Hyatt hotels Corporation - (2025-TII-02-SC-INTL) with NYSE ticker: H, is an American hotel conglomerate ultimately owned by the Pritzker family of the USA. Hyatt Hotels Corporation is headquartered in Chicago.

According to a website of the hotel chain, 'Hyatt has 52 hotels across Southwest Asia, including 50 in India and two in Nepal, spanning nine distinct brands. Hyatt recently crossed the milestone of 10,000 keys in the region, further cementing its position as one of the region's leading hospitality players.' Incidentally, one of the chains in the luxury range worldwide is known by its Hindi name- Andaz .

When 50/52 properties are in India, one would imagine that the headquarters of the Southwest Asia region of the group would be in India. But that is never the case. Most American companies never invest directly in India. The allure of Mauritius having diminished somewhat in recent years, it is either Singapore or the UAE. The present case that we will discuss involves the India-UAE tax treaty and involves the perpetual favourite question of the Indian Revenue about the existence of a PE in India.

Statistics often show and rightly so, that the Government is the biggest litigator in tax matters. Many a times, this is done for what in the revenue lingo is known as - keeping the issue alive. There are some cases where the courts have held that if the revenue has accepted a particular view point for one assessment year, then the same issue, generally speaking, cannot be agitated in another case.

But this case illustrates that the MNCs are no less adept in resorting to litigation either. Hyatt has lost its case before the ITAT and the High Court on the issue of the existence of a PE of the foreign company in India. The lower courts having ruled against the taxpayer predominantly on factual aspects and in favour of the revenue, it nevertheless filed a special leave petition before the Supreme Court and this SLP came to be finally decided against the taxpayer.

We may note that having lost on the issue of the existence of a PE at the level of the High Court and before the decision of the SLP, in between, the taxpayer took an alternate plea that even if it had a PE in India, no profit could be allocated to the said PE on the ground that the entity at the global level had losses and hence even if the alleged PE had profits in India, nothing could be allocated to the Indian PE. That argument, of course, was based on a Delhi High Court observation in the case Nokia Networks OY. In the taxpayer's own case, a Division Bench of the Delhi High Court overruled its own observation in the Nokia case and finally ruled in favour of the Revenue ruling that the profits of the PE of a foreign enterprise in India are liable to tax in India even if the enterprise suffers a loss at the global level. It is not known whether the said decision is again under appeal before the Supreme Court. As we shall see, in the present decision itself, the Supreme Court also took note of the said decision of the Division Bench of the Delhi High Court, although the Court did not express any specific view in this regard.

Before diving into the facts of the case and the legal provisions, it is also interesting to note that the Supreme Court in this case has given a table indicating the year-wise revenue involved for different assessment years. It may be for the purpose of indicating that the tax effect is above the threshold that the government has prescribed for litigating before the Supreme Court to reduce litigation by the Government. At any event, the table also shows the magnitude of tax planning involved in a single case and is reproduced below.

Judgements of the Supreme Court of India receive world-wide attention. Generally speaking, those favouring the taxpayers, particularly those following the OECD views are applauded, while those taking contrary or independent views get mixed reviews. Such was the case of the decision of the Supreme Court in the now famous Formula One World Championship (FOWC) case relating mainly to the temporal aspect of the existence of a PE. But that judgement elaborated on many other aspects in regard to the existence of a place of business and has indeed been heavily relied on by the lower courts as also by the SC in this case also.

Coming to the facts, the present SC decision states that the litigant company is incorporated under the Companies Law, Dubai International Financial Centre Law No.3 of 2006, in the United Arab Emirates and that it is a tax resident of the UAE under Article 4 of the India-UAE double tax avoidance agreement.

In 2008, the UAE company entered into two Strategic Oversight Services Agreements (SOSA) with Asian Hotels Limited, India - one for Asian Hotels Limited (AHL), Delhi and another for AHL, Mumbai. Under this agreement, the taxpayer agreed to provide strategic planning services and "know-how" to ensure that the hotel was developed and operated as an efficient and a high-quality international full-service hotel.

