Supreme Court Upholds Delhi High Court's Decision, Rules Hyatt International Southwest Asia's Operations in India as Permanent Establishment for Tax Purposes.

The Supreme Court of India upheld the Delhi High Court's decision that Hyatt International Southwest Asia's operations in India will be treated as a Permanent Establishment (PE) for tax purposes. The court also ruled that a PE should be treated as a separate taxable entity, allowing India to tax profits attributable to the PE even if the foreign parent company incurs overall global losses.

The Supreme Court of India has upheld the Delhi High Court's decision, ruling that UAE-headquartered Hyatt International Southwest Asia (HISA) will be considered a Permanent Establishment (PE) in India for tax purposes. The court's decision has significant implications for multinational corporations (MNCs) operating in India, as it clarifies the taxability of income derived from such establishments.

In its ruling, the Supreme Court affirmed that HISA's operations in India constitute a fixed place of business, thereby making it a PE under Article 5(1) of the Double Taxation Avoidance Agreement (DTAA) between India and the United Arab Emirates. The court also held that a PE should be treated as a separate taxable entity, allowing India to tax profits attributable to the PE even if the foreign parent company incurs overall global losses.

The court's decision was based on the continuous and coordinated engagement of HISA's executives and employees in India, despite no single individual exceeding the nine-month stay threshold under Article 521. The court emphasized that the relevant consideration is the continuity of business presence in aggregate, not the length of stay of individual employees. The court also noted that HISA's role extended beyond high-level decision-making, involving substantial operational control and implementation.

The ruling has significant implications for foreign companies operating through Indian affiliates. Pallav Pradyumn Narang, Partner at law firm CNK, stated that the judgment further clarifies that global losses cannot shield India-sourced profits from taxation. Rahul Sateeja, Partner at law firm DMD Advocates, added that the judgment will have a chilling effect across industries where standardization of services through oversight by foreign executives is inevitable.

To mitigate this tax exposure, international hotel chains may consider setting up dedicated entities in India to manage local hotel operations. Ankit Jain, Partner at law firm Ved Jain and Associates, suggested that by routing management and brand services through an Indian company, the risk of triggering a PE and resulting tax disputes can be reduced.

The Supreme Court's decision is a significant development in the Indian tax landscape, providing clarity on the taxability of income derived from permanent establishments. It also underscores the importance of compliance with tax laws for MNCs operating in India.

References:
[1] https://economictimes.indiatimes.com/industry/services/hotels-/-restaurants/supreme-court-dismisses-hyatt-international-southwest-asias-appeal-in-tax-case/articleshow/122873159.cms?UTM_Campaign=RSS_Feed&UTM_Medium=Referral&UTM_Source=Google_Newsstand
[2] https://www.business-standard.com/industry/news/sc-dismisses-hyatt-appeal-tax-permanent-establishment-india-125072401495_1.html