[Shravan Anande is a fourth-year B.A., LL.B. (Hons.) student and Hari Priya Murarikar is a third-year B.A., LL.B. (Hons.) student, both at NALSAR University of Law, Hyderabad]
In a significant judgment with wide-ranging implications for international taxation, the Supreme Court of India in Hyatt International (Southwest Asia) Ltd. v. Additional Director of Income Tax has affirmed the existence of a permanent establishment (PE) for Hyatt International (Southwest Asia) Ltd., a UAE-incorporated entity, under the India-UAE Double Taxation Avoidance Agreement (DTAA). The ruling clarifies that even in the absence of a fixed physical office or formal agency arrangement, the systematic and sustained presence of foreign personnel and the exercise of operational control in India can give rise to a PE thereby triggering domestic tax liability.
A PE is a concept in international tax law that determines when a foreign company becomes liable to pay income tax in another country. In simple words, it is a fixed or ongoing presence of a foreign company in a country where it does business. In most tax treaties, including the India-UAE DTAA, a PE is generally defined as a “fixed place of business through which the business of an enterprise is wholly or partly carried on.” Traditionally, this meant a foreign company would only be taxed in India if it had a physical office, branch, or factory. However, the present context reflects a broader and more functional understanding of PE, especially after the Supreme Court’s ruling in the Hyatt case.
This decision is particularly important in the context of Articles 5 and 7 of the DTAA, which respectively deal with the definition of a PE and the attribution of profits to it. By adopting a substance-over-form approach, the Court has moved beyond a narrow or formalistic interpretation of tax treaties, and instead focusing on the functional and economic realities of cross-border business operations.
This post aims to critically analyze the Supreme Court’s reasoning, examining how the judgment interprets key provisions of the DTAA. It also seeks to analyze the departure from earlier jurisprudence that emphasized formal presence, and to assess the broader legal and practical implications for foreign enterprises rendering services in India.
Understanding the Background
To understand the significance of the Supreme Court’s ruling, it is important to first look at how Hyatt International (Southwest Asia) Ltd. operated in India and how the dispute unfolded over time.
Hyatt’s Operations in India
Hyatt International (Southwest Asia) Ltd. (referred to as “Hyatt-UAE”) is a company incorporated in the United Arab Emirates. Although it did not have any office or legal entity registered in India, Hyatt entered into management and consultancy agreements with various Indian hotel owners. Under these agreements, Hyatt provided services such as branding and marketing under the “Hyatt” name, operational and managerial guidance, consultancy on staffing, quality standards, and financial planning. These services were delivered partly through Indian-based employees, and partly through visits by Hyatt executives from abroad. Importantly, the hotel properties themselves were owned and operated by Indian companies, not by Hyatt.
Arguments Advanced
The Indian tax authorities argued that despite not having a formal office, Hyatt’s activities amounted to a PE under Article 5 of the India-UAE DTAA. They claimed that Hyatt personnel regularly visited and exercised control over hotel operations, Hyatt had access to and used the Indian hotel premises to carry out core business functions and, ultimately, the arrangement resulted in taxable business income in India, under Article 7 of the DTAA.
Hyatt, on the other hand, argued that it did not have any fixed place of business in India, the hotels were owned and operated by third parties, its employees’ visits were temporary and limited, and not enough to establish continuity, Therefore, no PE existed, and no profits were attributable to India.
Timeline of Litigation
After going through a series of cases from the Income tax Assessing Officer, the Income Tax Appellate Tribunal and the Delhi High Court, Hyatt finally approached the Supreme Court, which delivered the judgment affirming that Hyatt had a PE in India
The questions before the Supreme Court which needed to be answered were:
- Whether Hyatt-UAE had a “fixed place” PE in India under Article 5 of the India-UAE DTAA, despite the absence of a formal office or legal presence.
- Whether Hyatt’s repeated and structured activities in India, carried out through its personnel and control mechanisms, constituted sufficient nexus to create a PE.
- Whether profit attribution to such a PE is valid under Article 7, even if the foreign enterprise (Hyatt) claimed global losses.
Defining PE: Control, Continuity and Contribution
Fixed Place PE: Scope and Requirements
One of the central questions was whether Hyatt had a “fixed place” PE in India, even though it did not own or lease any physical office here. The Court applied what is often referred to as the “disposal test”—which asks whether a foreign company has access to and control over a specific place in another country where it carries out business activities. In Hyatt’s case, although it did not own the hotels, the Court found that Hyatt’s personnel had continuous access to the hotel premises, and they were using these premises to carry out key business functions, such as supervision, management, and quality control. This, according to the Court, was enough to show that the hotel premises were “at the disposal” of Hyatt, meeting the threshold for a fixed place PE.
The Court referred to the OECD Model Tax Convention, which also recognizes the disposal test. Under OECD commentary, a foreign enterprise does not need to own or rent a location to have a PE—what matters is whether the place is used regularly and meaningfully for business purposes. The Court’s interpretation largely aligns with this, though it leans more toward a substance-over-form view, potentially expanding the scope of PE under Indian law.
Continuity and Aggregation Principle
Another key issue was whether the repeated but short-term visits by Hyatt’s staff to India could establish a sufficient degree of presence. Hyatt argued that no single employee stayed long enough, and therefore, there was no continuity. The Supreme Court rejected this argument. Instead, it looked at the pattern of business operations with multiple Hyatt personnel visiting India over a long period, and the central role these visits played in delivering Hyatt’s management and branding services.
