Supreme Court of India
HYATT INTERNATIONAL SOUTHWEST ASIA LTDversusADDITIONAL DIRECTOR OF INCOME TAX
- Citation
- 2025 INSC 891
- Decided
- 24 July 2025
- Disposal
- Dismissed
- Bench
- B PARDIWALA
Holding
The Court held that the appellant has a fixed‑place permanent establishment in India under Article 5(1) of the Indo‑UAE DTAA and that the income earned under the SOSA is taxable in India.
Summary
Hyatt International Southwest Asia Ltd., a UAE‑resident company, entered into long‑term Strategic Oversight Services Agreements (SOSA) with Indian hotel owners to provide strategic, operational and financial oversight of hotels in Delhi and Mumbai. The Assessing Officer treated the fees earned under the SOSA as taxable in India, holding that the company had a permanent establishment (PE) in India under Article 5(1) of the Indo‑UAE DTAA. The ITAT and the Delhi High Court affirmed this view, prompting the company to appeal. The Supreme Court examined whether a fixed place of business existed, applying the "disposal test" and the principles from Formula One and other precedents, and considered the aggregate duration of employee presence. It concluded that the appellant exercised pervasive control over the hotel premises, which were at its disposal, satisfying the criteria for a fixed‑place PE. Consequently, the Court held that the income attributable to the PE is taxable in India and dismissed all appeals.
Issues considered
- Whether the service charges received under the SOSA constitute royalties under the DTAA
- Whether the appellant has a Permanent Establishment in India within the meaning of Article 5(1) of the Indo‑UAE DTAA
- Whether the findings of the Tribunal regarding the existence of a PE are perverse or contrary to the SOSA
- Whether Article 7(1) of the DTAA applies to the appellant’s income given its overall losses
Legislation cited
- Income Tax Act, 1961s. 143(3), s. 92F(iii-a)
Headnote
Issue for Consideration Issue arose whether the appellant, a tax resident of the UAE, has a Permanent Establishment-PE in India u/Art.5(1) of the Indo-UAE Double Taxation Avoidance Agreement-DTAA, and consequently, whether its income derived under the Strategic Oversight in India. Headnotes† Income Tax Act, 1961 – ss. 92F(iii-a), 143(3) – Double Taxation Avoidance Agreement (Indo-UAE) – Arts. 4, 5(1), 7 – Strategic Oversight Services Agreement-SOSA – Art. I to V – Permanent Establishment-PE – Appellant company
Subjects
Indo-UAE Double Taxation Avoidance Agreement (DTAA)Permanent Establishment (PE)Income taxFixed place of businessHotel consultancyFees for Technical Services (FTS)Strategic Oversight Services Agreement (SOSA)Disposal testDegree of control and supervisionUN Model Double Taxation Convention (2021)OECD Model Tax Convention (2017)Tax resident of UAEConsultancy services in the hotel sectorGlobal profitabilityBusiness profits of foreign enterprise
Judgment
[2025] 7 S.C.R. 1497 : 2025 INSC 891
Hyatt International Southwest Asia Ltd.
v.
Additional Director of Income Tax
(Civil Appeal No. 9766 of 2025)
24 July 2025
[J.B. Pardiwala and R. Mahadevan,* JJ.]
Issue for Consideration
Issue arose whether the appellant, a tax resident of the UAE, has
a Permanent Establishment-PE in India u/Art.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.
Headnotes†
Income Tax Act, 1961 – ss. 92F(iii-a), 143(3) – Double Taxation
Avoidance Agreement (Indo-UAE) – Arts. 4, 5(1), 7 – Strategic
Oversight Services Agreement-SOSA – Art. I to V – Permanent
Establishment-PE – Appellant company incorporated in Dubai,
a tax resident of UAE, engaged in rendering consultancy
services in the hotel sector – Appellant entered into SOSAs
with Indian company, one for Delhi Hotel and other for Mumbai
hotel – Assessment orders by the assessing officer taxing
the hotel related services rendered by the appellant, on the
ground that the appellant has a Permanent Establishment
in India in the form of a place of business u/Art.5(1) of the
DTAA – Affirmed by the ITAT and High Court – Correctness:
Held: High Court rightly held that the appellant has a fixed place
Permanent Establishment-PE in India and income received under
the SOSA is attributable to such PE and is thus, taxable in India –
Taxability is based on business presence and not the global
profitability of the enterprise – Under DTAAs, the taxing rights of the
source State over the business profits of a foreign enterprise are
contingent upon the existence of a PE in the source country – One
of the sine qua non for a fixed place PE is that the place through
which the business is carried on must be ‘at the disposal’ of the
enterprise, the “disposal test” principle – High Court was correct in
concluding that the appellant’s role was not confined to high-level
* Author
1498 [2025] 7 S.C.R.
Supreme Court Reports
decision making, but extended to substantive operational control
and implementation – Detailed review of the SOSA executed
between the appellant and the Indian Company demonstrates
that the appellant exercised pervasive and enforceable control
over the hotel’s strategic, operational, and financial dimensions –
Appellant’s ability to enforce compliance, oversee operations, and
derive profit-linked fees from the hotel’s earnings demonstrates
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
u/Art.5(1) of the India-UAE DTAA – Appellant’s executives and
employees made frequent and regular visits to India to oversee
operations and implement the SOSA – 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 – u/Art.5(2)(i), 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. [Paras 15-24]
Case Law Cited
Formula One World Championship Limited v. Commissioner of
Income Tax, International Taxation-3, Delhi & Anr. [2017] 2 SCR
152 : (2017) 15 SCC 602 – relied on.
Assistant Director of Income Tax-1, New Delhi v. M/s. E-Funds
IT Solutions Inc. [2017] 10 SCR 157 : (2018) 13 SCC 294 –
distinguished.
Union of India & Anr. v. U.A.E Exchange Centre [2020] 4 SCR
719 : (2020) 9 SCC 329 – referred to.
List of Acts
Income Tax Act, 1961.
List of Keywords
Indo-UAE Double Taxation Avoidance Agreement (DTAA);
Permanent Establishment (PE); Income tax; Fixed place of
business; Hotel consultancy; Fees for Technical Services (FTS);
[2025] 7 S.C.R. 1499
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
Strategic Oversight Services Agreement (SOSA); Disposal test;
Degree of control and supervision; UN Model Double Taxation
Convention (2021); OECD Model Tax Convention (2017); Tax
resident of UAE; Consultancy services in the hotel sector; Global
profitability; Business profits of foreign enterprise.
Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 9766 of 2025
From the Judgment and Order dated 22.12.2023 of the High Court
of Delhi at New Delhi in ITA No. 216 of 2020
With
Civil Appeal No(s). 9767, 9768, 9769, 9770, 9771, 9772 and 9773
of 2025
Appearances for Parties
Advs. for the Appellant:
S. Ganesh, Sr. Adv., Ujjwal A. Rana, Himanshu Mehta, for M/s.
Gagrat And Co.
