Room Service or Remote Control? The Supreme Court Checks in on Permanent Establishment in Hyatt

The Supreme Court’s decision in Hyatt International Southwest Asia Ltd v. ADIT^[1][2025] 176 taxmann.com 783 (SC). represents a definitive consolidation of permanent establishment (“PE”) jurisprudence rather than novel doctrinal innovation. The judgment affirms that functional control over business operations, and not formal legal arrangements, determines PE existence and provides crucial clarity for multinational enterprises by definitively rejecting formalistic arguments on what constitutes a PE under Indian tax law.

The judgment builds systematically upon the foundational precedents established in Formula One World Championship Ltd v. CIT^[2][2017] 394 ITR 80 (SC). , E-Funds IT Solutions Inc. v. CIT^[3][2017] 399 ITR 34 (SC)., and Morgan Stanley & Co v. DIT^[4][2007] 292 ITR 416 (SC)., applying their established legal tests to complex hotel management arrangements.

I. Background and Prior Litigation

The Hyatt case emerged from a complex web of hotel management agreements spanning multiple assessment years and revolved around the taxability in India of fees earned by Hyatt International Southwest Asia Ltd (“Appellant”), a company incorporated and tax resident in the United Arab Emirates (“UAE”) from the provision of services to an Indian entity.

The case involved a structure that was not unusual in the hospitality sector. The Appellant had entered into Strategic Oversight Services Agreements (“SOSA”) with Asian Hotels Limited (the “Owner”), in relation to the iconic Hyatt Regency hotels in Delhi and Mumbai. Under the SOSA, Hyatt International was to provide strategic planning services and “know-how” to ensure the hotels’ efficient and high-quality operation as internationally branded full-service properties. Notably, the day-to-day management of the hotel was handled by a separate affiliate, Hyatt India Pvt Ltd, under a Hotel Operating Service Agreement.

The Indian income tax authorities sought to tax the fees received by the Appellant under the SOSA on the basis that it had a fixed place PE in India under Article 5(1) of the India-UAE Double Taxation Avoidance Agreement (“DTAA”). The Appellant, in contrast, maintained that (i) there was no fixed place of business in India under Article 5(1), (ii) the limited and occasional presence of its employees in India fell short of the nine-month threshold for a “service PE” under Article 5(2)(i) of the DTAA, and (iii) in any event, its global operations were loss-making and thus there could be no profit attribution in India.

The Assessing Officer, the Dispute Resolution Panel, and the Income Tax Appellate Tribunal (“the Tribunal”) each rejected the company’s contentions. The Tribunal, relying on Formula One, held that the Appellant had a “fixed place” PE in India due to the degree of operational involvement, duration of contract, and control ostensibly exercised over both hotels under the SOSA. An appeal to the Delhi High Court resulted in partial relief: the High Court accepted that the fees paid to the Appellant were not “royalties” under Article 12 of the DTAA but were business income potentially attributable to a PE and referred the question of profit attribution in a loss situation to a larger bench of the Court^[5]A Full Bench of the Delhi High Court had held on September 19, 2024 that profits could be attributed to Indian PEs regardless of global entity level losses. See Hyatt International Southwest Asia Ltd … Continue reading. At the same time, it upheld the existence of a PE under Article 5(1) based on the Tribunal’s findings.

These findings were challenged before the Supreme Court, which was called upon to evaluate, inter alia, whether the Appellant had a “fixed place” PE in India, whether the SOSA and associated activities crossed the threshold laid down in Formula One, E-Funds, and Morgan Stanley, and how profit attribution should occur in such a situation.

II. The Supreme Court’s Ruling: A Doctrinal Analysis

The Supreme Court largely affirmed the findings of the High Court and the ITAT, holding that the Appellant had a “fixed place” PE within the meaning of Article 5(1) of the DTAA. In so doing, the Court traversed the legal framework established by Article 5 (definition of PE) and Article 7 (business profits) of the DTAA, as well as the interpretive standards previously articulated by it in Formula One and E-Funds.

In Formula One, the Supreme Court had addressed whether a foreign company had a PE in India when it controlled the Buddh International Circuit for limited but critical periods during the Formula One Indian Grand Prix. The Supreme Court laid down two central requirements for a fixed place PE under tax treaties: (i) there must be a “fixed place” (i.e., a geographically identified, stable site); and (ii) that place must be “at the disposal” of the taxpayer so as to enable the conduct of its own business. Exclusive legal possession was not necessary, but sufficient degree of control, continuity (even if for only a few days in the context of the business), and the ability to carry on commercial activity from the premises were determinative. The decision stressed the “economic reality” of the presence and control over the location.

