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Navigating Permanent Establishment | The Hyatt International Ruling and Its Wider Tax Implications

Author: Gaurav Shanker, Managing Partner And Yamini Mishra, Associate |

Article by Business Law Chamber

The concept of permanent establishment (PE) is fundamentally rooted in the idea that a business must demonstrate a continuous and tangible connection with a jurisdiction before that state can levy taxes on its profits. Traditionally, this was understood as a physical "fixed place" of business, such as an office or factory. However, as corporate structures and cross-border transactions grew more complex, relying exclusively on fixed place PE risked excluding various significant business activities from taxation in the source country.

Background:

In a landmark decision delivered on July 24, 2025, the Indian Supreme Court tackled the question of whether Hyatt International Southwest Asia Ltd. (“Hyatt”), a company incorporated in Dubai, constituted a PE in India. Hyatt was recognized as a tax resident of the United Arab Emirates (UAE) under Article 4 of the India-UAE Double Taxation Avoidance Agreement (DTAA). In 2008, Hyatt entered into two Strategic Oversight Services Agreements (SOSAs) with Asian Hotels Limited (AHL), covering its properties in Delhi and Mumbai. Under these agreements, Hyatt committed to providing strategic planning and “know-how” services aimed at ensuring that these hotels were developed and operated as efficient, high-quality international full-service establishments. Subsequent to these agreements, AHL underwent reorganization and was renamed Asian Hotels (North) Limited, continuing ownership of the said hotels. The SOSAs were later amended in 2010, to reflect operational changes.

The Indian tax authorities issued assessment orders for the assessment years 2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2016-17, and 2017-18 taxing the income earned by Hyatt from the hotel-related services rendered, on the ground that the company had established a PE in India in the form of a fixed place of business under Article 5(1) of the DTAA. This position was upheld by the Income Tax Appellate Tribunal (ITAT) upon appeals filed by Hyatt against the assessment orders. Thereafter, eight appeals were filed before the Delhi High Court, whereby it answered three of them, and referred the fourth question to a Larger Bench. Aggrieved by the finding of the High Court that Hyatt indeed had a PE in the form of a place of business in India, it preferred appeals before the Supreme Court in the year 2024.

Analysis, Law & Decision

The Court emphasized that under Double Tax Avoidance Agreements, a source country’s right to tax the business profits of a foreign enterprise depends on the existence of a PE within its territory. A fundamental criterion for a PE is that the enterprise must have a place “at its disposal”, a concept known as the “disposal test.” While traditional trading operations generally require continuous use of a fixed place, service-oriented businesses may operate differently, and jurisdictions vary in their approach. Some jurisdictions consider mere use of premises sufficient to create a PE, whereas others require legal or operational control over the space.

The Court clarified that determining the existence of a PE requires a nuanced, fact-specific examination involving factors such as the extent of the enterprise’s right to dispose of the premises, the degree of control and supervision exercised, and involvement in ownership, management, or operation.

Applying these principles, the Court found that Hyatt’s role with AHL surpassed advisory functions and included substantive control over strategic, operational, and financial affairs. Key activities establishing this control included:

  • Appoint and supervise the General Manager and other key personnel,
  • Implement human resource and procurement policies,
  • Control pricing, branding, and marketing strategies,
  • Manage operational bank accounts,
  • Assign personnel to the hotel without requiring the owner’s consent,
  • Entitlement to “strategic fees” calculated as a percentage of room revenue and other revenues derived from the hotel’s operations.

The Court dismissed the argument that the absence of exclusive or dedicated office space at the hotel negated the PE. Relying on its earlier judgment in Formula One World Championship Ltd. v CIT (2017), the Court reiterated that exclusive possession is not necessary; even temporary or shared use of premises qualifies if the enterprise conducts its business through that space. Considering the twenty-year duration of the SOSA and Hyatt’s continuous operational presence, the Court concluded that the arrangement met the tests of stability, productivity, and dependence, thus constituting a PE.

Furthermore, the Court stated that the legal form did not override economic substance in determining PE status. Although Hyatt’s activities involved complex arrangements and separate legal entities, the degree of control, decision-making, and influence it exercised over the hotels established that the core business was effectively carried out through its presence in India, satisfying the conditions of Article 5(1) of the DTAA.

Interestingly, the Court also noted that a continuous and coordinated engagement, demonstrated through regular visits by Hyatt’s employees, was sufficient to constitute a PE, even if no single employee crossed the threshold period of stay under the tax treaty.

Conclusion

The Court’s decision carries significant and far-reaching implications. It clarified that the absence of a dedicated physical space under the control or at the disposal of a foreign enterprise, or the absence of a permanent employee or representative in the source country, cannot by itself negate the existence of a PE. The critical factor for satisfying the “disposal test” is establishing functional control over core business activities performed at the location. This means that even temporary or shared use of space can suffice to constitute a PE, with emphasis placed on the economic substance rather than the formalistic appearance of the arrangement.

This ruling calls on multinational companies to carefully evaluate arrangements such as global capability centers, contract manufacturing, warehousing, or outsourced research and development, where there may not be a traditional physical footprint but where a foreign enterprise exercises control over operations by dictating key business decisions. Likewise, even subsidiaries that operate as separate legal entities may be considered PEs if the non-resident parent exercises significant management control over them.

These questions warrant a thorough and fact-based analysis of each arrangement’s unique circumstances, underscoring the need for businesses to adopt proactive tax planning and maintain transparent documentation to manage their exposure under the evolving PE paradigm.

Disclaimer: The views in this article are author's point of view. This article is not intended to substitute legal advice. In no event the author shall be liable for any direct, indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information. For any further queries or follow up, please contact us at communication@businesslawchamber.com.