Hyatt and the expansion of PE: An Analytical Criticism of the Supreme Court's Fallacies and Misapplication

The author is Shrushti Taori, a Fifth Year Student from Maharashtra National Law University, Nagpur.

Introduction

Recently, in Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (‘the Hyatt’), the Hon’ble Supreme Court (‘the Court’) delivered a significant judgment concerning the interpretation of a fixed place Permanent Establishment (‘PE’) under International Taxation. This judgement is particularly significant for how non-resident entities (‘NR’) are taxed in India for having a taxable presence within the country. The Hyatt found that Hyatt International Southwest Asia Ltd. (‘the appellant’) had a fixed place PE in India through the hotel premises, as the appellant exercised “pervasive and enforceable control” over the hotel’s strategic, operational, and financial dimensions. 

The author criticises the Hyatt for its potential fallacious reasoning and inconsistencies. The potential fallacious conflation includes that of ‘control over operations’ with ‘disposal of a place’ for a fixed place PE, and ‘business connection’ (‘BC’) with ‘PE’. The judgment further misapplies Formula One World Championship Ltd. v CIT (‘Formula One’). The author further argues that the Court has created ambiguity by introducing new ‘duration test’, which gives an unwanted interpretation to DTAA that otherwise warrants benefits to the assessee. 

The author argues that Hyatt reflects significant departure from settled Principles of International Taxation and treaty interpretation under OECD and UN Commentaries, leading to an expansive and uncertain application of Article 5 of the DTAA. 

Facts

The appellant is a company incorporated in Dubai and a tax resident of the UAE, entered into Strategic Oversight Services Agreement (‘SOSA’) with AHL, India. Under the SOSA, the appellant agreed to provide strategic planning services and know-how to ensure the hotels were developed and operated as efficient, high-quality international full-service hotels. Under SOSA, the appellant had wide discretion over strategic planning, branding, HR, procurement, pricing, and even bank accounts. It could recruit senior management and deploy its own staff temporarily.

For these services, the appellant was entitled to ‘Strategic Fees’. Although the SOSA stipulated that services would primarily be rendered from Dubai, it permitted occasional and temporary visits by the appellant’s employees to India for oversight.

Analysis

The classic test for a fixed place PE, derived from Article 5(1) of the OECD and UN Model Conventions and reflected in India’s DTAAs, is threefold. For a PE to exist, there must be:

1. A fixed place of business (a tangible, identifiable physical location); 

2. The place must be ‘at the disposal’ of the foreign enterprise; and 

3. The business of the enterprise must be wholly or partly carried on through that fixed place. 

   
   

However, it is argued that the Hyatt does not fulfil these essentials of PE, based on the following grounds: 

1. BC does not automatically constitute PE

   
   

BC as defined u/s 9(1)(i) of the Income Tax Act, 1961 (‘the act’) is a wide and encompassing term designed to tax any “real and intimate relation” between a NR’s business and some activity in India that contributes to its profits. However, its scope has been judicially interpreted to be significantly wider than that of a PE. PE as defined in Art. 5 of most DTAAs, serves as a higher threshold that must be met before a NR’s business profits can be taxed in the source state. According to Section 90(2) of the act, if a DTAA is applicable, its provisions override domestic law to the extent they are more beneficial to the taxpayer. Consequently, even if a non-resident has a clear BC u/s 9 of the act, its business profits are protected from Indian taxation unless it also has a PE in India to which those profits can be attributed. 

The classic ‘fixed place PE’ has additional ingredients, which makes it more specific than BC. For example - as established in cases like ADIT v. E-Funds IT Solutions Inc, a subsidiary providing back-office support does not automatically create a PE for its foreign parent, as the premises are not at the parent’s disposal. Hence, even though it may constitute BC, it cannot be taxed as it does not constitute PE due to an additional requirement. 

In the Hyatt, the Court found that the appellant had a fixed place PE in India through the hotel premises owned by AHL. This conclusion was based on the premise that the extensive functional control meant the hotel premises were ‘effectively at the disposal’ of the appellant. However, the core test for a fixed place PE, however, is not just about magnitude of influencing another’s business but about having a physical place at one’s own disposal to conduct one’s own business. A critical analysis, however, suggests that the Court may have inadvertently applied a BC-like standard to a PE determination, despite formal imposing charges and latter providing benefit. 

2. Misapplication of the Formula One Precedent

   
   

It is to be noted that the Formula One judgment itself is a controversial precedent criticised by scholars like Kanga and Palkiwala who are of the view that the Court in Formula One “failed to consider that mere exploitation of commercial rights is not a business activity under Article 5”. 