For the year the tax year 2009-10, the taxpayer filed a return showing nil income and claiming substantial refund. What is interesting is that the taxpayer claimed that its income from the SOSA agreement constituted 'fees for technical services'(FTS) and not business income and that it did not have any PE in India. The claim that the income constituted FTS is rather unusual since FTS is generally taxable under the Indian domestic law.

However, the India-UAE tax treaty signed in 1993 has an article 12 that deals with royalties and does not have a separate article relating to FTS. Royalties are defined under Article 12 of the said treaty as follows:

"3. The term "royalties" as used in this Article means payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience but do not include royalties or other payments in respect of the operation of mines or quarries or exploitation of petroleum or other natural resources."

This is more or less the standard definition of royalties in Indian treaties including in those that also contain a provision of fees for technical services either as a separate article or as a part of the article on Royalties.

Generally, consideration for any managerial or technical or consultancy services is separately defined as fees for technical services (FTS) in Indian treaties. The treaty with UAE, although modified twice in between continues with the stand-alone article on royalties, leaving open scope for tax planning. A few more treaties, such as those with Egypt, Greece (unamended for some strange reason since the beginning), Thailand, Philippines etc., also continue with the same lacuna. In cases involving some of these countries, Indian courts have ruled that in the absence of a specific article in the treaty in respect of FTS, fees for technical services will form part of the business income of the MNC and cannot be taxed in India if there is no PE of the foreign company in India. The taxpayer in the present case, obviously wanted to exploit the same loophole.

The tax treaty with the UAE however contains the usual PE provision – a fixed place of business through which the business of an enterprise is wholly or partly carried on along with an indicative list of such a PE in Article 5(2) that in item (i) states as follows: -

"the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period."- the so-called service PE provision.

The taxpayer claimed that it did not have any fixed place of business, office, or branch in India and that the service PE provision is also not attracted in the present case since the presence of its employees in India during the relevant previous years did not exceed the nine-month threshold and that in the absence of a specific FTS provision in the tax treaty, its business income in India was not taxable in India since it did not have a PE of any sorts in India. Another point taken before the AO was that what was being carried out in India was the business of the Asian Hotels Limited and that the taxpayer only rendered strategic oversight services as may be required by AHL and this cannot be construed as carrying on any business in India. Therefore, application of a fixed place PE under article 5(1) is ruled out and if at all one may consider article 5(2)(i) since a specific provision overrules a general provision. However, that provision is also not attracted since the stay of the employees in the aggregate amounted to only 158 days, the threshold is not crossed.

The AO however held that the taxpayer always had a fixed place of business at its disposal throughout the year in Hotel premises, including the chambers of MD, and other expatriates who were continually present. He alleged that though the taxpayer purposefully restricted the stay of employees below specified period, yet it was clear that the premises/place were available to the taxpayer for entire duration from which it had carried out its activities for performing its obligation under the strategic oversight agreements. He held that

a number of judicial precedents of commentaries have resulted in the foundation of the principle that if a fixed place of business is available to a taxpayer and is at its disposal through which it carries out its business fully or partly, then it would constitute a fixed place of business PE.

The AO observed that the taxpayer admits that it is rendering consultancy service but claims that its employees did not stay in India for a period aggregating 9 months. The contention of is incorrect as the operative word regarding duration is of the activities and not stay in India . The AO pointed out that from details of visits of employees submitted by the taxpayer, they were involved in the project throughout the year. They had their actual physical presence in every month of the year under consideration.

 The activities under the agreement were carried out throughout the year. It is of no relevance that employees came and left restricting their stay in India. But the activities undertaken by them in pursuance of consultancy services were continued throughout the year. Hence, it is also PE as per Article 5(1) (i) of Indo-UAE DTAA.

