Operational control enough to tax foreign firms in India, says SC

The Supreme Court ruled that MNCs can be taxed in India if they exercise significant operational control, impacting Hyatt's tax liability for services provided.

The Supreme Court on Thursday held that a multinational company may be taxed in India so long as it exercises significant operational control over such premises, even if it has no employees staying here for a period longer than the threshold typically used to assess whether the company is a so-called Permanent Establishment.

Operational control enough to tax foreign firms in India, says SC

The ruling , which has significant implications for MNCs operating in India, came as a setback to Dubai-based Hyatt International Southwest Asia Ltd, which had challenged its tax liability in India for advisory and management services rendered to Hyatt hotels across the country between 2009 and 2018.

A bench of justices JB Pardiwala and R Mahadevan affirmed a 2023 Delhi High Court judgment that recognised Hyatt’s presence in India as a Permanent Establishment (PE) under Article 5(1) of the India-UAE Double Taxation Avoidance Agreement (DTAA). The court concluded that Hyatt’s active control over the day-to-day hotel operations in India through long-standing agreements established a fixed place PE, making it liable to pay tax in India. Typically, only branch offices, factories, mines etc are considered PEs, although there is also a stipulation related to the time employees spend in India.

At the centre of this case was a Services and Operating Services Agreement (SOSA) signed by Hyatt with hotel owners in India, under which the Dubai-based entity provided hotel advisory and consultancy services. Hyatt contended that it operated solely from Dubai, was not obliged to station staff in India, and only permitted occasional visits by its personnel to Indian hotels. It further argued that the SOSA contained no clause allowing it to conduct business from within the hotels, nor did it maintain any office or branch in India.

But the top court rejected these submissions, holding that the “disposal test” for identifying a PE did not require exclusive possession or formal rights over premises, but a fact-specific inquiry into the foreign enterprise’s ability to conduct core business functions from the premises.

“The appellant’s contention that the absence of an exclusive or designated physical space within the hotel precludes the existence of a PE, is misconceived, said the court, relying on its earlier precedent in Formula One World Championship Ltd ()2017. “Temporary or shared use of space is sufficient, provided business is carried on through that space,” it added.

In this case, the bench found that Hyatt exercised “pervasive and enforceable control” over the hotel’s strategic, operational, and financial aspects. This included the authority to appoint and supervise key personnel, implement HR and procurement policies, control pricing and branding, operate bank accounts, and assign staff to the hotel without the owner’s approval.

“These rights go well beyond mere consultancy and indicate that the appellant was an active participant in the core operational activities of the hotel,” said the court, noting that Hyatt’s control extended to everyday affairs and not just high-level decisions.

Amit Baid, Head of Tax at BTG Advaya law firm, said that the ruling could set a precedent for PE determinations in cases involving frequent employee travel to India. “The judgment provides a clear conceptual framework for determining PE thresholds -- frequent, regular visits by employees, rather than the duration of individual stays, is the key factor. Once continuity of business presence is established, the return or rotation of individuals becomes irrelevant; and operational control, oversight, and income linked to core functions establish a commercial nexus necessary for a PE,” Baid added.

The judgment meanwhile stressed that the 20-year duration of the agreements, combined with continuous and structured involvement of Hyatt’s executives in India, satisfied the three-pronged test of stability, productivity, and dependence that governs the recognition of a PE.

Further, the court ruled that even though no single Hyatt employee exceeded the 9-month threshold under Article 5(2)(i) of the DTAA, the aggregate and continuous presence of various employees, verified through travel logs and operational duties, fulfilled the requirement of a PE. The court clarified that the legal form of presence is secondary to the economic substance of business functions being carried out in India.

“The appellant’s ability to enforce compliance, oversee operations, and derive profit-linked fees from the hotel’s earnings demonstrates a clear and continuous commercial nexus and control with the hotel’s core functions,” the bench said, calling the hotel premises the “situs of the appellant’s primary business operations.”

Importantly, the Supreme Court clarified that under the India–UAE Direct Taxation Avoidance Agreement, the lack of a specific article allowing taxation of Fees for Technical Services (FTS) would not override the existence of a PE under Article 5(1), particularly where core business functions are carried out through a fixed place.