Justice J.B. Pardiwala, Justice R. Mahadevan, Supreme Court
Supreme Court: Under DTAAs, Taxing Rights Of Source State Over Business Profits Of Foreign Enterprise Are Contingent Upon Existence Of Permanent Establishment
|The Supreme Court said that once it is found that there is continuity in the business operations, the intermittent presence or return of a particular employee becomes immaterial and insignificant in determining the existence of a permanent establishment.
The Supreme Court explained that under DTAAs (Double Taxation Avoidance Agreements), the taxing rights of the source State over the business profits of a foreign enterprise are contingent upon the existence of a Permanent Establishment (PE) in the source country.
The Court explained thus in Civil Appeals arising out of a common Judgment of the Delhi High Court in the Income Tax Appeals filed by the assessee in respect of the Assessment Years (AYs).
The two-Judge Bench of Justice J.B. Pardiwala and Justice R. Mahadevan observed, “Evidently, under DTAAs, the taxing rights of the source State over the business profits of a foreign enterprise are contingent upon the existence of a Permanent Establishment in the source country. One of the sine qua non for a fixed place PE is that the place through which the business is carried on must be 'at the disposal' of the enterprise – a principle commonly referred to as the "disposal test". It is noteworthy that the Organisation for Economic Co-operation and Development does not rigidly define this test, but provides illustrative examples.”
The Bench said that once it is found that there is continuity in the business operations, the intermittent presence or return of a particular employee becomes immaterial and insignificant in determining the existence of a permanent establishment.
Senior Advocate S. Ganesh represented the Appellant while Additional Solicitor General (ASG) N. Venkatraman, Senior Advocates Arijit Prasad, and Rupesh Kumar represented the Respondent.
Facts of the Case
The Appellant was a company incorporated under the Companies Law, Dubai International Financial Centre Law No.3 of 2006, in the United Arab Emirates (UAE). It was a tax resident of the UAE under Article 4 of the Agreement between the Government of India and the UAE for the avoidance of Double Taxation. In 2008, the Appellant entered into two Strategic Oversight Services Agreements (SOSA) with Asian Hotels Limited, India – one for AHL, Delhi and another for AHL, Mumbai. Under the SOSA, the Appellant agreed to provide strategic planning services and ‘know-how’ to ensure that the hotel was developed and operated as an efficient and a high-quality international full-service hotel. Subsequently, AHL underwent reorganization and its name was changed to Asian Hotels (North) Limited, which continued to own the hotel. In 2010, the SOSA was partially amended and for the AY 2009-10, the Appellant filed its return of income declaring ‘Nil’ income and claiming a refund of Rs. 87,99,091/-.
After scrutiny, the Assessing Officer (AO) issued a notice under Section 142(1) read with Section 143(3) of the Income Tax Act, 1961 (ITA). In response, the Appellant asserted that its income was not taxable under the ITA as there was no specific Article under DTAA for taxing Fees for Technical Services. Therefore, it claimed that it did not have a PE in India and its business income was not taxable. The AO held that the Appellant’s activities constituted a business connection, to which the Appellant filed objections before the Dispute Resolution Penal (DRP), which rejected the same and upheld the AO’s findings. Challenging the assessment orders, the Appellant approached the Income Tax Appellate Tribunal (ITAT), which rejected its contention and dismissed the Appeals. The Appellant then approached the High Court, which held that, being a company incorporated in Dubai and a tax resident of the UAE, the Appellant had a PE in India in the form of a fixed place of business. Hence, the Appellant was before the Apex Court.
Reasoning
The Supreme Court after hearing the contentions of the counsel, elucidated, “The question of what constitutes a “place of business” under Article 5(1) of the DTAA is no longer res integra. In Formula One (supra), this Court unequivocally held that for a Permanent Establishment (PE) to exist, two essential conditions must be satisfied: (i)the place must be “at the disposal” of the enterprise, and (ii)the business of the enterprise must be carried on through that place. The Court further held that a PE must demonstrate the three core attributes of: stability, productivity, and a degree of independence. Among these, the “disposal test” is pivotal, meaning thereby the enterprise must have a right to use the premises in such a way that enables it to carry on its business activities. This test is to be applied contextually, taking into account the commercial and operational realities of the arrangement.”
The Court also noted that typically, trading operations require a continuously used fixed place, whereas service-oriented business may not and some jurisdictions consider mere use of a place sufficient, while others require legal or operational control over the premises.
“In our view, determining whether a Fixed place PE exists must involve a fact-specific inquiry, including: the enterprise’s right of disposal over the premises, the degree of control and supervision exercised, and the presence of ownership, management, or operational authority”, it added.
The Court further reiterated that legal form does not override economic substance in determining PE status and the extent of control, strategic decision-making, and influence exercised by the Appellant clearly establish that business was carried on through the hotel premises, satisfying the conditions under Article 5(1).
“… the High Court was correct in concluding that the appellant’s role was not confined to high-level decision making, but extended to substantive operational control and implementation. 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. This nexus satisfies the conditions necessary for the constitution of a Fixed Place Permanent Establishment under Article 5(1) of the India – UAE DTAA”, it concluded.
Accordingly, the Apex Court dismissed the Appeals and affirmed the findings of the High Court that the Appellant has a fixed place PE in India within the meaning of Article 5(1) of the DTAA, and that, the income received under the SOSA is attributable to such PE and is therefore taxable in India.
Cause Title- Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (Neutral Citation: 2025 INSC 891)
Appearance:
Appellant: Senior Advocate S. Ganesh, Advocates Ujjwal A. Rana, and Himanshu Mehta.
Respondent: ASG N. Venkatraman, Senior Advocates Arijit Prasad, Rupesh Kumar, AOR Raj Bahadur Yadav, Advocates Shashank Bajpai, V Chandrashekhara Bharathi, Santosh Kumar, and Diwakar Sharma.