The AO also held that part of the scope of the activities under the agreement clearly qualifies to be treated as royalties under section 9(i) (vi) of the Act and Article 12 of the DTAA. In particular, he mentioned the following clause from the agreement: (paragraph 24 of the Tribunal's order)

"In furtherance of the oversight and strategic planning services to be provided for the benefit of the Hotel pursuant to this Section 3. Strategic Provider shall provide to the Owner and the Hotel employees, exclusive use in the operation to the Hotel, the proprietary, written knowledge, skills, experience, operational and management information and associated technologies related to the operation of international, luxury full service hotels which Strategic Services Provider, and their affiliates have developed and accumulated over time as operators and managers of similar luxury, full service hotels throughout the world ( collectively, "know- How" ), subject to the provisions of Article IV. below. Owner hereby confirms, acknowledges and agrees that the Know-How and any expertise arising there from or relating thereto shall be used only in connection with the Hotel and shall be provided to Service Provider by Owner solely for such purpose. Any use of the Know-How outside the context set forth herein, shall be deemed a default by Owner, subject to the immediate termination of this Agreement by Strategic Services Provider, solely at its discretion. Particular areas of such knowledge, skills, experience, operation and management information and associated technologies that comprise the Know-How furnished under this Agreement are generally described in Appendix I, which forms an integral part of this Agreement."

The order of the AO is not available. So, it is not clear what the AO actually determined as royalty. The Tribunal's order despite being long is somewhat peculiarly structured. However, the High Court's order discussed below states that the AO computed the tax payable by the Assessee at 10% of the gross receipts. He held that the royalties and FTS relatable to the PE were required to be taxed on net basis in accordance with Article 7 of the DTAA and Section 44 DA of the Act. However, since no information was provided by the Assessee in regard to the computation of taxable profits attributable to its PE in India, the AO assumed that the Assessee's net profit would be 25% of the receipts and resultantly, the tax would be payable at 10% of the gross receipts.

It appears that the DR, pointed out that the taxpayer has not much argument regarding the place of business being at the disposal of the taxpayer. The duration of the stay of the employees is relevant only for the service PE provision but not for the fixed place of business PE under article 5(1). He also submitted a chart showing that the employees of the MNC were present throughout the year except for a period of 75 days; that although individually nobody stayed for more than nine months, but if the aggregate is taken, employees of the foreign company were present for a period of 290 days in India. He explained about the geographical test, business test and the duration test and argued that the employees of the foreign company were working by placing themselves at the hotel and which was a fixed place placing heavy reliance on the judgment in the case of Formula One World Championships regarding fixed place of business.

Pointing to clauses of the agreement that placed various restrictions in matters of opening of bank accounts, employment of personnel etc., the DR argued that the agreement not only provides the taxpayer with an unrestricted right to access the hotel premises but also the complete control over such premises thereby clearly establishing the fact that the hotel premises were at the disposal of the taxpayer in view of the length and duration of their use. It was also pointed out that the operating time of the lease was for a period of 20 years.

The DR argued that even if section 5.2(i) is also applicable, the employees having stayed for more than 9 months, the income had to be taxed in India. The DR also pointed out that, the agreement was not for a project, but for running, maintaining, and managing of the hotel.

The representative of the taxpayer however argued that the control of the hotel was in the hands of the owner, and that the taxpayer was only extending contract and strategic planning

According to him what is to be seen is the real and dominant control which was always with the towner of the hotel and not with the taxpayer.

Having heard the arguments and having examined the various clauses of the SOSA, the ITAT concluded that the taxpayer has been technically operating the hotel belonging to the owners namely, Asian Hotels Ltd. (AHL) through the employees who are recruited by them and that the hotel premises were at the disposal of the taxpayer during their period of stay.

The ITAT also held: "The place of business may also exist where no premises are available required for carrying on the business of the enterprise. It is sufficient to have certain amount of space at their disposal to conduct their business operations. Further, the place of business may also be situated in the business facilities of any other enterprise too. Thus, it can be said that the assessee who is running the business operations at the premises available for constant disposal in the hotel can be said to be a place of business. The availability of an office premises to a foreign company in the premises of the contracting party in order to ensure that both the parties comply with their obligations to the contract for a long period of time will constitute a permanent establishment. As long as, the premises is at the disposal of the assessee and having the right to use the premises for the purpose of the assessee's business on behalf of the party to the agreement can constitute a fixed place PE."