Advs. for the Respondent:
N Venkatraman, A.S.G., Arijit Prasad, Rupesh Kumar, Sr. Advs., Raj
Bahadur Yadav, Shashank Bajpai, V Chandrashekhara Bharathi,
Santosh Kumar, Diwakar Sharma.
Judgment / Order of the Supreme Court
Judgment
R. Mahadevan, J.
Leave granted.
2. All these appeals arise out of the common judgment and order dated
22.12.2023 passed by the High Court of Delhi1 in the Income Tax
Appeals preferred by the appellant / assessee, in respect of the
Assessment Years 2009-10, 2010-11, 2011-12, 2012-13, 2013-14,
2014-15, 2016-17 and 2017-18. The details of the impugned orders
1 For short, “the High Court”
1500 [2025] 7 S.C.R.
Supreme Court Reports
before this Court, before the High Court and before the Income Tax
Appellate Tribunal, along with the corresponding tax effect involved
in each case, are tabulated below:
Case No. High Court ITAT AO Tax effect
evolved
SLP (C) No. ITA 579/Del/2013 21.11.2012 85,14,156/-
No.216/2020
5710 of 2024 Order dated AY 2009-10
Order dated 04.12.2019
22.12.2023
SLP (C) No. ITA 1762/Del/2015 28.01.2015 2,98,96,262/-
1 0 1 5 2 o f No.219/2020
Order dated AY 2011-12
2024
Order dated 04.12.2019
22.12.2023
SLP (C) No. ITA 957/Del/2016 18.12.2015 2,85,75,313/-
1 0 1 5 7 o f No.217/2020
Order dated AY 2012-13
2024
Order dated 04.12.2019
22.12.2023
SLP (C) No. ITA 6363/Del/2019 19.06.2019 4,05,14,966/-
1 0 7 9 6 o f No.201/2023
Order dated AY 2016-17
2024
Order dated 20.12.2022
22.12.2023
SLP (C) No. ITA 712/Del/2021 13.04.2021 4,05,14,966/-
1 0 7 9 7 o f No.215/2023
Order dated AY 2017-18
2024
Order dated 20.12.2022
22.12.2023
SLP (C) No. ITA 727/Del/2017 24.11.2016 2,91,07,664/-
1 0 7 9 8 o f No.140/2021
Order dated AY 2013-14
2024
Order dated 12.03.2021
22.12.2023
SLP (C) No. ITA No.36/2022 6179/Del/2017 28.07.2017 3,05,12,883/-
10800 of
Order dated Order dated AY 2014-15
2024
22.12.2023 27.07.2021
S L P ( C ) ITA 779/Del/2014 28.11.2013 2,98,96,262/-
D i a r y N o . No.218/2020
Order dated AY 2010-11
14972 of
Order dated 04.12.2019
2024
22.12.2023
[2025] 7 S.C.R. 1501
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
3. The necessary facts leading to the filing of the present appeals, as
culled out from the impugned orders, are as follows:
3.1. The appellant is a company incorporated under the Companies
Law, Dubai International Financial Centre Law No.3 of 2006, in
the United Arab Emirates2. It is a tax resident of the UAE under
Article 4 of the Agreement between the Government of India
and the UAE for the avoidance of Double Taxation3.
3.2. On 04.09.2008, the appellant entered into two Strategic
Oversight Services Agreements4 with Asian Hotels Limited5,
India – one for AHL, Delhi and another for AHL, Mumbai. Under
the SOSA, the appellant agreed to provide strategic planning
services and “know-how” to ensure that the hotel was developed
and operated as an efficient and a high-quality international
full-service hotel. Subsequently, AHL underwent reorganization
and its name was changed to Asian Hotels (North) Limited,
which continued to own the hotel. On 18.07.2010, the SOSA
was partially amended.
3.3. For the Assessment Year 2009-10, the appellant filed its
return of income declaring ‘Nil’ income and claiming a refund
of Rs.87,99,091/-. After scrutiny, the Assessing Officer issued
a notice dated 20.08.2010 under Section 142(1) read with
Section 143(3) of the Income Tax Act, 19616. In response,
the appellant submitted a reply dated 25.08.2011, asserting
that its income was not taxable under the Act as there was no
specific Article under the DTAA for taxing Fees for Technical
Services. It further stated that it did not have any fixed place
of business, office, or branch in India, and that 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, the appellant claimed that it did not have a
Permanent Establishment (PE) in India and that its business
income was not taxable under Article 7 of the DTAA.
2 For short, “UAE”
3 For short, “DTAA”
4 For short, “SOSA”
5 For short, “AHL”
6 For short, “the Act”
1502 [2025] 7 S.C.R.
Supreme Court Reports
3.4. On 28.12.2011, the Assessing Officer passed a draft assessment
order under Section 143(3) read with Section 144C of the Act,
holding inter alia that the appellant’s activities constituted
(i) a business connection under Section 9(1)(i) of the Act;
(ii) a PE under Article 5 of the DTAA;
(iii) royalties and fees for technical services under Section
9(1)(vi)/(vii) of the Act; and
(iv) royalties under Article 12 of the DTAA.
3.5. The appellant filed its objections dated 22.01.2012 before the
Dispute Resolution Panel (DRP), which rejected the objections
and upheld the Assessing Officer’s findings. Consequently,
the Assessing Officer passed a final assessment order
dated 21.11.2012, for the assessment year 2009-10. Similar
assessment orders were passed for the Assessment Years
2010-11, 2011-12 and 2012-13.
3.6. Challenging the above assessment orders, the appellant filed
four appeals before the Income Tax Appellate Tribunal (ITAT).
By a common order dated 04.12.2019, the ITAT rejected the
appellant’s contention that it did not have a PE in India and
dismissed the appeals. In doing so, the ITAT relied on the
decision of this Court in Formula One World Championship
Limited v. Commissioner of Income Tax, International
Taxation-3, Delhi & Anr.7 and held that the appellant had
a fixed place of business in India, thereby constituting a PE
under Article 5(1) of the DTAA. Aggrieved by the said order,
the appellant filed further appeals under Section 260A of the
Act before the High Court.
3.7. In the meanwhile, the Assessing Officer passed a similar
assessment order dated 24.11.2016 for the Assessment Year
2013-14, which the appellant challenged by filing ITA No.727/
Del/2017 before the ITAT. By order dated 12.03.2021, the
ITAT dismissed the appeal, following its earlier order dated
04.12.2019. Aggrieved, the appellant preferred ITA No.140 of
2021 before the High Court.
