SC dismisses Hyatt International Southwest Asia's appeal in tax case

The Supreme Court upholds the Delhi High Court's decision, ruling that Hyatt International Southwest Asia's operations in India will be treated as a Permanent Establishment for tax purposes

The Supreme Court on Thursday held that UAE-headquartered Hyatt International Southwest Asia, which provides hotel advisory services in India as part of its business operations, will be considered a Permanent Establishment (PE) in India for tax purposes.

 

A bench of Justices JB Pardiwala and R Mahadevan upheld the Delhi High Court’s decision, ruling that Hyatt’s Indian PE must be treated as a distinct taxable entity.

 

“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 Double Taxation Avoidance Agreement (DTAA), and that the income received under the SOSA (Strategic Oversight Services Agreement) is attributable to such PE and is therefore taxable in India,” the order said.

   

The principal issue for the court to decide was whether Hyatt International Southwest Asia, a tax resident of the UAE, has a Permanent Establishment (PE) in India under Article 5(1) of the Indo–UAE DTAA, and consequently, whether its income derived under the SOSA is taxable in India.

 

Hyatt International Southwest Asia (HISA) is a company incorporated under the Companies Law, Dubai International Financial Centre Law No 3 of 2006, in the United Arab Emirates. 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 Taxation.

 

The court also observed that 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." The court said that HISA’s submission that the daily operations were handled by Hyatt India, 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 (HISA) clearly establishes that business was carried on through the hotel premises…” the judgment said.

 

The court also held that a PE should be treated as a separate taxable entity, meaning India can tax profits attributable to the PE even if the foreign parent company incurs overall global losses.

 

Foreign companies operating through Indian affiliates may now face possible taxation unless these strategic elements are addressed adequately, said Pallav Pradyumn Narang, Partner at CA firm CNK.

 

“The judgment further states that global losses cannot shield India-sourced profits from taxation, and foreign firms with Permanent Establishments in India must now clearly attribute Indian income to such PEs. The court has flagged a conflict with its earlier ruling in the case of Nokia and has referred this matter to a larger bench, signalling that past precedents on PE may soon be overturned,” he said.

 

Rahul Sateeja, Partner at law firm DMD Advocates, said the Hyatt International judgment by the Supreme Court will have a chilling effect across industries where standardisation of services through oversight by foreign executives is inevitable.

 

“The Indian counterparts of foreign companies need to review their transactions and calibrate them at arm's length price to avoid taxability based on another apex court judgment in MasterCard, even if Hyatt International is pressed to hold the existence of a permanent establishment (PE),” he said.

 

Meanwhile, Ankit Jain, Partner at CA firm Ved Jain and Associates, said that one way for international hotel chains to mitigate this tax exposure is by setting up a dedicated entity in India to manage their local hotel operations.

 

“By doing so, the management and brand services can be routed through an Indian company, reducing the risk of triggering a PE and the resulting tax disputes. This structure also provides greater clarity and compliance for tax authorities and offers long-term stability for both the hotel chain and property owners operating under the brand,” he said.