Further, "The availability of an office premises to a foreign company in the premises of the contracting party in order to ensure that both the parties comply with their obligations to the contract for a long period of time will constitute a permanent establishment . As long as, the premises is at the disposal of the assessee and having the right to use the premises for the purpose of the assessee's business on behalf of the party to the agreement can constitute a fixed place PE."

Though, the taxpayer argued that it had no right to use the premises and no premises of AHL was at their disposal, the ITAT held that on going through the agreements and the work executed, that the premises of AHL was very much at the disposal of the taxpayer for carrying on their business.

The agreement provides absolute control to the assessee over the day-to-day management administration, finance, and all other sphere of the running of the hotel including opening and operating of the bank accounts. Having so found, the ITAT then wondered as to whether when the strategic agreement itself is for a period of 20 years when an agreement is made for such a long period of 20 years, whether it can be said to be a consultancy provided or whether the same should be for the use of rights whether intellectual or technical, or know-how or patent or license or otherwise.

Examining various clauses of the strategic Oversight Agreement such as the AHL cannot unreasonably withheld or delay the appointment of GM and appointment of employees as full-time members of executive staff goes to prove the extent of control and management of the taxpayer in the affairs of the running of the business. The agreement provides absolute control to the taxpayer over the day-to-day management administration, finance, and all other sphere of the running of the hotel including opening and operating of the bank accounts. Hence, the ITAT observed that it cannot be held that the foreign taxpayer was only giving consultancy services to the hotel.

"The operations such as guest admission, charges for rooms, operating of bank account, overseeing, implementation and administration of the same on day to day account, recruiting, interviewing, hiring, establishing Hyatt operating standards, establishing purchasing policies with regard to selection of goods, supplies, food, beverages including vermin extermination, security, garbage removal are all managed and operated by the assessee. All these operations are controlled through the General Manager who in turn reports to the assessee in all aspects."

Based on the clauses of the Strategic Service Agreement and Strategic Oversight Agreements, tribunal held that the revenue's earned by the taxpayer were taxable under Article 12 of the DTAA. Regarding the determination of the profit, the ITAT held that the taxable profits may be computed in accordance with the provisions of Section 44DA of Indian Income Tax Act and Article 12 of Indo-UAE, DTAA.

The High Court :

The taxpayer appealed to the High Court and the court formulated the following questions:

(i) Whether the Tribunal misdirected itself both in law and on facts in holding that service charges received by the appellant under the various SOSA agreement were taxable as royalty? (ii) Whether the appellant has Permanent Establishment in India within the meaning of the Double Taxation Avoidance Agreement? (iii) Whether the findings recorded by the Tribunal, in paragraphs 56, 57 and 59 are perverse and contrary to the terms of the Strategic Oversight Services Agreement (SOSA)? (iv) Is article 7(1) of the DTAA at all applicable to the appellant, having regard to the fact that it has incurred losses in the relevant financial years.

The High Court referred the 4th question to a Larger Bench that we have discussed earlier.

Regarding the royalty issue, the High Court held that in consideration of the host of services to be provided in terms of the SOSA, the Assessee would be entitled to fee (strategic fee as well as incentive fee) as set out in SOSA. It is clear that the said fee is not a consideration for use of or the right to use any process or for information of commercial or scientific experience. The fees payable is in consideration of providing the services as set out in SOSA and as highlighted above.

"We are unable to accept the Revenue's contention that the fee received by the Assessee in terms of SOSA could be termed as consideration for use or for right to use any design, model, process and also for information concerning commercial and scientific experience. Indisputably, in terms of the SOSA, the Assessee had agreed to provide access. However, such access is only incidental to the services agreed to be provided by the Assessee. The obligation to grant access to information, knowledge and software is solely to certain information, written knowledge, skill and experience in furtherance of the service provided by the Assessee under SOSA and for operating the Hotel. Merely because the extensive services rendered by the Assessee in terms of the SOSA also included access to written knowledge, processes, and commercial information in furtherance of the services, cannot lead to the conclusion that the fee received by the Assessee was in the nature of royalty as defined under Article 12 of the DTAA."

