Permanent Establishment based on Strategic Control in India: Hyatt International

What is Permanent Establishment (PE) in India?

The concept of a PE is well defined in the Double Tax Avoidance Agreement (DTAA). Under Article 5 of the India DTAA, a foreign enterprise is considered to have a Permanent Establishment in India if any of the following apply:

1. It uses a fixed place of business in India like an office, branch, workshop, site of management, or similar facility that conducts its business wholly or partly.
2. It operates a construction or installation project in India that lasts more than nine months in total within any 12-month period.
3. It provides services (including consultancy) via its employees or personnel in India for more than nine months overall in any twelve-month period even if some of the work is done remotely.
4. It carries on business in India through an agent (who is not independent) such as someone authorised to regularly conclude contracts or secure orders on behalf of the company.

 
Some activities are explicitly excluded from creating a PE even if they involve premises in India. These include cases where the site is used only for storage, display, delivery, purchasing, or other preparatory or auxiliary functions. 
 

Whether a Fixed Place can be considered as PE without the physical presence

 
For a fixed place PE to exist, two conditions must be met:

• there must be fixed place of business, and
• through that place, the business of the enterprise must be wholly or partly carried on.

Foreign companies can be considered to have a PE in India even without a physical office,  based on their level of control and involvement in business operations within the country. That said, the determination of a Fixed Place PE goes beyond mere physical presence and depends on the nature of business activities and the degree of control exercised within India. Following are some key consideration to determine PE in India:

• Beyond Just Physical Space:- PE status can arise even without exclusive office space. Shared or temporary premises used for core business activities may suffice if control and continuity exist.
• The "Disposal Test":- An enterprise must have sufficient rights to use premises to conduct its operations. It’s not just legal title, it’s the ability to act through those premises that matters
• Control & Operational Presence Matter:- The Court highlighted that Hyatt’s contractual rights to appoint staff, set HR policy, monitor operations, manage finances, and derive profit related fees showed a direct, enforceable operational link with Indian hotels far beyond advisory services.
• Aggregate Presence vs. Individual Stays:- Even though individual executives never stayed longer than nine months, their continuous and coordinated presence in the country satisfied PE criteria.
• Taxation of PE Regardless of Global Losses:- The judgment confirmed that even if the parent company shows global losses, the Indian PE is treated as a separately taxable entity and can be taxed independently.

 

Implications of having PE in India

If a foreign enterprise is deemed to have a PE in India, then all tax compliances including Income Tax Return filing, Tax Audit, and Transfer Pricing become applicable. The income of such a foreign enterprise attributable to the business carried out in India becomes taxable in India, regardless of whether the foreign parent company reports global profits or losses.
 

How to avoid Fixed Place Permanent Establishment in India

To avoid creating a Fixed Place Permanent Establishment (PE) in India, a foreign company should make sure it doesn’t maintain any permanent office, branch or other business location where its core operations are carried out. If the company does have some presence in India, it should be limited to support activities like market research, promotion, or liaison work that are generally considered preparatory in nature. Using independent agents who work with multiple clients and operate on their own can help reduce PE risk. Also, foreign entity should avoid long-term use or control of office space in India, especially if it's used consistently for business purposes.
 

Latest Judgment: Hyatt International

Hyatt International (Southwest Asia) Ltd. (“Hyatt UAE”) is a company incorporated in the Dubai International Financial Centre and recognized as a tax resident of the UAE under the India-UAE tax treaty.

The Agreement

Hyatt UAE is a company incorporated under the Companies Law of the Dubai International Financial Centre, in the United Arab Emirates. It is a tax resident of the UAE under Article 4 of the DTAA between India and the UAE. In 2008, Hyatt entered into a Strategic Oversight Services Agreements (SOSAs) with Indian hotel owner for a period of 20 years to provide strategic planning services and “know-how” to ensure that the hotel operates as a high-quality international full-service property.

Tax Filing and Dispute

Hyatt UAE filed its return of income declaring ‘Nil’ income and claiming a refund. After scrutiny, the Assessing Officer issued a notice under Section 142(1) read with Section 143(3) of the Income Tax Act, 1961 alleging that Hyatt had a taxable presence in India.

