Case Law (SC) – Profit attribution to a PE in India is permissible even if the overall foreign enterprise has incurred losses. It is well established that legal form does not override economic substance in determining PE status. Once it is found that there is continuity in the business operations, the intermittent presence or return of a particular employee becomes immaterial and insignificant in determining the existence of a permanent establishment (PE). Under Article 5(2)(i) of the DTAA, the relevant consideration is the continuity of business presence in aggregate – not the length of stay of each individual employee. even though no single individual exceeded the 9-month stay threshold. Further, the extent of control, strategic decision-making, and influence exercised by the appellant clearly establish that business was carried on through the hotel premises, satisfying the conditions under Article 5(1).

 

HYATT INTERNATIONAL SOUTHWEST ASIA LTD. v. ADIT [2025 INSC 891] dated 24.07.2025.

Issue before Court is: -

“Whether the appellant – Hyatt International Southwest Asia Ltd., a tax resident of the UAE, has a Permanent Establishment (PE) in India under Article 5(1) of the Indo – UAE Double Taxation Avoidance Agreement (DTAA), and consequently, whether its income derived under the Strategic Oversight Services Agreement (SOSA) is taxable in India”

Decision: -

“17. 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. 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. The actual role of the appellant is not just advisory in nature but extends to various other administrative roles. In this case, the 20-year duration of the SOSA, coupled with the appellant’s continuous and functional presence, satisfies the tests of stability, productivity and dependence. From the nature of functions carried out by the appellant, it cannot be said that they were performing merely “auxiliary” functions. Rather, the functions performed by the appellant, through its staff operating from the hotel premises, were not just limited for setting up a pattern of activities for the hotel, but were core and essential functions, clearly establishing their control over the day to-day operations of the hotel. Moreover, they were to be continuously performed over a period of twenty years, under an agreement that included revenue sharing. Therefore, the hotel premises clearly satisfy the criteria required to be classified as a “fixed place of business” or PE.

18. The argument that the absence of a specific clause in the SOSA permitting the conduct of business from the hotel premises negates the existence of a PE is also without merit. As held in Formula One, 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 and were used for conducting its core business functions.

19. The appellant’s further submission that daily operations were handled by Hyatt India Pvt Ltd., a separate legal entity, does not decisively support its case. It is well established that legal form does not override economic substance in determining PE status. The extent of control, strategic decision-making, and influence exercised by the appellant clearly establish that business was carried on through the hotel premises, satisfying the conditions under Article 5(1).

20. Additionally, the reliance placed by the appellant on E-Funds is wholly misplaced. That decision is distinguishable on facts. In that case, the Indian subsidiary merely provided back-office support and was compensated on an arm’s length basis, with no involvement in core business functions. In contrast, in the present case, the hotel itself was the situs of the appellant’s primary business 34 operations, carried out under its direct supervision and aligned with its commercial interests.

21. It is undisputed that the appellant’s executives and employees made frequent and regular visits to India to oversee operations and implement the SOSA. The findings of the assessing officer, based on travel logs and job functions, establish continuous and coordinated engagement, even though no single individual exceeded the 9-month stay threshold. Under Article 5(2)(i) of the DTAA, the relevant consideration is the continuity of business presence in aggregate – not the length of stay of each individual employee. Once it is found that there is continuity in the business operations, the intermittent presence or return of a particular employee becomes immaterial and insignificant in determining the existence of a permanent establishment.

22. Accordingly, the High Court was correct in concluding that the appellant’s role was not confined to high-level decision making, but extended to substantive operational control and implementation. 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. This nexus satisfies the conditions necessary for the constitution of a Fixed Place Permanent Establishment under Article 5(1) of the India – UAE DTAA.

23. At this juncture, we also note the reference made to a Larger Bench of the Delhi High Court in Hyatt International Southwest Asia Ltd v. Additional Director of Income Tax, where it was held that profit attribution to a PE in India is permissible even if the overall foreign enterprise has incurred losses. Accordingly, the question no.(iv) referred was answered in the affirmative, reinforcing the principle that taxability is based on business presence and not the global profitability of the enterprise. The relevant paragraph is profitably reproduced below:

“66. On an overall consideration of the above, we come to the firm conclusion that the submission of global income being determinative of the question which stood referred, is wholly unsustainable. The activities of a permanent establishment are liable to be independently evaluated and ascertained in the light of the plain language in which article 7 stands couched. The fact that a permanent establishment is conceived to be an independent taxable entity cannot possibly be doubted or questioned. The wealth of authority referred to hereinabove clearly negates the contention to the contrary and which was commended for our consideration by the appellants. Bearing in mind the well-established rule of source which applies and informs the underlying theory of taxation, we find ourselves unable to countenance the submission of the source State being deprived of tis right to tax a permanent establishment or that right being dependent upon the overall and global financials of an entity. The Division Bench in these appeals rightly doubted the correctness of taxation being dependent upon profits or income being earned at the “entity level”. The decision of the Special Bench in Motorola Inc. v. Dy. CIT 2005 SCC OnLine ITAT 1 : (2005) 95 ITD 269 (Delhi) has clearly been misconstrued and it, in any case, cannot be viewed to be an authority for the proposition which was canvassed on behalf of the appellants. Article 7 cannot possibly be viewed as restricting the right of the source State to allocate or attribute income to the permanent establishment based on the global income or loss that may have been earned or incurred by a cross border entity.”

24. In view of the foregoing analysis, we affirm the findings of the High Court that the appellant has a fixed place PE in India within the meaning of Article 5(1) of the DTAA, and that, the income received under the SOSA is attributable to such PE and is therefore taxable in India.

25. We find no merit in the appeals. Accordingly, all the appeals are dismissed.”