Hyatt International Southwest Asia Ltd. (“Hyatt-UAE”) is a company incorporated in Dubai and a tax resident of the United Arab Emirates. It entered into several Strategic Oversight Services Agreements (SOSA) with Asian Hotels Ltd. (“AHL”). Under these agreements, Hyatt-UAE provided strategic planning, brand control, and operational oversight to Hyatt hotels in India. AHL operated daily under the Hotel Operating Services Agreement (HOSA).
The tax authorities said that Hyatt-UAE exercised substantive and continuous operational control, even without a formal office or employees present for over nine months. They considered it a permanent establishment (PE)-a “fixed place PE”-under Article 5 of the Double Taxation Avoidance Agreement (DTAA) with the UAE.
Supreme Court Decision
The Supreme Court confirmed the existence of a PE in India, based on Hyatt-UAE’s ability to assign and supervise key personnel (including the general manager and operational staff), control prices, branding, human resources, banking, and marketing by operating intermittently from the hotels.
The Court emphasized that PEs do not require a controlled office or a continuous period of stay. Even if each employee was in India for less than nine months, their systematic, coordinated, and functional presence constituted actual operational control.
The Court also noted that income attributable to the PE in India is taxable under Article 7 of the DTAA, even if the global entity reports aggregate losses elsewhere.
Implications for Transfer Pricing and Tax Planning
This ruling directly affects Transfer Pricing and international tax risk:
- PEs require developing a FAR (Functions, Assets, Risks) analysis to attribute income consistently at Arm’s Length to the operation in India.
- Therefore, even without a permanent office, it is essential to maintain a robust and well-documented transfer pricing model to support PE compensation and address audit requirements.
- The case stresses that substantive links to key activities (control, branding, operations) can constitute a PE, raising the risk threshold for predominantly contractual structures.
- Audits should review agreements with local entities, strengthen documentary evidence, and ensure that payments (such as strategic fees) effectively reflect the sharing of risks and results.
Conclusion
The July 24, 2025, Supreme Court ruling redefined the concept of PEs, endorsing the substance-over-form principle in cross-border assessments. For Transfer Pricing, it is a clear warning: Actual operational control, even if not continuous, can establish a PE with all its tax obligations.
Source: TPCases