Foreign Entity Doing Business Through Temporary Premises In India Liable To Tax: Supreme Court

Foreign Entity Doing Business Through Temporary Premises In India Liable To Tax: Supreme Court

Introduction

The Supreme Court of India has delivered a significant judgment clarifying the concept of Permanent Establishment (PE) in the context of international taxation. The court ruled that the existence of a PE is sufficient to attract tax liability for a foreign entity in India, even in the absence of exclusive possession of its own fixed place of business.

Factual Background

Hyatt International, a foreign entity based in the UAE, had entered into Strategic Oversight Services Agreements (SOSA) with Asian Hotels Ltd., the operator of Hyatt's hotel business in India. Under these agreements, Hyatt International was responsible for providing strategic oversight and management services to the hotels.

Procedural Background

The Delhi High Court had held that Hyatt International was liable to pay income tax in India on income earned through SOSA. The court found that Hyatt International’s role in the hotel business constituted a PE, thereby triggering tax liability in India. Hyatt International appealed to the Supreme Court, challenging the High Court’s order.

Issues

The primary issue before the Supreme Court was whether Hyatt International’s role in the hotel business constituted a PE, thereby triggering income tax liability in India. The court had to consider whether the existence of a PE requires exclusive possession of a fixed place of business or whether even temporary or shared use of premises is sufficient to establish a PE.

Contentions of the Parties

Appellant’s Contentions:

• Hyatt International argued that it did not have a designated space or office at the hotel premises in India and therefore did not constitute a PE.
• The company claimed that its role was limited to policy decisions and enforcement of brand standards, which did not amount to a fixed place of business PE.
• Hyatt International relied on the definition of PE under Article 5(1) of the India-UAE Double Taxation Avoidance Agreement (DTAA), which requires a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Respondent’s Contentions:

• The respondent argued that Hyatt International exercised substantial control over the day-to-day operations of the hotels, going well beyond a mere advisory role.
• The respondent claimed that the hotel premises were effectively at the disposal of Hyatt International due to its continuous and substantial control over key operational aspects of the hotel business.
• The respondent relied on the Supreme Court’s judgment in Formula One World Championship Limited v. Commissioner of Income Tax, International Taxation-3, Delhi & Anr. (2017) 15 SCC 602, which held that exclusive possession is not essential to establish a PE.

Reasoning & Analysis

The Supreme Court observed that the concept of PE is not limited to exclusive possession of a fixed place of business. The court held that temporary or shared use of premises, when combined with substantive administrative or operational control, is adequate to establish a PE. The court relied on its earlier decision in Formula One World Championship Limited v. Commissioner of Income Tax, which held that the actual role and control of the foreign entity, rather than just physical presence, is crucial in determining the existence of a PE.

The bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan observed that Hyatt International’s role in the hotel business was not confined to mere policy formulation but extended to substantive operational control and implementation. The court held that the company’s ability to enforce compliance, oversee operations, and derive profit-linked fees from the hotel’s earnings demonstrated a clear and continuous commercial nexus and control over the hotel’s core functions.

Implications

This judgment highlights the importance of considering the substance over form of a foreign entity’s presence in India when determining tax liability. The court’s ruling clarifies that the existence of a PE requires a nuanced approach, taking into account the actual role and control exercised by the foreign entity.

The decision also emphasizes the significance of the India-UAE DTAA in determining tax liability. The court’s interpretation of Article 5(1) of the DTAA provides clarity on the concept of PE and its application to foreign entities operating in India.

Outcome

The Supreme Court dismissed Hyatt International’s appeal, holding that the company’s role in the hotel business constituted a PE and therefore triggered income tax liability in India. The court’s ruling is significant for foreign entities operating in India, as it underlines the importance of considering the real nature of their presence in determining tax obligations.

In this case the appellant was represented by Mr. S. Ganesh, Sr. Adv., Mr. Ujjwal A. Rana, Mr. Himanshu Mehta for M/s. Gagrat And Co., AOR. Meanwhile, the respondent was represented by Mr. N. Venkatraman, A.S.G., Mr. Arijit Prasad, Sr. Adv., Mr. Rupesh Kumar, Sr. Adv., Mr. Raj Bahadur Yadav, AOR, Mr. Shashank Bajpai, Mr. V. Chandrashekhara Bharathi, Mr. Santosh Kumar, and Mr. Diwakar Sharma, Advocates.