India's new test for Permanent Establishment: Control over Presence

The Hyatt case has reignited a debate over what constitutes a permanent establishment, with courts increasingly focusing on the 'form over substance' principle

For years, whether or not a multinational company in India had to pay taxes hinged on one overarching question: Do they have a permanent establishment (PE) here? If the answer was no, the company either did not pay any taxes or would have to pay a flat tax with no examination of profit. But if a physical office existed, the company would have to file full tax returns, maintain books, undergo audits, and pay profit-based tax,  making PE status one of the most contested issues in cross-border taxation in India. 

 Now, following a landmark ruling by the Supreme Court in July and a string of tribunal decisions involving service-based operations, India’s interpretation of what constitutes a PE is expanding. Following the ruling, involving UAE-based Hyatt International Southwest Asia, which provides hotel advisory services in India, the multinational doesn’t need to have a brick-and-mortar office and staff to be taxed for profit.  

The emphasis is moving away from physical presence — offices, employees or fixed facilities — to whether a foreign company exercises meaningful control over business functions carried out in India. Who, in other words, is running the show. 

 Core challenge  

At its heart, a PE refers to a foreign company having a business presence in India. Traditionally, this meant a fixed place of business with some ‘permanence’— an office, branch, factory or site where the company had control. But courts are increasingly emphasising a “substance over form” principle: What matters here is not what the contract says, but what actually happens on the ground, according to experts. Kunj Vaidya, partner with PwC, notes that the determination of a PE today depends on whether the foreign company has real operational involvement in India.  

“Courts are looking at the totality of conduct rather than contractual labels. If a foreign enterprise is directing or managing crucial business functions in India, the absence of a physical office may not protect it from being treated as having a PE,” he says.  

A critical ingredient of evaluating whether a PE is constituted are contacts executed between a foreign company and the Indian unit. These could take multiple forms, including inter-company agreements and employment agreements, according to Chetan Daga, founder-partner with AdvantEdge Consulting. 

 Once a PE is established, the next issue is profit attribution. India taxes only that portion of profits that is connected to Indian activities, based on the functions performed, and assets used locally, among others. This attributable income is taxed at the ‘foreign company tax rate’ of 35 per cent plus surcharge and cess.  

What Hyatt changed 

The Supreme Court’s decision, on a challenge by Hyatt, has become the defining reference point for modern PE interpretation. In assessing whether Hyatt’s foreign operator had a PE in India, the Court introduced three broad indicators: stability, productivity and dependence. Stability related to the long-term nature of the hotel management agreement; productivity involved the foreign entity earning revenue-linked fees tied directly to the hotel’s performance in India rather than globally; and dependence referred to the Indian hotel’s reliance on the foreign operator’s systems, personnel and approvals. Crucially, the court looked beyond the agreement’s language, which described the foreign operator’s role as “strategic” or “oversight.” 

 

Instead, it examined actual conduct: Hyatt appointed and supervised the general manager, controlled pricing and branding, influenced human resources and procurement policies, and exercised real managerial authority. These actions, the apex court held, went far beyond advisory oversight and amounted to direct operational involvement.  

 This, said Dhruv Kumar, a chartered accountant with PwC, mirrors the reasoning in an older ruling on Formula One, where the three-day racing event was held to constitute a PE because the foreign organiser had complete control over the race track during the course of the event. “The Court’s emphasis then—and now—is on disposal and control rather than duration or ownership.”  

 Amit Maheshwari, tax partner at AKM Global, observed that the Hyatt ruling confirms the growing trend of recognising a PE on the basis of economic substance. “Active and continuous control over Indian operations can trigger a PE even without an office. This marks a decisive shift from physical presence to functional presence,” he says.   

New terms in play  

 Control, in simple language, refers to who is actually running the business activities in India. If a company with its headquarters in another country is making key decisions, approving budgets, appointing senior staff or influencing policies, it may be considered to have control. Presence, traditionally understood as having an office or employees in the country, now extends to situations where the foreign company’s economic footprint resembles an on-ground presence. Profit attribution answers the practical question: how much of the foreign company’s income is genuinely generated from the work done in India? Only that part is taxable. 

 Why it matters  

These developments have far-reaching implications for technology, hospitality and consulting firms. “For technology companies, especially after the withdrawal of the 6 per cent equalisation levy, PE rules once again become central,” said Maheshwari.  

 Ongoing disputes on PE, involving, for instance, Mastercard, show that even servers or digital infrastructure may be examined for economic ownership and business relevance, according to Vaidya. The hospitality sector faces the most direct consequences, as Hyatt-style management contracts, which established strong commercial links with various Indian hotels, are common. Foreign operators may need to reassess the extent of control they retain over Indian properties.  

