In a landmark ruling with far-reaching implications for multinational corporations (MNCs) operating in India, the Supreme Court on Thursday held that a foreign company can be taxed in India if it exercises significant operational control over Indian premises — even in the absence of a formal office or prolonged employee presence.
The judgment came as a setback to Dubai-based Hyatt International Southwest Asia Ltd, which had contested its tax liability for advisory and management services provided to Hyatt-branded hotels in India between 2009 and 2018.
A bench comprising Justices J.B. Pardiwala and R. Mahadevan upheld a 2023 Delhi High Court ruling, affirming that Hyatt had a “Permanent Establishment” (PE) in India under Article 5(1) of the India-UAE Double Taxation Avoidance Agreement (DTAA). The Court concluded that Hyatt’s continuous and structured control over hotel operations in India—through long-standing service agreements—qualified as a “fixed place” PE, making it liable to pay Indian taxes.
“Disposal Test” and Substance Over Form
Rejecting Hyatt’s argument that it operated solely from Dubai and had no fixed office or branch in India, the Court emphasized that the PE test hinges not on formal rights or exclusive possession, but on whether a foreign enterprise “carries on business through” a specific location.
“The absence of exclusive space does not negate the presence of a PE. Temporary or shared use of space is sufficient if core business functions are carried out from there,” the Court ruled, invoking its earlier precedent in Formula One World Championship Ltd (2017).
Hyatt had entered into a Services and Operating Services Agreement (SOSA) with Indian hotel owners, granting it authority over critical functions such as staff appointments, HR and procurement policies, pricing, branding, and operations — all executed without maintaining a formal Indian office.
The Court found that these rights “go well beyond mere consultancy” and established “pervasive and enforceable control”, amounting to a permanent operational footprint in India.
Duration and Employee Visits Not Sole Criterion
While Hyatt argued that no single employee had stayed in India for more than the nine-month threshold required under Article 5(2)(i) of the DTAA, the Court dismissed this as insufficient to defeat PE status. Instead, it highlighted the continuous and aggregate presence of Hyatt personnel over the years, validated through travel logs and day-to-day managerial duties.
Tax expert Amit Baid of BTG Advaya noted that the judgment shifts the PE assessment standard. “The focus is no longer just the duration of individual stays, but rather the continuity of business presence and operational involvement,” he said, adding that the ruling will likely influence how frequent employee visits are treated for tax purposes.
Technical Services Clause No Shield
The apex court also clarified that under the India–UAE DTAA, the absence of a distinct provision allowing taxation of Fees for Technical Services (FTS) does not negate the existence of a PE under Article 5(1). If core business activities are conducted through a fixed place in India, taxability follows, the bench said.
Implications for MNCs
This ruling broadens the interpretation of “Permanent Establishment” under Indian tax law and could impact MNCs with advisory or management roles across Indian businesses, even if their formal structures remain abroad.
By establishing that substance of control and economic presence trump formality, the Court has laid a new framework for tax authorities to determine MNC liabilities under international treaties, especially where cross-border service agreements lead to active day-to-day operational involvement.
