Beyond Borders: Apex Court's Hyatt Verdict Redraws Global Tax Map

When the Supreme Court speaks, everyone listens, and in the case of Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (2025 INSC 891)¹, the message was loud and clear. India is redefining the parameters of the global tax landscape. In a decision delivered by Justices J.B. Pardiwala and R. Mahadevan, Hyatt's operations based in the UAE were designated as a 'fixed place' Permanent Establishment (PE) in accordance with the India-UAE Double Taxation Avoidance Agreement (DTAA) granting India new authority to tax foreign companies operating on its territory. The ruling has echoed through multinational firms, tax planners, and compliance departments around the globe, forcing a reassessment of how international businesses establish their presence in India. This article delves into the case's background, analyses Article 5 of the DTAA, examines the Court's rationale, draws connections with precedents such as Formula One World Championship Ltd. and UAE Exchange Centre Ltd., and highlights the implications that could transform cross-border tax strategies.

What triggered the case?

The Hyatt International case emerged from a tax conflict that spanned eight assessment years (2009–2018), involving Hyatt International Southwest Asia Ltd., a company based in Dubai and incorporated under UAE law, which is also a tax resident of the UAE. In 2008, Hyatt entered into Strategic Oversight Services Agreements (SOSAs) with Asian Hotels Ltd. (AHL), an Indian entity that operates Hyatt-branded hotels in Delhi and Mumbai. These agreements, which last for 20 years, assigned Hyatt the responsibility of providing strategic planning, ensuring brand compliance, overseeing operations, marketing, and human resource support to guarantee that the hotels met global Hyatt standards.

The Indian tax authorities, led by the Additional Director of Income Tax, argued that Hyatt's operations amounted to a fixed place PE under Article 5(1) of the India-UAE DTAA², rendering its income from SOSAs taxable in India according to Article 7. Conversely, Hyatt maintained that it did not have a fixed place of business in India, as it lacked an exclusive office or permanent staff present there. The company asserted that its services were provided from Dubai, with only occasional visits from employees to India, and contended that its global losses should prevent the attribution of profits to an Indian PE. Furthermore, Hyatt claimed that the lack of a specific DTAA article addressing Fees for Technical Services (FTS) and the fact that no employee remained in India beyond the nine-month limit specified in Article 5(2)(i) invalidated the existence of a PE.

The Income Tax Appellate Tribunal (ITAT) and the Delhi High Court dismissed Hyatt's arguments, upholding the position of the tax authorities. The Supreme Court's rejection of Hyatt's appeals in July 2025 reinforced these conclusions, highlighting the importance of the substance of Hyatt's operational control over form-based arguments.

Analysing Article 5 of the DTAA

Article 5 of the India-UAE DTAA defines the concept of a Permanent Establishment, which is a vital element in international tax legislation that determines the circumstances under which a foreign enterprise is obligated to pay income tax in a source country (in this instance, India). A PE creates a taxable nexus, enabling the source country to levy taxes on profits attributable to business activities carried out through the PE as given in Article 7. Article 5 specifies three main categories of PE:

1. Fixed Place PE (Article 5(1)): A "fixed place of business through which the business of an enterprise is wholly or partially conducted." This encompasses physical locations such as offices, branches, or factories, provided they fulfil certain conditions (elaborated on below).
2. Service PE (Article 5(2)(i)): This arises when a foreign enterprise offers services in the source country through employees or personnel for a defined duration (for example, nine months as per the India-UAE DTAA).
3. Agency PE (Article 5(4)): This occurs when a dependent agent in the source country possesses the authority to finalize contracts on behalf of the foreign enterprise. The Hyatt case predominantly centred on the fixed place PE under Article 5(1), with the Supreme Court broadly interpreting its scope to encompass situations where a foreign entity exerts considerable control over operations without the existence of a formal office.

