oversight Agreements
- Hyatt International had signed up Strategic Oversight Services Agreements (SOSA) with Asian Hotels Ltd., an Indian entity owning and operating Hyatt-Branded hotels in India. These agreements existed for a duration of 20 years, allowing Hyatt to exercise considerable control over hotel operations.
- According to the argument by Hyatt, it asked its status not to be that of a PE under Indian tax law or the India–UAE DTAA on the ground that Hyatt had no exclusive right to or control over a fixed place of business in India, an office, and a permanent set of staff.
The Court contradicted it.
Court’s Observation: Beyond Advisory Role, Substantive Control
- Further, the Supreme Court held that Hyatt's role was far from advisory, highlighting the extent of its operational and administrative control over the Indian hotel operations. Justice Mahadevan who authored the verdict had found that Hyatt had a continuing and enforceable right pursuant to the SOSA to impose its global standards and control all operational aspects of the hotels.
- “From the contractual provisions detailed above, it is evident that the appellant's role was not confined to mere policy formulation,” the Court said. “The degree of control and supervision exercised by the appellant clearly transcends a mere advisory capacity and aligns with the criteria for a Fixed Place PE under Article 5(1) of the India–UAE DTAA.”
Rejection of Hyatt’s Argument on Lack of Physical Premises
- Hyatt had contended that PE cannot arise without exclusive or permanent physical space in the hotel; in other words, it had only a very limited involvement in strategic decision-making and policy enforcement, and it did not conduct “business” within the premises.
- Rejecting the argument, the Court refused to accept it, relying largely upon the precedent set in Formula One World Championship Ltd. v. Commissioner of Income Tax (2017) 15 SCC 602, where it was held that exclusive possession of premises is not a prerequisite to constituting a PE.
- The judgment said, "In Formula One, this Court expressly held that exclusive possession is not essential, temporary or shared use of space is sufficient, provided business is carried on through that space."
Nature of Activities Determined Tax Liability
- Law Court stressed that existence of PE is not related to ownership or tenancy, but rather to the kind and extent of business activities conducted through the premises.
- Hyatt's continuous control, administration, enforcement of policies, and arrangements regarding the sharing of revenues characterized it as having a core and essential operational presence. The Court noted that these activities were not merely auxiliary, but central to the functioning and profitability of the Indian hotel operations.
- “The Court went on to say and clarify that on account of the nature of the functions carried out by the appellant it could not be said that they were merely performing ‘auxiliary’ functions,” adding that “rather, the functions performed were essential, continuous and all in conformity with the elements for PE.”
Significance of the Judgment
- This landmark ruling reiterates the principle that foreign entities cannot avoid Indian taxation simply because by structuring contracts, no formal possession of property took place there. If a foreign company meaningfully and continuously controls business activities carried on in India, even from shared or temporary premises, it will be deemed to be having a Permanent Establishment and be taxed for the same.
- The ruling is likely to impact multinationals and foreign service providers functioning as franchisees, managers, or technical service-providers in India, who would have to reconsider their tax structures and risk assessments.
The Court considered that Hyatt did have a direct and continuous commercial link with the core functions of the hotel-prosecution of compliance of the rights, supervision of daily operations, and the collection of fees for services rendered whose amounts were related to the income of the hotel-within the meaning of Article 5(1) of the DTAA.
“The High Court was indeed right in holding that the appellant's role was no mere approval at the highest level. There was rather full substantive operational control and implementation involved therein,” said the Supreme Court.
Therefore, the Court allowed the appeal of Hyatt International Southwest Asia Ltd., thereby reversing the decision of the High Court to the extent that the foreign Company is said to be liable for income-tax in India, in respect of income arising from the business carried on through Indian premises.
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