7 (2017) 15 SCC 602
[2025] 7 S.C.R. 1503
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
3.8. Similarly, the appellant challenged the assessment orders for
the Assessment Years 2014-15, 2016-17, and 2017-18 by filing
appeals before the ITAT. By separate orders dated 27.07.2021
and 20.12.2022, the ITAT dismissed the appeals again, following
its earlier order dated 04.12.2019. Aggrieved by these orders,
the appellant filed ITA Nos.36 of 2022, 201 of 2023, and 215
of 2023 before the High Court.
3.9. The High Court heard all eight appeals together and framed
the following substantial questions of law for consideration:
(i)Whether the Tribunal misdirected itself both in law
and on facts in holding that service charges received
by the appellant under the various SOSA agreement
were taxable as royalty?
(ii)Whether the appellant has Permanent Establishment
in India within the meaning of the Double Taxation
Avoidance Agreement?
(iii)Whether the findings recorded by the Tribunal, in
paragraphs 56, 57 and 59 are perverse and contrary
to the terms of the Strategic Oversight Services
Agreement (SOSA)?
(iv)Is article 7(1) of the DTAA at all applicable to the
appellant, having regard to the fact that it has incurred
losses in the relevant financial years?
3.10. By a common judgment and order dated 22.12.2023, the High
Court answered the first question in favour of the appellant /
assessee, and referred the fourth question to a larger
Bench. However, it answered questions (ii) and (iii) against
the appellant holding that the appellant, being a company
incorporated in Dubai and a tax resident of the UAE, had a
Permanent Establishment (PE) in India in the form of a fixed
place of business. Aggrieved by this part of the High Court’s
judgment, the appellant has preferred the present appeals.
4. Challenging the findings of the High Court regarding the existence
of a Permanent Establishment (PE) in the form of a fixed place of
business in India under the Indo-UAE DTAA, the learned Senior
Counsel for the appellant / assessee vehemently contended that
1504 [2025] 7 S.C.R.
Supreme Court Reports
the appellant is a Dubai based company engaged in rendering
hotel consultancy and advisory services from Dubai to hotels in
the Hyatt Group of Hotels, including several located in India. These
services are rendered under a SOSA entered into with each hotel
owner individually. The SOSA explicitly stipulates that the appellant
shall render its services from Dubai and is not obligated to send or
station any employee in India. However, the agreement permits at
the appellant’s sole discretion, occasional and temporary visits by
its employees to India.
4.1. It was further submitted that the income of the appellant is
not taxable in India under the provisions of the Act, as there
is no specific Article in the DTAA enabling taxation of Fees for
Technical Services (FTS). Furthermore, the appellant does not
maintain a fixed place of business, office, or branch in India.
The limited and occasional presence of its employees in India,
did not exceed the threshold of nine months under Article 5(2)
(i) of the DTAA, thereby excluding the existence of a PE.
4.2. The learned Senior Counsel argued that the High Court
erroneously disregarded the two essential conditions laid down in
Formula One (supra) and Assistant Director of Income Tax-
1, New Delhi vs. M/s. E-Funds IT Solutions Inc..8, which are
essential for the existence of a fixed place of business PE viz.,
(a) There must be a specific, fixed, and identifiable physical
location in India; and
(b) Such location must be at the disposal of the foreign
enterprise for use in carrying out its own business activities.
4.3. It was further submitted that there was no designated space
or office at the hotel premises in Delhi or Mumbai that was
either specifically reserved for or placed at the disposal of the
appellant. The appellant exercised no control or dominion over
any part of the premises. Mere involvement in policy decisions
or enforcement of brand standards does not amount to a fixed
place of business PE. Ownership and operational control of the
hotel remained entirely with the Indian entity, as reaffirmed by
Article 1, Section 3 of the SOSA.
8 (2018) 13 SCC 294
[2025] 7 S.C.R. 1505
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
4.4. The learned Senior Counsel further contended that the role of
the appellant under the SOSA, was limited to strategic guidance,
brand compliance, and long-term planning. The day-to-day
operations of the hotel were carried out by Hyatt India Pvt.
Ltd, under a separate Hotel Operating Services Agreement
(HOSA) entered into with the hotel owner. The appellant had
no involvement in such daily management. However, the High
Court erred in conflating the two separate legal agreements –
the SOSA entered into by the appellant and the HOSA entered
into by Hyatt India Pvt. Ltd. – and mistakenly attributed the day-
to-day control of hotel operations to the appellant. According to
the learned Senior Counsel, Hyatt India Pvt. Ltd. is a distinct
legal entity, taxable independently under Indian law, and its
operational activities cannot be attributed to the appellant for
the purpose of determining PE under the DTAA.
4.5. It was also submitted that the High Court laid undue emphasis
on the fact that six employees of the appellant visited India
and stayed at the hotel premises during the relevant years.
These visits, however, were brief and routine in nature and
the same executives visited other Hyatt hotels across India
including those in Goa, Bengaluru, Kochi, and Chennai. These
oversight visits were intended to ensure brand uniformity and
quality compliance. The short duration spread across multiple
locations, and lack of exclusive use or control over any space
do not satisfy the legal requirement of a fixed place of business
PE. Furthermore, the Department failed to produce documentary
evidence to establish that any such designated space was ever
placed at the disposal of the appellant.
4.6. It was submitted that the High Court incorrectly inferred that the
absence of an express prohibition in the SOSA on decision-
making by appellant’s employees during their stay at the hotel
implies a right of disposal. In law, a fixed place of business PE
cannot be presumed from the mere absence of a restriction;
there must be an affirmative grant of a right to use a specific
physical location to carry on the enterprise’s own business.
4.7. Ultimately, the learned senior counsel submitted that the High
Court’s findings are legally untenable and factually erroneous.
The essential legal requirements for the constitution of a fixed
place of business PE were not satisfied in the present case.
1506 [2025] 7 S.C.R.
Supreme Court Reports
4.8. Accordingly, it was prayed that the findings of the High Court
regarding the existence of a fixed place of business PE be set
aside and a declaration be made to the effect that the appellant
does not have a PE in India under Article 5 of the Indo-UAE
DTAA, and that its income is not taxable in India under Article
7 of the said DTAA.
5. Per contra, the learned Additional Solicitor General of India appearing
for the respondents submitted that on 04.09.2008, the appellant
entered into SOSA with AHL, an Indian company and the owner of
the Hyatt Regency Delhi, for providing oversight services in relation
to the hotel for a period of 20 years. Under the SOSA, they had
more than mere access to the hotel premises – the premises were
at the appellant’s full and unconditional disposal.
5.1. According to the learned Senior Counsel, the appellant’s
business was carried on through the employees stationed
at the hotel, thereby satisfying the criteria of a fixed place of
business Permanent Establishment (PE) under Article 5 of the
Indo-UAE DTAA.
5.2. It was further submitted that Article 5(1) of the DTAA defines a
PE as a “fixed place of business through which the business
of an enterprise is wholly or partly carried on”. This definition
is echoed in Section 92F(iii-a) of the Income Tax Act, 1961.