The High Court referred to the decision in Director of Income Tax v Sheraton International Inc and held that the consideration received by the Assessee in terms of SOSA cannot be termed as Royalty under Article 12 of the DTAA. It is clearly in the nature of business income.

As we have noted in the beginning, the taxpayer had contended before the authorities that the amount received under SOSA was Fees for Technical Services (FTS ). In this connection, the High Court held:

"We are unable to accept the same. This is also inconsistent with the submissions advanced before this Court. The fee received is not fees for technical services but in consideration for wide range of services as discussed above. Since, the Assessee is in the business of providing such services for management of Hotels, the income is required to be classified as income from business."

As for the existence of the PE, the High Court confirmed the existence of a fixed place of business and elaborated on the disposal test even further.

The High Court held - It is also well accepted that a place of business would not be construed at the disposal of a person rendering services if it is made available to the said person only for the purpose to discharge his functions. To illustrate the same; a Chartered Accountant may be provided a space in the office of its client for the purpose of auditing the books of accounts of the said client. Although, the auditor may have an unhindered access, the space at his client's office cannot be construed his fixed place of business. This is because the access to the space is limited for the purposes of providing services to the specified client. A Chartered Accountant can neither service his other clients from the said premises nor use the same at his will to carry on any of his other activities. Therefore, the issue to be addressed was whether the taxpayer had sufficient control over the premises of the Hotel for the same to be construed at its disposal for carrying on its business.

The High Court held that there is no dispute that it is not necessary that an enterprise has a legal and exclusive control in respect of the fixed place of business for the same to be construed at its disposal. The plain test is to determine whether de facto the enterprise had sufficient control over the fixed place for the purpose of carrying on its business. It is relevant to note that SOSA was one amongst other agreements that were entered into contemporaneously. Whereas the SOSA was for providing overarching strategic services for management of the Hotel, the HOSA was for day-to-day management of the Hotel. This was the agreement with Hilton India.

It is important to note that six senior employees of the assessee had visited India during the said term. The job description clearly indicate that they had exercised certain amount of supervisory control in respect of various activities of the Hotel. Considering the nature of function coupled with the fact that the Assessee could depute its employees at its discretion, we find no infirmity with the decision of the Tribunal accepting that the Hotel premises would be sufficiently at the disposal of the Assessee through which it carries on its business.

It is apparent from the plain reading of the SOSA that the Assessee exercised control in respect of all activities at the Hotel, inter alia, by framing the policies to be followed by the Hotel in respect of each and every activity, and by further exercising apposite control to ensure that the said policies are duly implemented. The Assessee's affiliate (Hyatt India), was placed in control of the day to day operations of the Hotel in terms of the HOSA. This further ensured that the policies and the diktats by the Assessee in regard to operations of the Hotel were duly implemented without recourse to the Owner. As noted above, the Assessee had the discretion to send its employees at its will without concurrence of either Hyatt India or the Owner. This clearly indicates that the Assessee exercised control over the premises of the Hotel for the purposes of its business. Thus, the condition that a fixed place (Hotel Premises) was at the disposal of the Assessee for carrying on its business, was duly satisfied.

Supreme Court :

In its appeal before the SC, the taxpayer argued that there was no designated space or office at the hotel premises in Delhi or Mumbai that was either specifically reserved for or placed at the disposal of the appellant. The appellant exercised no control or dominion over any part of the premises. Mere involvement in policy decisions or enforcement of brand standards does not amount to a fixed place of business PE.