 Consulting and professional service firms must continue to balance ‘day-count rules’ and manage how teams based abroad operate during India visits, as service PE remains closely tied to physical presence. Foreign companies in other models—such as global capability centres (GCCs), captive units, contract manufacturing, and franchise arrangements — may also see new tax questions emerging after Hyatt.  

Day count rules refer to the number of days foreign employees are allowed to spend in India on work. Exceeding the number of days can trigger a PE. 

 Kunj Vaidya of PwC said the ruling will force a closer look at the role played by the foreign enterprise and the level of day-to-day involvement it has in its Indian business. In many multinational companies, headquarters typically issue policies, quality standards and guidelines that Indian and other foreign units are expected to follow. Vaidya noted that while this is accepted practice, tax authorities may now examine whether such alignment leaves the Indian entity with limited operational freedom, and whether that could be viewed as a form of control.  

For instance, contract manufacturers also face a similar situation as they are expected to follow the principal’s instructions on processes and production. According to Dhruv Kumar, this alone should not create a PE, but companies may need clearer documentation to show that operational decisions are still taken locally and that the foreign enterprise is not running the show. Kumar added that secondment arrangements involving temporary transfers of employees, too, must be assessed carefully. While Hyatt was not a secondment case, and the ruling does not mean every secondment leads to a PE, if the seconded employees work under the control and supervision of the Indian company, both contractually and in practice, a PE should not arise. 

 Vaidya said intra-group service models, franchise structures and management contracts—where the foreign party often has defined oversight and brand-related standards—may now face higher PE risk. 

 The way ahead  

As PE disputes grow more complex — particularly in digital and service-led business models — experts say India needs rules that offer clarity without weakening its legitimate right to tax. A recent report by the NITI Aayog points in that direction. It suggests moving to ‘presumptive profit attribution’, where predefined profit margins are assigned to different industries. Foreign companies can choose this simpler system instead of detailed transfer pricing analysis, and those opting in would not need to litigate the existence of a PE for that activity. The scheme is optional, reduces compliance, and is intended to remain aligned with treaty principles.  

 Kunj Vaidya considers these recommendations a constructive move towards certainty but said the government must carefully evaluate the proposed margins to ensure they match industry realities. He noted that while presumptive attribution could reduce litigation, it marks a shift away from precedents that have upheld application of transfer pricing principles for attribution. Transfer pricing refers to how multinational companies set prices for goods or services exchanged between their own group entities in different countries. He said these recommendations must be implemented in a way that is consistent with treaty obligations.  

 Abhishek A Rastogi, founder of Rastogi Chambers, is more cautious. Because these changes would be unilateral amendments to domestic law, they may clash with treaty-based profit attribution rules. If India attributes high presumptive profits, the foreign jurisdiction may refuse to grant full credit, resulting in double taxation. He pointed out that this concern becomes more acute as digital PE disputes — such as those involving servers or economic ownership of infrastructure — gain prominence. For cases where a PE is accepted, Advance Pricing Agreements (APA) could offer stability and help avoid litigation that often drags on for years, he said. An APA is a binding agreement between a company and the tax authority that predetermines how its cross-border transactions will be priced for tax purposes for future years, so that there are no disputes later.   

Both Vaidya and Rastogi stressed that multinationals must maintain strong documentation — clarifying employee roles, functions performed in India, and the division of responsibilities between Indian and overseas teams.  

Courts in India and globally continue to prioritise substance over form, and the Hyatt ruling reinforces that approach. Clear, consistent records and transparent operating structures will be essential safeguards against prolonged PE disputes in the years ahead. 

Experts said the seriousness of the issue is evident in the NITI Aayog’s move to propose an alternative mechanism, signalling that policymakers recognise the uncertainty in the current system. But for companies to have confidence in any mechanism, the upcoming Union Budget FY27 must settle key operational questions such as industry margins, treaty compatibility and safe-harbour conditions. “The intent is clear — India wants a simpler system. What we now need is clarity in the Budget so that businesses know how to apply it in practice," said Rastogi.  

Who is present, who is not

• Existence of permanent establi­shment (PE) now depends on who directs Indian operations, not only whether an MNC has an office or any other form of presence in India
• Courts are examining actual conduct, not labels like ‘advisory’ or ‘oversight’ or matters stated as terms of a contract
• Hyatt’s control over staffing, pricing, and branding was held to create a PE, despite no physical base contractually belonging to the foreign company
• Tech firms, hotel operators, and consulting companies face greater PE exposure
• Companies must show who makes strategic decisions, especially in GCCs, franchises, and secondments
• NITI Aayog suggests optional presumptive profit attribution to cut PE profit attribution disputes
• Experts say clarity in Budget FY27 and strong records will be key to reducing litigation