Article 7(1) of the DTAA provides that profits of an enterprise
are taxable only in the State of residence unless the enterprise
carries on business through a PE in the other State. If a PE
exists, then the profits attributable to the PE are taxable in the
source country.
5.3. Referring to the various Clauses of the SOSA, it was submitted
that the appellant’s role extended beyond high-level policy
formulation and into the domain of actual implementation. The
appellant was involved in the appointment and training of staff,
monitoring daily operations, exercising financial oversight, and
influencing procurement and operational decisions – all of which
demonstrate managerial and functional control, particularly
through the General Manager, who reported to the appellant.
5.4. The learned Senior Counsel pointed out the documentary
evidence mentioned in the impugned orders, which include
records of names, roles, and durations of stay of the appellant’s
[2025] 7 S.C.R. 1507
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
employees posted at the hotel. Some individuals remained in
India for up to nine months and were involved in substantive hotel
operations, clearly indicating operational presence in line with
the terms of the SOSA. In view of the same, it was submitted
that the appellant had full and effective control over the hotel
premises and that the premises were indeed at its disposal
for conducting its business. Therefore, the hotel satisfies the
definition of a fixed place of business PE under Article 5(1) of
the DTAA. Consequently, in terms of Article 7(1) of the DTAA,
the profits attributable to such PE are liable to be taxed in India
and the appellant be taxed in India on the income derived from
such activities.
5.5. To substantiate his contention, the learned Senior Counsel
placed reliance on the decision of this Court in Formula One
(supra). In that case, the assessee (FOWC) incorporated in the
UK, entered into a Race Promotion Contract (RPC) with Jaypee
Sports International Ltd. to host the Formula One Grand Prix in
India. The Court had to determine whether Jaypee constituted
a fixed place PE of FOWC in India under the terms of the RPC.
The Court held in paragraphs 74 and 76.5 of the judgment that
for a fixed place PE to exist, two conditions must be met: (a)
there must be a fixed place of business, and (b) through that
place, the business of the enterprise must be wholly or partly
carried on. Although FOWC’s claimed, it only had access to
the race circuit for three days a year, the Court noted that the
contract term extended to five years (renewable to ten), and
FOWC had full control during the race period. Therefore, the
premises were held to constitute a PE. The Court also referred
to the OECD Commentary [paragraph 40(c) and 40(d)] to clarify
that the duration of access is not determinative in itself – the
right of disposal and conduct of business through the premises
are the core tests. It further emphasized three key features of
a PE: stability, productivity, and dependence.
5.6. Applying these principles to the present case, the learned Senior
Counsel contended that the appellant – Hyatt International
Southwest Asia Ltd – has entered into a long-term agreement
(20 years) under which it enjoys broad and continued control
over the hotel’s key functions, including staffing, operations,
strategic policy, and financial oversight. This arrangement
1508 [2025] 7 S.C.R.
Supreme Court Reports
reflects the three core characteristics of a PE: stability (20-
year term), productivity (fee linked to business outcomes), and
dependence (reliance on hotel infrastructure and staff to carry
out its business).
5.7. It was further submitted that the decision in E-Funds (supra),
is factually distinguishable and therefore, not applicable to the
present case.
5.8. In view of the foregoing submissions, particularly the principles
laid down in Formula One (supra), the learned Senior Counsel
submitted that the appellant’s operation satisfies all conditions
for the existence of a fixed place of business PE under Article
5(1) of the Indo-UAE DTAA. The appellant’s plea of lacking
day to-day control is untenable given the pervasive control and
continuous nature of its involvement.
5.9. Accordingly, it was submitted that the hotel premises constitutes
a fixed place of business of the appellant in India, and in terms
of Article 7(1) of the DTAA, the profits attributable to such PE
are liable to tax in India. Therefore, the present appeals are
liable to be dismissed.
6. We have heard the learned senior counsel appearing for the
appellant and the learned Additional Solicitor General appearing for
the respondents and also perused the materials available on record.
7. On 16.05.2024, when these matters were taken up for consideration,
this Court passed the following interim order:
“We have heard learned senior counsel for the petitioner
and learned Additional Solicitor General for the respondent-
department.
It is stated at the Bar that the tax demand has been
fully met by the petitioners (under protest). However, the
apprehension is with regard to the initiation of penalty
proceedings pending consideration of the matter before
this Court.
It was submitted that the petitioner has a good case on
merits and therefore, initiation of penalty proceedings and
the demand made thereon would ultimately be prejudicial
to the petitioner herein.
[2025] 7 S.C.R. 1509
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
Per contra, learned Additional Solicitor General submitted
that having regard to the fact that three authorities, including
the High Court, having held against the petitioner herein
on the basis of the judgments of this Court, there is no
reason as to why the penalty proceedings should be stayed
or frustrated at this stage.
However, we find that since notices have been issued
in these matters pending consideration of these special
leave petitions and bearing in mind the fact that the tax
demand has been made by the petitioners herein, the
penalty proceedings shall remain stayed till the next date
of hearing.
List the matters on 23.09.2024.”
7.1 On 23.09.2024, the aforesaid interim order was directed to be
continued until further orders of this Court.
8. It is not in dispute that the appellant is a company incorporated in
Dubai, and is a tax resident of the UAE within the meaning of Article
4 of the Agreement between the Government of India and the UAE
for the Avoidance of Double Taxation. The appellant is engaged in
rendering consultancy services in the hotel sector. It entered into two
SOSAs both dated 04.09.2008 with ASL, India – one in respect of
the Delhi hotel and the other, for the Mumbai hotel. For the relevant
assessment years, the Assessing Officer passed assessment orders
taxing the hotel related services rendered by the appellant, inter alia,
on the ground that the appellant has a Permanent Establishment
(PE) in India in the form of a place of business under Article 5(1) of
the DTAA. These findings were affirmed by the ITAT.
9. As noted earlier, the High Court, at the time of final hearing of the
appeals, framed four substantial questions of law, whereby it answered
three of them, and referred the fourth question to a Larger Bench.
Aggrieved by the finding of the High Court that the appellant has a
Permanent Establishment in the form of a place of business in India
as contemplated under Article 5(1) of the DTAA, the present appeals
have been filed before this Court.
10. The principal issue that arises for determination herein is whether the
appellant – Hyatt International Southwest Asia Ltd., a tax resident
of the UAE, has a Permanent Establishment (PE) in India under
1510 [2025] 7 S.C.R.
Supreme Court Reports
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.
11. At the outset, it is necessary to analyse the relevant clauses of
the DTAA and the SOSA for effective adjudication. The concept
of ‘Permanent Establishment’ is well defined under Article 5 of the
DTAA, and similar provisions are found in international models such
as the UN Model Double Taxation Convention (2021) and the OECD
Model Tax Convention (2017). These model conventions provide an
inclusive yet exhaustive definitions of PE, with the precise scope
depending upon the terms of the bilateral DTAA. Article 5(1) of the
India – UAE DTAA defines a PE as “a fixed place of business through
which the business of an enterprise is wholly or partly carried on”.