The Court held that the aggregate presence of Hyatt’s personnel amounted to continuity of operations, even though the individual stays were short. This approach marks a clear shift from focusing on individual duration to looking at the overall business footprint in India. This finding is especially significant for service-based foreign companies, as it shows that even scattered and temporary visits can add up to create a taxable presence if they reflect an ongoing business relationship.
Attribution of Profits Despite Global Losses
Hyatt had also argued that even if a PE were assumed, no profits could be attributed to it because the company had incurred global losses. The Court did not accept this argument. Instead, it applied the Function, Asset, Risk (FAR) analysis, a method drawn from international tax principles, including OECD guidelines. Under this approach, profits are attributed based on the functions performed in India (such as hotel management and consultancy), the assets used (including brand value, systems, and personnel), and the risks assumed (such as performance guarantees or quality control). Even if the global group makes an overall loss, the part of the business being carried out in India can still be considered independently profitable, and the Indian authorities can tax that portion.
This reinforces the idea that profit attribution is based on local substance, not just overall financial outcomes. It also places a greater compliance burden on foreign companies to maintain detailed documentation of their Indian operations and apply proper transfer pricing standards.
Critical Analysis
Substance Over Form: A Welcome Shift or Overreach?
One of the most notable aspects of the Supreme Court’s ruling in the Hyatt case is its shift from a formalistic understanding of PE to a substance-driven and functional approach. Earlier interpretations often required a company to have a physical office, legal registration, or long-term presence in India to be taxed here. However, the Court has now emphasized that what really matters is how the business actually operates on the ground, not how it is structured on paper.
This focus on economic substance and operational control reflects a global trend by which the OECD’s commentary on the Model Tax Convention has encouraged countries to consider whether a place is “at the disposal” of a foreign enterprise, regardless of ownership or lease. However, a significant concern arises as to whether the Court gone too far. By expanding the definition of PE to include aggregated visits, shared premises, and indirect control, the ruling may blur the boundaries of what qualifies as a taxable presence. The judgment provides limited guidance on how much control, how frequent a visit, or how long a presence is required to create a PE. This opens the door to wider interpretation by tax authorities, potentially leading to inconsistent enforcement.
Potential for Tax Uncertainty
Another concern arising from this ruling is the increased uncertainty foreign companies now face regarding their tax obligations in India. First, there’s the issue of retrospective applicability. Since tax assessments in India can be reopened within specified time limits, this judgment could be used to justify reassessments of past business arrangements, even if the company believed it had structured its activities lawfully under the older, stricter PE interpretations.
Second, the judgment leaves open several grey areas. For example, when do a series of brief visits add up to a “continuous presence”? How much operational control is too much? What is the threshold for a place to be considered “at the disposal” of a foreign company? Without clear statutory or administrative guidelines, foreign enterprises may find it difficult to assess their risk in advance. This lack of bright-line rules creates a compliance burden, particularly for service-based businesses like consultancy firms, hospitality chains, and tech companies that rely heavily on short-term personnel deployments and remote operations.
Impact on Contractual Structuring and Employment Models
The judgment also has serious implications for how foreign companies structure their contracts and employee roles when working in India. Companies may now be forced to rethink their franchise, management, or technical service agreements to avoid wording or practices that suggest control over Indian operations. Many contracts will likely be renegotiated to shift key decision-making, risk-bearing, and compliance obligations away from the foreign entity. Travel restrictions could limit the frequency and duration of foreign staff visits, with detailed documentation becoming necessary to prove that contracts are advisory or supportive in nature, not operational. If companies fail to implement these safeguards, they may unintentionally expose themselves to Indian tax jurisdiction under the broadened PE definition.
Implications for Foreign Companies Operating in India
The Hyatt judgment is a wake-up call for foreign businesses operating in India, especially those providing services without a formal office or relying on intermittent visits by foreign staff. Who is at risk? The ruling directly impacts hotel and hospitality chains that operate through local partners but retain management control, consultancy and advisory firms whose personnel frequently visit Indian clients, technology companies that provide technical or managerial support remotely or through short-term visits.
Even if a company does not own property in India or sign contracts on Indian soil, it may still be considered to have a PE if its activities show functional control or continuity of business presence. Foreign companies must now reassess their operational structures and local agreements, maintain proper transfer pricing documentation and FAR analysis, and be prepared for scrutiny of past transactions, especially during tax audits or reassessments.
In short, this judgment signals that substance matters more than structure. Foreign entities cannot avoid tax liability in India merely by avoiding formal setups. They must take a proactive approach to legal and tax planning, ensuring their business activities are not only efficient but also legally compliant under Indian tax law.
Conclusion
The Hyatt judgment marks a shift in Indian tax law from formal structures to the real, functional presence of foreign enterprises. By focusing on actual control and continuity of operations in India, the Court has aligned domestic law with international standards. For foreign companies, this means legal form alone is no longer enough—regular activities and personnel presence can trigger tax liability. The ruling highlights the need for proactive tax planning and stricter operational controls. In short, the Hyatt case shows that economic substance now matters more than legal labels in determining tax obligations in India.
– Shravan Anande & Hari Priya Murarikar