In E-Funds, the Supreme Court had to decide whether back-office operations undertaken by an Indian subsidiary for US group companies constituted a fixed place PE for those companies. The Court clarified that the mere existence of a subsidiary, or close business integration, was insufficient: what was crucial was whether the foreign parent had a fixed place “at its disposal” in India through which it carried on its own business. The operations of the Indian entity did not automatically translate into a PE for the foreign enterprise unless the premises or part thereof were actually and continuously made available for the enterprise’s use. The Court was clear: contractual arrangements, legal substance, and business realities all matter.

A. Application of Formula One and E-Funds: Substance over Form

In its judgment, the Supreme Court largely affirmed the factual and legal findings of the High Court. Applying the “disposal test” from Formula One, the Court held that it was not necessary for the Appellant to have exclusive legal possession or a specifically designated office within the hotel premises. What mattered was the “pervasive and enforceable control” it exercised over strategic, operational, and financial aspects of both hotels, as conferred by the SOSA. This included the power to assign personnel, implement policies, control branding and procurement, and appoint senior management – a degree of influence that exceeded mere consultancy.

The Supreme Court dismissed the claim that fragmented or occasional presence – spread over multiple executives and visits – precluded a finding of PE. Instead, the aggregate continuity of operations, the long-term nature of the contract (20 years), and the linkage of remuneration to hotel performance were all indicia of stability and business presence. The Court was unswayed by the formal division between Hyatt International, the strategic provider, and Hyatt India, the day-to-day manager. It underlined that actual segregation of advisory and operational roles in separate companies will not, by itself, prevent the existence of a PE where the foreign entity retains real economic and functional control.

The Court also factually distinguished its ruling in E-Funds, stating that E-Funds involved subsidiary back-office support while Hyatt involved core business operations at hotel premises. Here, the Court found that the Appellant’s arrangement gave it more than an advisory role: it was “an active participant in the core operational activities of the hotel”.

This doctrinal emphasis on commercial substance may have far-reaching implications for foreign businesses operating in India. Companies operating via complex service, oversight, or franchise agreements, particularly those relying on local affiliates for daily management, now face a heightened risk that seemingly “remote” or “oversight” functions may create a fixed place PE if effective commercial control can be shown. Further, the disaggregation of contracts and functions can now be combined to determine the “substance” of the transaction and the existence of a PE. Sectors such as hospitality, retail, consultancy, and technology, where global brands maintain central oversight but operational fragmentation is common, must now examine whether they have crossed the “disposal” threshold. Notably, fragmented or non-exclusive use of premises, combined with sustained policy-making or supervision, may be enough to constitute a fixed place PE under Indian law.

B. “Fixed Place” Test and the Requirement of Permanence

The Supreme Court’s analysis of “fixed place” notably privileges economic substance over formal legal rights, drawing on Formula One and international commentary (e.g., OECD, Klaus Vogel). It restates the three characteristics of a fixed place PE: stability, productivity, and dependence. Temporary or shared use, and even non-exclusive or partial control, may suffice provided the premises are at the “disposal” of the taxpayer in a manner commensurate with the character of the business.

However, unlike Formula One, where the foreign entity had direct contract-based access to the event premises (the Buddh International Circuit) for specified periods during the event calendar, in Hyatt the factual setting was more diffuse. The hotels continued to be owned by Indian entities who separately contracted for management and operations; the Appellant’s presence was described as one of strategic oversight, albeit with the ability to assign employees and oversee implementation on an ongoing basis.

Despite these differences, the Supreme Court ultimately found that the necessary elements of a fixed place PE were present. The Court did not expressly grapple with – or at least, did not analyse at length – whether each of the hotels constituted a separate PE, or whether there was a “single PE” aggregating multiple operations (the analysis is focused on the “hotel premises” as a unit). This may reflect the fact pattern, as each SOSA was a stand-alone contract and suggests that fragmented operations in distinct geographical locations may no longer preclude a unified PE finding.

While earlier Indian jurisprudence has hesitated to find a PE where the presence is fleeting or intermittent (e.g., E-Funds), the Court in Hyatt emphasised the aggregate continuity of personnel across the contract, the permanent right to assign staff, and the enforceable policy-making and financial rights. The stability and continuity, in the Court’s eyes, came from the long duration and the linkage of the Appellant’s economic fortunes with the operation of the hotels. This somewhat pragmatic approach to “fixed place” may significantly affect foreign companies whose Indian activities involve network-based or scattered business presence. A long-term ability to access, supervise, and influence operations across more than one location, even on a shared or rotating basis, may allow the tax authorities to attribute a PE to each, subject to sufficient commercial and contractual indicia of control. Traditional defences based on lack of exclusive legal right or absolute permanence are now perhaps less likely to succeed.