This is consistent with the definition provided in Section 92F(iii-a) of
the Income Tax Act, 1961. For better appreciation, Article 5 of the
India – UAE DTAA is extracted below:
“PERMANENT ESTABLISHMENT
1. For the purposes of this Agreement, the term “permanent
establishment” means a fixed place of business through
which the business of an enterprise is wholly or partly
carried on.
2. The term “permanent establishment” includes especially:
(a) a place of management ;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a mine, an oil or gas well, a quarry or any other place
of extraction of natural resources;
(g) a farm or plantation;
(h) a building site or construction or assembly project or
supervisory activities in connection therewith, but only
where such site, project or activity continues for a period
of more than 9 months;
[2025] 7 S.C.R. 1511
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
(i) the furnishing of services including consultancy services
by an enterprise of a Contracting State through employees
or other personnel in the other Contracting State, provided
that such activities continue for the same project or
connected project for a period or periods aggregating more
than 9 months within any twelve-month period.
3. Notwithstanding the preceding provisions of this Article,
the term “permanent establishment” shall be deemed not
to include:
(a) the use of facilities solely for the purpose of storage,
display or delivery of goods or merchandise belonging to
the enterprise;
(b) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of storage,
display or delivery;
(c) the maintenance of a stock of goods or merchandise
belonging to the enterprise solely for the purpose of
processing by another enterprise;
(d) the maintenance of a fixed place of business solely
for the purpose of purchasing goods or merchandise, or
of collecting information, for the enterprise;
(e) the maintenance of a fixed place of business solely for
the purpose of carrying on, for the enterprise, any other
activity of a preparatory or auxiliary character.
4. Notwithstanding the provisions of paragraphs (1) and
(3), where a person - other than an agent of independent
status to whom paragraph (5) applies - is acting on behalf
of an enterprise and has, and habitually exercises in a
Contracting State an authority to conclude contracts on
behalf of the enterprise, that enterprise shall be deemed
to have a permanent establishment in that State in respect
of any activities which that person undertakes for the
enterprise, unless the activities of such person are limited
to the purchase of goods or merchandise for the enterprise.
5.An enterprise of a Contracting State shall not be deemed
to have a permanent establishment in the other Contracting
1512 [2025] 7 S.C.R.
Supreme Court Reports
State merely because it carries on business in that other
State through a broker, general commission agent or any
other agent of an independent status, provided that such
persons are acting in the ordinary course of their business.
However, when the activities of such an agent are devoted
wholly or almost wholly on behalf of that enterprise, he will
not be considered an agent of independent status within
the meaning of this paragraph.”
11.1. Article 7 of the DTAA governs the taxation of business profits.
Article 7(1) provides that the profit of an enterprise shall be
taxable only in the State of its residence, unless the enterprise
carries on business in the other Contracting State through a
permanent establishment (PE) situated therein. In such a case,
only so much of the profits as is attributable to that PE may be
taxed in the other State. The provision reads as follows:
“Article 7 - Business profits
(1) The profits of an enterprise of a Contracting State
shall be taxable only in that State unless the enterprise
carries on business in the other Contracting State
through a permanent establishment situated therein.
If the enterprise carries on business as aforesaid, the
profits of the enterprise may be taxed in the other
State but only so much of them as is attributable to
that permanent establishment.”
12. Insofar as the SOSA is concerned, the relevant clauses have already
been extracted by the High Court in the impugned order; hence, we
do not consider it necessary to reproduce them here once again.
However, for contextual clarity, it may be noted that Section 4 of
Article I of the SOSA deals with the ‘title to the hotel’. It provides
that if the hotel owner desires to obtain financial assistance for the
construction or refinancing of the hotel – or if the hotel is to be used
as collateral for any borrowing unrelated to the hotel business –
the owner is required to obtain a non-disturbance and attornment
agreement from the lender, which must be acceptable to the assessee.
This provision ensures that the assessee can perform its obligation
under the SOSA and realise its fees without interference but also.
12.1. Article II of the SOSA pertains to operating terms. As per
Sections 1 and 2 of Article II, the SOSA is to remain in force
[2025] 7 S.C.R. 1513
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
for a term of twenty years from the effective date, with a
possibility of extension by ten years through mutual agreement.
12.2. Article III governs the operation of the hotel. Section 1 stipulates
that the hotel shall be operated in accordance with standards
comparable to those prevailing in international hotels operated
by Hyatt International and its subsidiaries. The assessee is
responsible for providing strategic plans, policies, procedures,
and guidelines to ensure adherence to the ‘Hyatt Operating
Standards’. There is also an obligation to use reasonable
efforts to avoid conflicts between Hyatt branded hotels and the
subject hotel. Under Section 2, the assessee is vested with
complete control and discretion in formulating and establishing
the strategic plan for all aspects of hotel operations, including
branding, marketing, product development, and daily operations.
Section 3 further empowers the assessee to assign employees
(either its own or its affiliates) to India without needing prior
approval from the hotel owner or management. The assessee
is also responsible for formulating policies relating to human
resources, procurement, guest admittance, use of premises,
pricing, sales and marketing, and reservations. Section 4
authorizes the assessee to formulate policies governing the
hotel’s operating bank accounts. Section 7 authorizes the
assessee to identify, recruit and assist in appointing non-
local hotel employees – including the General Manager, key
personnel, and members of the Executive Committee – on
behalf of the hotel owner. The assessee is further required to
align the hotel’s human resource policies with Hyatt Operating
Standards. It may also temporarily assign its own employees
to serve as full-time executive staff at the hotel.
12.3. Section 1(a) and 1(b) of Articles V of the SOSA sets out the
assessee’s entitlement to “Strategic Fees” for the services
provided. The consideration is not a fixed fee; instead, it is
calculated as a percentage of room revenue and other revenues
and income – whether directly or indirectly derived from the
hotel’s operations – as well as cumulative gross operating
profit. This remuneration structure clearly reflects an active
commercial involvement, linking the assessee’s income to the
financial and operational performance of the hotel.
1514 [2025] 7 S.C.R.
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12.4. From the contractual provisions detailed above, it is evident that
the appellant’s role was not confined to mere policy formulation.
On the contrary, the SOSA conferred upon the appellant a
continuing and enforceable right to implement its policies and
ensure compliance in all operational aspects of the hotel. 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 Permanent Establishment (PE)
under Article 5(1) of the India – UAE DTAA.