The heavy reliance of the Court on Formula One represents a significant misapplication and an unwarranted overextension of the precedent for two primary reasons: first, the factual matrix of the two cases is fundamentally different, particularly concerning the nature of the business and the use of the physical premises; and secondly, equating pervasive control over another’s business to disposal of a place amounts to functional control fallacy. 

a. Fundamental Factual Distinctions Between Hyatt and Formula One

The core of the Formula One decision was that the UK-based company, Formula One World Championship Ltd. (‘FOWC’), had the Buddh Circuit ‘at its disposal’ to conduct its own core business activity. The key findings were: (a) the physical premises were directly used for core business activity; and (b) FOWC had complete control on the physical premises during the race period. 

In stark contrast, the business of the appellant was fundamentally different. The appellant’s business under the SOSA was to influence and control how the hotel owner (AHL) and the hotel operator (Hyatt India) conducted their hotel business. Unlike FOWC, the appellant did not use the physical hotel premises as the direct venue for its own core business of providing strategic advice. It merely ensured that the hotel, as a business run by other entities, complied with its brand standards and strategic vision.

b. Pervasive control over another’s business is not equivalent to disposal of a place for its own

The Court’s conclusion that the appellant has “pervasive and enforceable control” over AHL’s operations means the hotel premises were “effectively at its disposal,” is based on a functional control fallacy. It substituted extensive operational influence over a third party’s business (AHL) for the appellant’s direct right to use the physical place to carry on its own distinct business. 

This reasoning conflates having operational control over a third party's business with having a physical place at one’s own disposal to conduct one’s own business. While the appellant could appoint key personnel, set policies, and manage bank accounts, these actions controlled the hotel's business operations, not the physical use of the hotel premises for the appellant's own distinct business of providing strategic services. This is a critical distinction that the application of the Formula One precedent overlooks.

The “disposal test” under most DTAAs, including that of India-UAE, implies that the enterprise must have a right to use the physical premises as an instrument for carrying on its own business activities. Klaus Vogel explains this test as the taxpayer should be free to use the place of business – (a) at any time of its own choice; (b) for its internal administrative and bureaucratic work; and (c) for work relating to more than one customer. 

The apt application of this test could be found in the Supervisory PE cases, like GFA Anlagenbau v. Asst. DIT, where the employees stayed for more than 183 days (more than what was stated in the treaty), and were still not recognised as the Supervisory PE as they were present on the construction site not under the disposal of the NR. Similarly, in the case of Hyatt, the physical place in India is under the disposal of AHL or Hyatt India, and not under the appellant. Hence, even though presuming that the appellant has operational control, it does not fulfil the test of disposal. 

3. Inconsistent application of Duration Test

   
   

Under Article 5 of DTAAs, the concept of “permanence” is critical. In CIT v. Sumitomo Corporation, the Delhi High Court specifically held that for a PE under the India-Japan DTAA, the six-month threshold could not be met by aggregating disconnected visits unless the treaty expressly provided for such aggregation. This rule gave beneficial interpretation to the DTAA, and ensured that continuity must be real, and not artificially constructed.

In Hyatt, the Court held that “continuity of business presence in aggregate” across repeated visits of different employees was sufficient to meet the permanence test. By doing so, the Court introduced an implicit aggregation principle without identifying textual support in the India-UAE DTAA. This stands in tension with Sumitomo, where the Court demanded explicit language for aggregation. The inconsistency creates interpretive laid down an uncertain precedent. 

4. Virtual Projection

   
   

The AP HC in CIT v. Vishakhapatnam Port Trust famously articulated that a PE requires a “virtual projection of the foreign enterprise... into the soil of another country.” Indian commentary and cases such as Motorola v. DCIT have clarified that this projection must involve the foreign enterprise carrying on its own business activities from a fixed place at its disposal. 

Applied to Hyatt, the appellant provided services related to strategic planning and know-how from Dubai. Whereas, AHL and Hyatt India Pvt. Ltd. delivered the services related to hotel business in India. While the appellants significantly influenced AHL and Hyatt India, from branding and recruitment to policy framing, however, these functions were in the nature of strategic oversight and quality assurance. To treat this influence as equivalent to the appellant “projecting itself” into India risks conflating the appellant’s own core business with the operations of a separate Indian entity. 

Conclusion

The Hyatt represents a marked departure from the established doctrine of PEs. Despite being appreciated for reinforcing substance over form principle, the Court has stretched Art. 5 beyond its traditional limits by treating managerial oversight and indirect control as sufficient for disposal, and by heavily relying on Formula One despite its narrower factual context. Its introduction of an aggregated duration test further adds to the uncertainty. This broader approach risks diluting the core requisites of a PE, i.e, fixed place, disposal, and carrying on one’s own business. It also clouds the line between “business connection” under domestic law and PE under treaties, which consequently undermines the fact that DTAAs are meant to provide benefits. 

Hence, India’s PE jurisprudence must return to first principles. If strategic oversight arrangements are to be taxed, this should be done through clear legislative or treaty amendments. Until then, Hyatt serves as a cautionary signal for the foreign enterprises. They must look beyond their physical presence in India and closely examine whether even their strategic or brand-related involvement may now expose them to taxation.