It was further submitted that the role of the appellant under the SOSA, was limited to strategic guidance, brand compliance, and long-term planning. The day-to-day operations of the hotel were carried out by Hyatt India Pvt. Ltd, under a separate Hotel Operating Services Agreement (HOSA) entered into with the hotel owner. The appellant had no involvement in such daily management. However, the High Court erred in conflating the two separate legal agreements - the SOSA entered into by the appellant and the HOSA entered into by Hyatt India Pvt. Ltd. - and mistakenly attributed the day-to-day control of hotel operations to the appellant. According to the Senior Counsel, Hyatt India Pvt. Ltd. is a distinct legal entity, taxable independently under Indian law, and its operational activities cannot be attributed to the appellant for the purpose of determining PE under the DTAA.

On the other hand, the ASG mainly relied on the SC decision in FOWC and submitted that the appellant's operation satisfies all conditions for the existence of a fixed place of business PE under Article 5(1) of the Indo-UAE DTAA. Hec asserted that the appellant's plea of lacking day to-day control is untenable given the pervasive control and continuous nature of its involvement. Accordingly, it was submitted that the hotel premises constitutes a fixed place of business of the appellant in India, and in terms of Article 7(1) of the DTAA, the profits attributable to such PE are liable to tax in India.

The SC again went through the treaty provisions as also the terms of the SOSA. The relevant observations of the SC in this regard were:

"The appellant's contention that the absence of an exclusive or designated physical space within the hotel precludes the existence of a PE, is misconceived. In Formula One, this Court expressly held that exclusive possession is not essential - temporary or shared use of space is sufficient, provided business is carried on through that space. The actual role of the appellant is not just advisory in nature but extends to various other administrative roles. In this case, the 20-year duration of the SOSA, coupled with the appellant's continuous and functional presence, satisfies the tests of stability, productivity and dependence. From the nature of functions carried out by the appellant, it cannot be said that they were performing merely "auxiliary" functions. Rather, the functions performed by the appellant, through its staff operating from the hotel premises, were not just limited for setting up a pattern of activities for the hotel, but were core and essential functions, clearly establishing their control over the day to-day operations of the hotel. Moreover, they were to be continuously performed over a period of twenty years, under an agreement that included revenue sharing. Therefore, the hotel premises clearly satisfy the criteria required to be classified as a "fixed place of business" or PE.

The argument that the absence of a specific clause in the SOSA permitting the conduct of business from the hotel premises negates the existence of a PE is also without merit. As held in Formula One, the test is not whether a formal right of use is granted, but whether, in substance, the premises were at the disposal of the enterprise and were used for conducting its core business functions.

The appellant's further submission that daily operations were handled by Hyatt India Pvt Ltd., 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 clearly establish that business was carried on through the hotel premises, satisfying the conditions under Article 5(1).

Additionally, the reliance placed by the appellant on E-Funds is wholly misplaced. That decision is distinguishable on facts. In that case, the Indian subsidiary merely provided back-office support and was compensated on an arm's length basis, with no involvement in core business functions. In contrast, in the present case, the hotel itself was the situs of the appellant's primary business operations, carried out under its direct supervision and aligned with its commercial interests.

It is undisputed that the appellant's executives and employees made frequent and regular visits to India to oversee operations and implement the SOSA. The findings of the assessing officer, based on travel logs and job functions, establish continuous and coordinated engagement, even though no single individual exceeded the 9-month stay threshold. Under Article 5(2)(i) of the DTAA, the relevant consideration is the continuity of business presence in aggregate - not the length of stay of each individual employee. Once it is found that there is continuity in the business operations, the intermittent presence or return of a particular employee becomes immaterial and insignificant in determining the existence of a permanent establishment .

Accordingly, the High Court was correct in concluding that the appellant's role was not confined to high-level decision making, but extended to substantive operational control and implementation. The appellant's ability to enforce compliance, oversee operations, and derive profit-linked fees from the hotel's earnings demonstrates a clear and continuous commercial nexus and control with the hotel's core functions. This nexus satisfies the conditions necessary for the constitution of a Fixed Place Permanent Establishment under Article 5(1).

Although strictly speaking this decision does not break any new ground, the reiteration of the principle of continuity of business operations as the most important criterion in relation to the finding of a PE is important to keep in mind.