In response, Hyatt International submitted a reply that its income was not taxable under the Act as

• There was no specific Article under the DTAA for taxing Fees for Technical Services.
• They did not have any fixed place of business, office, or branch in India,
• The presence of its employees in India during the relevant previous year did not exceed the nine-month threshold under Article 5(2) of the DTAA.

Therefore, they don’t have a Permanent Establishment (PE) in India and that its business income was not taxable under Article 7 of the DTAA.
Consequently, there was litigation on taxability of income arising from the operations carried out by Hyatt via its long term agreement in India whether the same constitutes as PE in India.
 

Legal Contention’s on the tax status of Hyatt

Hyatt UAE's Defense Against Permanent Establishment in India (Why It Claimed No PE in India)

• Its Strategic Oversight Services Agreement (SOSA) was limited to strategic guidance focusing on brand standards and long-term planning.
• Hyatt employees' time in India never exceeded nine months in any 12 month period, as permitted under Article?5(2) of the India-UAE DTAA.
• Visits were purely for maintaining quality, they remained advisory, not operational.
• There was no dedicated office, branch, or physical space provided to Hyatt within the Indian hotels.

 
Indian Tax Authorities’ Position (Why PE Argued to Exist)

• The 20?year SOSA with Asian Hotels Ltd. gave Hyatt UAE significant operational authority over pricing, staffing, HR policies, bank accounts, and procurement.
• Under the SOSA, Hyatt UAE had full and unconditional disposal of the hotel premises.
• Hyatt could appoint employees without approval from the Indian hotel owner and oversaw day-to-day operations.
• These operational activities satisfy the definition of a “fixed place of business” PE under Article?5(1) of the DTAA - business was carried partly through hotel premises under Hyatt’s control.
• Under DTAA Article?7(1) and India’s Income Tax Act Section 92F(iii?a), profits attributable to a PE are taxable in India, even if the parent company reports global losses

 

Delhi High Court Decision

The Hon’ble Delhi High Court passed a judgment against the Hyatt UAE holding that the company is incorporated in Dubai and a tax resident of the UAE, had a Permanent Establishment (PE) in India in the formed of fixed place of business even without having exclusive physical premises. The Court emphasised on the Hayatt’s operational involvement in daily activities along with control in India while passing the judgment and note mere legal form.
 

Supreme Court Ruling: Permanent Establishment in India

On July 24, 2025, the Supreme Court of India ruled that Hyatt International Southwest Asia Ltd (Hyatt UAE), a UAE-based company, has a taxable presence or Permanent Establishment (PE) in India.

Business Implications

The Supreme Court ruling will have implication on the businesses where foreign enterprise operating in or planning to enter Indian market. Such business implication will depend on various factors as observed in the Hon’ble Supreme Court Ruling namely:

• It is not mandatory to have physical presence to trigger PE tax exposure.
• Focus on operational control, supervisory authority, and continuity of involvement in India.
• Even shared space or rotating visits can be sufficient to constitute a PE.
• Profits attributable to India based operations can be taxed even if global results are negative, creating a new compliance risk for multinational groups.

Conclusion

This ruling serves as an important reminder to foreign companies operating in or planning to enter the Indian market. It underscores the fact that business activities that generate income from India may create tax obligations, even without a physical office or staff in the country. Understanding the concept of Permanent Establishment and the implications for income tax is important. As per recent Supreme Court ruling and DTAA, it’s not just physical presence like office/ branch in India but substantive involvement that will trigger tax liability in India. Thus, a proactive approach taken today will help mitigate legal implications on the foreign companies and will ensure smooth entry in Indian market and related compliances in India. In view of the Hyatt’s ruling by Hon’ble Supreme Court, it is recommended for foreign businesses to Review existing agreements particularly long-term service, oversight or consultancy contracts with Indian partners must be scrutinized for PE risk. Maintaining vigorous documentation such as terms of contracts, policies w.r.t. transfer pricing, defining decision making boundaries and nature of service clearly in terms of operational involvement and control Structure agreements prudently.