Three essentials of PE

The ruling by the Supreme Court in Hyatt reaffirmed three fundamental characteristics necessary for determining a fixed place of PE under Article 5(1) of the Double Taxation Avoidance Agreement (DTAA), referencing the OECD Model Tax Convention and Indian judicial rulings:

1. Existence of a Place of Business: There must be a physical location, such as offices, facilities, or installations used for conducting the enterprise's operations. This location does not have to be owned or rented, but it must be "at the disposal" of the enterprise.
2. Permanence or Continuity: The business location must possess a certain degree of permanence, although it does not need to be everlasting. Temporary or shared usage is adequate if the business activities are ongoing and systematic.
3. Business Conducted Through the Place: The enterprise must conduct its primary business activities, either fully or partially, through this location, rather than engaging solely in preparatory or auxiliary tasks. The Court highlighted the "disposal test," which stipulates that the foreign enterprise must have enough control or access to the location to perform its business activities. Exclusive possession is not a requirement; practical control and regular use of the premises are sufficient.

Supreme court's Findings and the Disposal Test

The Supreme Court's analysis in Hyatt focused on whether Hyatt's operations under the SOSAs represented a fixed place PE in India. The Court dismissed Hyatt's argument that a PE necessitated exclusive physical premises or a permanent workforce, opting for a substance-over-form perspective. Key components of the Court's reasoning encompass:

1. Operational Control Beyond Advisory Role: The SOSAs conferred upon Hyatt considerable powers, including the ability to appoint key personnel (e.g., General Managers), regulate pricing, branding, marketing, human resources, and bank accounts, as well as assign employees to hotels without the owner's permission. The Court concluded that Hyatt's involvement extended to "pervasive and enforceable control over the hotel's strategic, operational, and financial dimensions," significantly beyond mere consultancy.
2. Application of the Disposal Test: Referencing Formula One World Championship Ltd. v. CIT, the Court elucidated that a fixed place PE does not necessitate ownership or exclusive possession. The "disposal test" was fulfilled because Hyatt maintained continuous access to and control over the hotel premises to perform essential business functions, including operational oversight and brand enforcement. The 20-year term of the SOSAs further guaranteed "stability, productivity, and dependence."
3. Continuity of Presence: While no individual Hyatt employee remained in India for more than nine months, the Court stated that the frequent and regular visits by executives and personnel, as demonstrated by travel logs, created a continuous and coordinated business presence. The cumulative presence, rather than individual durations, was regarded as adequate to satisfy the continuity requirement.
4. Profit Attribution Despite Global Losses: Hyatt contended that its worldwide losses should prevent profit attribution to an Indian PE. The Court dismissed this assertion, referencing the OECD's approach and Article 7, which permits India to impose taxes on profits based on the functions conducted, assets utilized, and risks undertaken (FAR analysis) in India, treating the PE as a separate entity.

Comparison with Precedents

The Hyatt decision relies on and differentiates between two significant precedents: Formula One World Championship Ltd. v. CIT (2017)³ and UAE Exchange Centre Ltd. v. Union of India (2020)⁴. In the Formula One case, the Supreme Court determined that the Buddh International Circuit qualified as a fixed place PE for the UK-based FOWC, despite being utilized for only three days, due to FOWC's exclusive control and commercial utilization throughout the event. The five-year agreement further bolstered continuity, fulfilling the disposal test. In contrast, in UAE Exchange, the Court decided that liaison offices engaged in preparatory tasks (such as document collection) did not constitute a PE under Article 5(3)(e), as they were devoid of essential business functions. Hyatt aligns itself with Formula One by underscoring functional control and the disposal test, with the hotels acting as the location of Hyatt's operations, further substantiated by the 20-year SOSAs. It differentiates itself from UAE Exchange by emphasizing that Hyatt's extensive operational control, in contrast to auxiliary activities, activated a PE, reinforcing a substance-over-form perspective.

Key Takeaways

The Hyatt verdict establishes a solid framework for determining PE, providing essential guidance for tax planners, Multinational Corporations (MNCs), foreign businesses, and the Indian tax authorities. The ruling emphasizes a functional, substance-oriented approach, with the following key principles and implications:

1. Operational Control as the Key Determinant: The existence of a PE hinges on the level of functional control exercised by a foreign company. Strategic oversight and operational engagement, as demonstrated by Hyatt's management of its hotels, can initiate a PE, even in the absence of formal ownership or a permanent establishment.
2. Flexible Premises Requirement: A fixed place PE does not require exclusive or dedicated premises. Temporary or shared locations, such as the hotels operated by Hyatt, are sufficient if utilized consistently for essential business activities.
3. Centrality of the Disposal Test: The "at the disposal" test is sine qua non, assessing whether the foreign company effectively utilizes premises to carry out its business, regardless of contractual disclaimers. This test emphasizes practical control over legal formalities.
4. Focus on Business Situs: The location where fundamental business operations take place like the hotels in Hyatt determines the situs of the PE, highlighting the physical centre of value-generating activities.
5. Primacy of Substance Over Form: The ruling highlights that actual operational control takes precedence over legal or contractual arrangements. Agreements that seek to limit PE exposure through formal disclaimers are ineffective if functional control is apparent.
6. Policy Enforcement Triggers Exposure: While creating policies may not, by itself, establish a PE, the enforceable authority to implement and oversee compliance with those policies, as Hyatt did, significantly heightens PE risk.
7. Distinguishing Core Functions: Activities involving substantial administrative and operational responsibilities, in contrast to the auxiliary functions seen in UAE Exchange, are likely to be classified as core business activities, thereby establishing a PE.
8. Long-Term Agreements and Continuity: Long-term contracts, such as Hyatt's 20-year SOSAs, coupled with a consistent operational presence, meet the criteria of stability and dependence required for a fixed place PE.
9. Aggregate Presence for Service PE: In assessing service PE, the overall presence of personnel is more significant than the individual stays of employees. Regular, coordinated visits, as observed in Hyatt, establish continuity.
10. Navigating Rule 10 and Article 7: Tax authorities may invoke Rule 10 of the Income Tax Rules or Article 7 of the DTAA for profit attribution, necessitating that MNCs maintain robust documentation to justify allocations and reduce disputes.
11. Alignment with Global Standards: The Court's reliance on OECD and UN Model Commentaries ensures alignment with international tax principles, strengthening India's position in global tax compliance.
12. Retrospective Tax Risks: Foreign entities with extended operational involvement in India face increased risks of retrospective tax assessments. This compels a reassessment of aggressive tax strategies that depend on narrow interpretations of PE definitions.

Implications for Stakeholders

The Hyatt ruling carries profound consequences for both international businesses and the Indian tax authorities, altering their strategies regarding tax compliance and enforcement:

For Foreign Enterprises: Firms, especially in industries such as hospitality, technology, infrastructure, and consulting, need to re-evaluate their operational frameworks to minimize PE risks. They ought to assess whether their representatives in India are engaged in essential business activities, such as strategic decision-making or operational oversight, and carefully examine contracts for clauses that suggest functional control or access to facilities, even in the absence of ownership. To lessen their exposure, companies might consider localizing their operations through subsidiaries, reducing their physical footprint, or employing independent agents who assume entrepreneurial risks. Remote operations should be designed to avoid triggering service PE. Given the increased scrutiny, it is vital to maintain comprehensive records of India-specific activities, travel logs, and FAR analysis to defend against aggressive tax assessments and potential retrospective taxation.

For Indian Tax Administration: The ruling enables authorities to claim PE status in situations involving strategic or operational control, even in the absence of formal premises, thus expanding the tax base. They can utilize Article 7 and Rule 10 to assign profits to PEs using FAR analysis, ensuring equitable taxation of income sourced from India. The emphasis on functional analysis, scrutinizing contracts, employee roles, and operational behaviours enhances audit procedures, particularly in sectors considered high-risk. By disputing DTAA protections based on factual substance, authorities are in line with global anti-avoidance trends, which could lead to increased tax revenues while bolstering India's standing in international tax compliance.

Conclusion

The Supreme Court's Hyatt decision signifies a pivotal shift in Indian tax law, emphasizing functional control, the disposal test, and substance over form in determining PE status. By building on Formula One and differentiating it from UAE Exchange, the ruling clarifies that substantial operational engagement, even without exclusive premises, establishes a PE. For tax planners, multinational corporations, and foreign businesses, this calls for a strategic redesign of contracts, operational frameworks, and compliance measures. The Indian tax authorities acquire a robust instrument to assert taxing rights, aligning with global norms while intensifying scrutiny of foreign operations. As India strengthens its tax framework, stakeholders must proactively address PE risks to navigate this evolving landscape effectively.

Footnotes

1. https://api.sci.gov.in/supremecourt/2024/9277/9277_2024_9_1502_62468_Judgement_24-Jul-2025.pdf

2. Income tax Department. (n.d.).

3. (2017) 15 SCC 602

4. [2020] 425 ITR 30 (SC)

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