Supreme Court rules that continuous and substantive control over operations of Indian entity establishes Fixed Place PE

This Tax Alert summarizes a two-judge bench Supreme Court (SC) ruling, in the case of Hyatt International Southwest Asia Ltd. (Taxpayer). The main issue under consideration before the SC was whether the activities of the Taxpayer (a Dubai-based company) under a Strategic Oversight Services Agreements (SOSA) entered into with various hotels in India led to the creation of a Fixed Place Permanent Establishment (PE) in India under Article 5(1) of India-UAE Double Taxation Avoidance Agreement (DTAA). Under the SOSA, the Taxpayer provided strategic planning services and know-how to hotels in India to ensure that the hotels were developed and operated as an efficient and a high-quality international full-service hotel.

The SC acknowledged that for determination of existence of a Fixed place PE, there is no standard formula applicable to all cases, and it is a fact-specific exercise, wherein several factors must be evaluated, including the enterprise’s right of disposal over the premises, the degree of control and supervision exercised, the presence of ownership, management, or operational authority.

In the facts of the case, having regard to the terms of the SOSA, coupled with the fact that the Taxpayer exercised continuous and substantive control and supervision over the day- to-day operations of the hotels and had disposal over the hotel premises through its employees in India, the SC held that the activities of the Taxpayer established a clear commercial nexus with the hotel’s core functions, thereby, resulting in creation of a Fixed Place PE under Article 5(1) of the DTAA. Correspondingly, the SC also ruled that the profits attributable to the PE are required to be determined on the premise that the PE is an independent taxable entity and the Taxpayer will be liable to pay tax on the income attributable to its PE in India even if the overall foreign enterprise has incurred losses.