13. The question of what constitutes a “place of business” under Article
5(1) of the DTAA is no longer res integra. In Formula One (supra),
this Court unequivocally held that for a Permanent Establishment
(PE) to exist, two essential conditions must be satisfied: (i)the place
must be “at the disposal” of the enterprise, and (ii)the business of
the enterprise must be carried on through that place. The Court
further held that a PE must demonstrate the three core attributes of:
stability, productivity, and a degree of independence. Among these,
the “disposal test” is pivotal, meaning thereby the enterprise must
have a right to use the premises in such a way that enables it to
carry on its business activities. This test is to be applied contextually,
taking into account the commercial and operational realities of
the arrangement. The relevant paragraphs from the judgment are
extracted below for better appreciation:
“29. Philip Baker explains that the concept of PE is
important for several articles of the Conventions; the
concept, or its cognate, also appears in the domestic law
of some countries. According to him, the concept marks
the dividing line for businesses between merely trading
with a country and trading in that country; if an enterprise
has a PE, its presence in a country is sufficiently
substantial that it is trading in the country. He has
quoted the following passage from the judgment of the
Andhra Pradesh High Court, authored by Justice (Retd.)
Jagannadha Rao (as his Lordship then was, later Judge
of this Court) in CIT v. Visakhapatnam Port Trust [CIT v.
Visakhapatnam Port Trust, 1983 SCC OnLine AP 287:
(1983) 144 ITR 146]: (SCC OnLine AP para 54)
“54. … the words “permanent establishment”
postulate the existence of a substantial element
[2025] 7 S.C.R. 1515
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
of an enduring or permanent nature of a foreign
enterprise in another country which can be
attributed to a fixed place of business in that
country. It should be of such a nature that it
would amount to a virtual projection of the
foreign enterprise of one country into the
soil of another country.”
30. Emphasising that as a creature of international tax
law, the concept of PE has a particularly strong claim to
a uniform international meaning, Philip Baker discerns
two types of PEs contemplated under Article 5 of OECD
Model. First, an establishment which is part of the
same enterprise under common ownership and
control—an office, branch, etc., to which he gives
his own description as an “associated permanent
establishment”. The second type is an agent, though
legally separate from the enterprise, nevertheless who
is dependent on the enterprise to the point of forming a
PE. Such PE is given the nomenclature of “unassociated
permanent establishment” by Baker. He, however,
pointed out that there is a possibility of a third type of PE
i.e. a construction or installation site may be regarded
as PE under certain circumstances. In the first type
of PE i.e. associated permanent establishments,
primary requirement is that there must be a fixed
place of business through which the business of an
enterprise is wholly or partly carried on. It entails
two requirements which need to be fulfilled: (a) there
must be a business of an enterprise of a contracting
State (FOWC in the instant case); and (b) PE must be
a fixed place of business i.e. a place which is at the
disposal of the enterprise. It is universally accepted
that for ascertaining whether there is a fixed place
or not, PE must have three characteristics: stability,
productivity and dependence. Further, fixed place of
business connotes existence of a physical location
which is at the disposal of the enterprise through
which the business is carried on.
……..
1516 [2025] 7 S.C.R.
Supreme Court Reports
33. The principal test, in order to ascertain as to
whether an establishment has a fixed place of business
or not, is that such physically located premises have
to be “at the disposal” of the enterprise. For this
purpose, it is not necessary that the premises are
owned or even rented by the enterprise. It will be
sufficient if the premises are put at the disposal of
the enterprise. However, merely giving access to such
a place to the enterprise for the purposes of the project
would not suffice. The place would be treated as “at the
disposal” of the enterprise when the enterprise has right
to use the said place and has control thereupon.
34.2. In a case generally referred to as Hotel Manager
[Bundesfinanzhof, 3-2-1993, IR 80-81/91, IStR 1993, p.
226, (1993) BStBl, II, 462], the Bundesfinanzhof held that
a UK hotel management company had a PE in Germany
when it entered into a 20 year contract with a limited
partnership which owned a hotel. The agreement required
the UK company to supply a general manager: the
general manager’s office constituted the PE (and
not the entire hotel) since the UK company had a
secured right to use this office for the purposes of
the agreement.
….
35. According to Philip Baker, the aforesaid illustrations
confirm that the fixed place of business need not be
owned or leased by the foreign enterprise, provided
that it is at the disposal of the enterprise in the
sense of having some right to use the premises for
the purposes of its business and not solely for the
purposes of the project undertaken on behalf of the
owner of the premises.
36. Interpreting the OECD Article 5 pertaining to PE, Klaus
Vogel has remarked that insofar as the term “business” is
concerned, it is broad, vague and of little relevance for the
PE definition. According to him, the crucial element is the
term “place”. Importance of the term “place” is explained
by him in the following manner:
[2025] 7 S.C.R. 1517
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
“In conjunction with the attribute “fixed”, the
requirement of a place reflects the strong link
between the land and the taxing powers of the
State. This territorial link serves as the basis not
only for the distributive rules which are tied to
the existence of PE but also for a considerable
number of other distributive rules and, above
all, for the assignment of a person to either
contracting State on the basis of residence
(Article 1, read in conjunction with Article 4
OECD and UN MC).”
37. We would also like to extract below the definition to
the expression “place” by Vogel, which is as under:
“A place is a certain amount of space within the
soil or on the soil. This understanding of place
as a three-dimensional zone rather than a single
point on the earth can be derived from the French
version (installation fixe) as well as the term
“establishment”. As a rule, this zone is based on
a certain area in, on, or above the surface of the
earth. Rooms or technical equipment above the
soil may qualify as a PE only if they are fixed
on the soil. This requirement, however, stems
from the term “fixed” rather than the term
“place”, given that a place (or space) does
not necessarily consist of a piece of land. On
the contrary, the term “establishment” makes
clear that it is not the soil as such which is
the PE but that the PE is constituted by a
tangible facility as distinct from the soil. This
is particularly evident from the French version
of Article 5(1) OECD MC which uses the term
“installation” instead of “place”.
The term “place” is used to define the term “establishment”.
Therefore, “place” includes all tangible assets used for
carrying on the business, but one such tangible asset can
be sufficient. The characterization of such assets under
private law as real property rather than personal property
1518 [2025] 7 S.C.R.
Supreme Court Reports
(in common law countries) or immovable rather than
movable property (in civil law countries) is not authoritative.
It is rather the context (including, above all, the terms
“fixed”/“fixe”), as well as the object and purpose of Article 5
OECD and UN MC itself, in the light of which the term
“place” needs to be interpreted. This approach, which
follows from the general rules on treaty interpretation,
gives a certain leeway for including movable property in
the understanding of “place” and, therefore, assume a PE
once such property has been “fixed” to the soil.
For example, a work bench in a caravan, restaurants
on permanently anchored river boats, steady oil rigs, or
a transformator or generator on board a former railway
wagon qualify as places (and may also be “fixed”).