C. Fixed Place PE and Employee Presence

Unusually, the Supreme Court took the position that even if no individual employee exceeded the Article 5(2)(i) threshold (of nine months presence in a twelve-month period), the aggregate presence and functional control sufficed for a fixed place PE under Article 5(1). Citing Formula One and commentaries, the Court stated that employees’ intermittent presence, coupled with the enterprise’s right to use hotel premises for its business functions, reflected stability and continuity through the fixed place. It implicitly rejected the notion that the requirements for a fixed place PE and a service PE must be mutually exclusive and indicated that employees matter for both — not necessarily in terms of total duration but in terms of their role and relationship with the fixed place. Thus, locally performed employee operations may evidence the conduct of business operations “through” fixed premises. Foreign companies that rely on mobile, rotating, or project-based workforce structures should pay close attention. Even absent any single employee’s prolonged presence, the aggregate and systemic use of premises for recurring oversight, quality control, or strategic interventions may suffice for fixed PE exposure (and not just service PE). This blurs traditional safe harbours based on headcount, individual days, or strictly contract-based mobility limitations.

D. Profit Attribution and the Arm’s Length Principle

On profit attribution, the Supreme Court noted the principle, long established in Morgan Stanley, that only those business profits “attributable” to the PE are taxable in the source state. The Court also quoted the Delhi High Court’s reference to the “independent entity” fiction for PEs and upheld the principle that taxability depends on business presence (nexus), not global profitability, a view strongly stated by the Delhi High Court’s larger bench in the connected matter^[6]Hyatt International Southwest Asia Ltd v. ADIT, [2025] 472 ITR 53 (Delhi).. This suggests an implicit affirmation of the view taken by the Delhi High Court that profit attribution to a PE remains unaffected by global losses.

Yet, unlike in Morgan Stanley, where the Court vacated to the assessing officer the task of profit attribution (emphasising that, where the PE is remunerated at arm’s length, there may be no further profit to attribute), the Supreme Court did not do so in Hyatt. Instead, it simply declared all income received under the SOSA to be attributable to the Appellant’s PE and therefore taxable in India. With respect, this suo motu approach to profit attribution was unwarranted. While the substantive legal principles applied by the Court remain consistent with Morgan Stanley, the Court’s decision to attribute profits itself rather than remand for administrative factual and functional determination stretches traditional appellate boundaries and suggests that judicial efficiency concerns outweighed procedural accuracy. This lacuna could be interpreted as leaving open the precise mechanics of attribution in future proceedings, but it also sidesteps what may be, for affected multinationals, the most practically significant issue in PE cases.

III. Implications and Conclusion: Continuity or Change in Indian PE Jurisprudence?

Does the Supreme Court’s judgment represent a doctrinal innovation, or does it merely restate existing law? On balance, the Hyatt decision largely consolidates and reaffirms the principles explicated in Formula One and elsewhere. The significance of “at disposal”, the focus on economic reality over contractual form, and the de-emphasis of exclusive or even continuous physical use all find their lineage in established jurisprudence. The Court’s broad reading of control and presence, coupled with an emphasis on duration and profit linkages, may arguably extend the reach of Indian tax authorities but does not, as a matter of legal principle, advance beyond prior Supreme Court precedents.

That said, Hyatt is important for the way it applies and confirms the adaptability of the fixed place PE concept to the global hospitality industry and management contracts, particularly those involving multifaceted brand, strategy, and oversight functions. Multinational groups operating in India on an “asset-light” or service hub model will see the risk of Indian PEs being asserted even where physical presence is limited and operational activities appear indirect.

In conclusion, Hyatt is notable not for breaking new ground in PE law but for confirming the Court’s willingness to interpret established principles in a commercially realistic fashion, giving tax authorities a robust toolkit in confronting cross-border service and intellectual property arrangements. For taxpayers, the imperative will be to ensure that legal form matches operational substance, and that profit attribution positions are well-justified and contemporaneously documented, lest the existence of a PE become a springboard for protracted litigation over the quantum of Indian taxable profits. Service arrangements require particular scrutiny as the Court’s distinction between core business functions and auxiliary activities determines PE exposure. Enterprises must carefully structure operational arrangements to avoid inadvertent PE creation while maintaining business efficiency. As such, the Supreme Court’s judgment is a significant — albeit not revolutionary — contribution to Indian tax law, blending respect for precedent with pragmatic attention to modern business realities.