Following an audit, the tax authorities concluded that the payments received by Hyatt under the Strategic Oversight Services Agreements (SOSAs) constituted royalties under Article 12 of the India–UAE Double Tax Agreement (DTA), or alternatively, business profits attributable to a permanent establishment (PE) in India.
The Income Tax Appellate Tribunal found that Hyatt had a PE in India, after which Hyatt filed an appeal with the High Court.
The High Court examined both issues. Regarding royalties, the High Court ruled against the tax authorities. The Court held that the payments did not constitute “royalty” for the use of intellectual property, know-how, or technical services, as defined in the Indian Income Tax Act or Article 12 of the DTA. However, regarding the PE, the High Court ruled that Hyatt did have a fixed-place PE in India under Article 5, due to its continuous and significant involvement in the operations of the Indian hotels under the SOSA. This meant that the payments could be taxed in India as business profits attributable to that PE.
Hyatt then filed an appeal with the Supreme Court.
Judgment:
The Supreme Court agreed with the High Court on both counts and therefore dismissed Hyatt’s appeals.
The Court affirmed that Hyatt, a UAE resident, had a fixed place of business in India under Article 5(1) of the India-UAE DTA in relation to the SOSA with Asian Hotels for the Hyatt Regency Delhi and the Mumbai hotel.
The Court held that the hotel premises were effectively at Hyatt’s disposal and were used to conduct its core business activities. The SOSA gave Hyatt pervasive and enforceable control over strategy, staffing, operations, financial oversight, and bank account policies for a 20-year term (extendable), including the authority to assign personnel and appoint key executives, such as the general manager, as well as set operating standards. The fees were linked to profit and revenue, demonstrating active commercial involvement rather than mere advisory services.
The Court emphasised the disposal test and the attributes of stability, productivity, and independence. It distinguished e-Funds as a back-office case with no involvement in core functions. Although no individual Hyatt executive stayed for more than nine months, the regular visits satisfied the requirements of Article 5(2)(i) in aggregate.
The Supreme Court held that profits could be attributed to an Indian permanent establishment (PE) even if the enterprise had global losses, and affirmed the taxability of SOSA income in India.