In contrast, purely intangible property cannot qualify
in any case. In particular, rights such as participations
in a corporation, claims, bundles of claims (like bank
accounts), any other type of intangible property
(patents, software, trademarks, etc.) or intangible
economic assets (a regular clientele or the goodwill
of an enterprise) do not in themselves constitute a PE.
They can only form part of PE constituted otherwise.
Likewise, an internet website (being a combination of
software and other electronic data) does not constitute
tangible property and, therefore, does not constitute a PE.
Neither does the mere incorporation of a company in a
contracting State in itself constitute a PE of the company
in that State. Where a company has its seat, according
to its bye-laws and/or registration, in State A while the
POEM is situated in State B, this company will usually
be liable to tax on the basis of its worldwide income
in both contracting States under their respective
domestic tax law. Under the A-B treaty, however, the
company will be regarded as a resident of State B only
[Article 4(3) OECD and UN MC]. In the absence of both
actual facilities and a dependent agent in State A, income
of this company will be taxable only in State B under the
1st sentence of Article 7(1) OECD and UN MC.
[2025] 7 S.C.R. 1519
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
There is no minimum size of the piece of land. Where
the qualifying business activities consist (in full or in part)
of human activities by the taxpayer, his employees or
representatives, the mere space needed for the physical
presence of these individuals is not sufficient (if it were
sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN
MC and the notion of agent PEs were superfluous). This
can be illustrated by the example of a salesman who
regularly visits a major customer to take orders, and
conducts meetings in the purchasing director’s office. The
OECD MC Comm. has convincingly denied the existence
of a PE, based on the implicit understanding that the
relevant geographical unit is not just the chair where the
salesman sits, but the entire office of the customer, and
the office is not at the disposal of the enterprise for which
the salesman is working.”
38. Taking cue from the word “through” in the article, Vogel
has also emphasised that the place of business qualifies
only if the place is “at the disposal” of the enterprise.
According to him, the enterprise will not be able to use
the place of business as an instrument for carrying on
its business unless it controls the place of business
to a considerable extent. He hastens to add that there
are no absolute standards for the modalities and
intensity of control. Rather, the standards depend
on the type of business activity at issue. According
to him, “disposal” is the power (or a certain fraction
thereof) to use the place of business directly. Some
of the instances given by Vogel in this behalf, of relative
standards of control, are as under:
“The degree of control depends on the type of business
activity that the taxpayer carries on. It is therefore not
necessary that the taxpayer is able to exclude others
from entering or using the POB.
The painter example in the OECD MC Comm. (No. 4.5
OECD MC Comm. on Article 5) (however questionable
it might be with regard to the functional integration test)
suggests that the type and extent of control need not
1520 [2025] 7 S.C.R.
Supreme Court Reports
exceed the level of what is required for the specific type
of activity which is determined by the concrete business.
By contrast, in the case of a self-employed engineer who
had free access to his customer’s premises to perform the
services required by his contract, the Canadian Federal
Court of Appeal ruled that the engineer had no control
because he had access only during the customer’s regular
office hours and was not entitled to carry on businesses
of his own on the premises.
Similarly, a Special Bench of Delhi’s Income Tax Appellate
Tribunal denied the existence of a PE in the case of
Ericsson. The Tribunal held that it was not sufficient that
Ericsson’s employees had access to the premises of
Indian mobile phone providers to deliver the hardware,
software and know-how required for operating a network.
By contrast, in the case of a competing enterprise, the
Bench did assume an Indian PE because the employees
of that enterprise (unlike Ericsson’s) had exercised other
businesses of their employer.
The OECD view can hardly be reconciled with the two
court cases. All three examples do indeed shed some
light onto the method how the relative standards for the
control threshold should be designed. While the OECD MC
Comm. suggests that it is sufficient to require not more than
the type and extent of control necessary for the specific
business activity which the taxpayer wants to exercise
in the source State, the Canadian and Indian decisions
advocate for stricter standards for the control threshold.
The OECD MC shows a paramount tendency (though no
strict rule) that PEs should be treated like subsidiaries
[cf. Article 24(3) OECD and UN MC], and that facilities
of a subsidiary would rarely be unusable outside the
office hours of one of its customers (i.e. a third person),
the view of the two courts is still more convincing.
Along these lines, a POB will usually exist only where the
taxpayer is free to use the POB:
— at any time of his own choice;
[2025] 7 S.C.R. 1521
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
— for work relating to more than one customer; and
— for his internal administrative and bureaucratic work.
In all, the taxpayer will usually be regarded as
controlling the POB only where he can employ it at
his discretion. This does not imply that the standards
of the control test should not be flexible and adaptive.
Generally, the less invasive the activities are, and the
more they allow a parallel use of the same POB by
other persons, the lower are the requirements under the
control test. There are, however, a number of traditional
PEs which by their nature require an exclusive use of the
POB by only one taxpayer and/or his personnel. A small
workshop [cf. Article 5(2)(e) OECD and UN MC] of 10 or
12 sq m can hardly be used by more than one person.
The same holds true for a room where the taxpayer runs
a noisy machine.”
39. OECD commentary on Model Tax Convention mentions
that a general definition of the term “PE” brings out its
essential characteristics i.e. a distinct “situs”, a “fixed
place of business”. This definition, therefore, contains the
following conditions:
(i) the existence of a “place of business” i.e. a facility
such as premises or, in certain instances, machinery or
equipment.
(ii) this place of business must be “fixed” i.e. it must be
established at a distinct place with a certain degree of
permanence;
(iii) the carrying on of the business of the enterprise
through this fixed place of business. This means usually
that persons who, in one way or another, are dependent
on the enterprise (personnel) conduct the business of the
enterprise in the State in which the fixed place is situated.
40. The term “place of business” is explained as covering
any premises, facilities or installations used for carrying
on the business of the enterprise whether or not they
are used exclusively for that purpose. It is clarified that a
1522 [2025] 7 S.C.R.
Supreme Court Reports
place of business may also exist where no premises are
available or required for carrying on the business of the
enterprise and it simply has a certain amount of space at
its disposal. Further, it is immaterial whether the premises,
facilities or installations are owned or rented by or are
otherwise at the disposal of the enterprise. A certain
amount of space at the disposal of the enterprise
which is used for business activities is sufficient to
constitute a place of business. No formal legal right
to use that place is required. Thus, where an enterprise
illegally occupies a certain location where it carries on its
business, that would also constitute a PE. Some of the
examples where premises are treated at the disposal of
the enterprise and, therefore, constitute PE are: a place of
business may thus be constituted by a pitch in a market
place, or by a certain permanently used area in a customs
depot (e.g. for the storage of dutiable goods). Again the
place of business may be situated in the business facilities
of another enterprise. This may be the case for instance
where the foreign enterprise has at its constant disposal
certain premises or a part thereof owned by the other
enterprise. At the same time, it is also clarified that the
mere presence of an enterprise at a particular location does
not necessarily mean that the location is at the disposal
of that enterprise.”
14. In Union of India & Anr. v. U.A.E Exchange Centre9, this Court
had occasion to clarify the scope of “permanent establishment” in
the context of cross-border taxation under the India – UAE DTAA.
The issue involved was whether the liaison offices (LOs) of the
UAE Exchange Centre in India constituted a PE. The Court held in
the negative, as the LOs performed only preparatory and auxiliary
activities, and there was no right of disposal or control over a fixed
placed through which core business was carried on. The following
paragraph from the judgment is especially pertinent in this regard:
“13. And again, whilst analysing the scope of Articles 5 and
7 of the DTAA in para 12 of the impugned judgment [UAE
9 (2020) 9 SCC 329
[2025] 7 S.C.R. 1523
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
Exchange Centre Ltd. v. Union of India, 2009 SCC OnLine
Del 337: (2009) 313 ITR 94], the High Court noted thus:
“12. … In the case of DTAA under consideration
in the present case under Article 5 read with
Article 7, profits of an enterprise are liable to
tax in India if an enterprise were to carry on
business through permanent establishment,
meaning thereby fixed place of business through
which business of an enterprise is wholly or
partly carried on. Under Article 5(2)(c), amongst
others, permanent establishment includes an
office. However, Article 5(3) which opens with a
non obstante clause, is illustrative of instances
where—under the DTAA various activities have
been deemed as ones which would not fall
within the ambit of the expression “permanent
establishment”. One such exclusionary clause
is found in Article 5(3)(e) which is: maintenance
of fixed place of business solely for the purpose
of carrying on, for the enterprise, any other
activity of a preparatory or auxiliary character.
The plain meaning of the word “auxiliary” is
found in Black’s Law Dictionary, 7th Edn. at
p. 130 which reads as “aiding or supporting,
subsidiary”. The only activity of the liaison
offices in India is simply to download information
which is contained in the main servers located
in UAE based on which cheques are drawn on
banks in India whereupon the said cheques are
couriered or dispatched to the beneficiaries in
India, keeping in mind the instructions of the
NRI remitter. Can such an activity be anything
but auxiliary in character. Plainly to our minds,
the instant activity is in “aid” or “support” of the
main activity. The error into which, according to
us, the Authority has fallen is in reading Article
5(3)(e) as a clause which permits making a
value judgment as to whether the transaction
would or would not have been complete till
1524 [2025] 7 S.C.R.
Supreme Court Reports
the role played by liaison offices in India was
fulfilled as represented by the petitioner to their
NRI remitter. According to us, what has been
lost sight of, is that, by invoking the clause
with regard to permanent establishment, we
would, by a deeming fiction tax an income
which otherwise neither arose nor accrued
in India — when looked at from this point
of view, the exclusionary clause contained
in Article 5(3) and in this case in particular,
sub-clause (e) have to be given a wider and
liberal play. Once an activity is construed as
being subsidiary or in aid or support of the main
activity it would, according to us, fall within the
exclusionary clause. To say that a particular
activity was necessary for completion
of the contract is, in a sense saying the
obvious as every other activity which an
enterprise undertakes in earning profits is
with the ultimate view of giving effect to the
obligations undertaken by an enterprise vis-
à-vis its customer. If looked at from that point
of view, then, no activity could be construed as
preparatory or of an “auxiliary” character. On
this aspect of the matter, the Supreme Court
in CIT v. Morgan Stanley & Co. Inc. [(2007) 7
SCC 1] amongst other issues was called upon
to decide as to whether back office operations
carried on by Morgan Stanley Company for
one of its Morgan Stanley Advantages Services
Pvt. Ltd. would qualify as having a permanent
establishment in India. The Supreme Court, while
holding that back office operations fall within
the exclusionary clause Article 5(3)(e) of Indo-
US Double Taxation DTAA, which is, identical
to DTAA under consideration in the present
case, came to the conclusion that back office
operations came within the purview of Article
5(3)(e). It is laid down by the Supreme Court
[2025] 7 S.C.R. 1525
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
in CIT v. Morgan Stanley & Co. Inc., [(2007)
7 SCC 1] that in ascertaining what would
constitute a “permanent establishment”
within the meaning of Article 5(1) of the
Indo-US DTAA, one had to undertake what
is called a functional and factual analysis
of each of the activities undertaken by an
establishment. In that case, the Supreme Court
came to the conclusion that the entity located
in India which was engaged in only supporting
the front office functions of Morgan Stanley &
Co., a non-resident, in fixed income and equity
research and information technology enabled
services such as data processing support
centre , technical services and reconciliation
of accounts being back office operators would
not fall with Article 5(1) of the Indo-US DTAA.”
15. Evidently, under DTAAs, the taxing rights of the source State over
the business profits of a foreign enterprise are contingent upon the
existence of a Permanent Establishment in the source country. One
of the sine qua non for a fixed place PE is that the place through
which the business is carried on must be ‘at the disposal’ of the
enterprise – a principle commonly referred to as the “disposal test”.
It is noteworthy that the Organisation for Economic Co-operation and
Development does not rigidly define this test, but provides illustrative
examples. There is no strait-jacket formula applicable to all cases.
Typically, trading operations require a continuously used fixed place,
whereas service-oriented business may not. Some jurisdictions
consider mere use of a place sufficient, while others require legal
or operational control over the premises. In our view, determining
whether a Fixed place PE exists must involve a fact-specific inquiry,
including: the enterprise’s right of disposal over the premises, the
degree of control and supervision exercised, and the presence of
ownership, management, or operational authority.
16. In the present case, a detailed review of the SOSA executed
between the appellant and AHL demonstrates that the appellant
exercised pervasive and enforceable control over the hotel’s strategic,
operational, and financial dimensions. Specifically, the agreement
vested the appellant with powers to:
1526 [2025] 7 S.C.R.
Supreme Court Reports
– Appoint and supervise the General Manager and other key
personnel,
– Implement human resource and procurement policies,
– Control pricing, branding, and marketing strategies,
– Manage operational bank accounts,
– Assign personnel to the hotel without requiring the owner’s
consent.
These rights go well beyond mere consultancy and indicate that the
appellant was an active participant in the core operational activities
of the hotel.
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.
[2025] 7 S.C.R. 1527
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
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 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
1528 [2025] 7 S.C.R.
Supreme Court Reports
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.
[2025] 7 S.C.R. 1529
Hyatt International Southwest Asia Ltd. v.
Additional Director of Income Tax
25. We find no merit in the appeals. Accordingly, all the appeals are
dismissed. There shall be no order as to costs.
26. Consequently, connected miscellaneous application(s), if any, shall
stand closed.
Result of the case: Appeals dismissed.
†
Headnotes prepared by: Nidhi Jain
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