The Indian Supreme Court has recently answered one of the most important questions relating to international taxation i.e. whether a foreign firm which is engaged in giving strategic oversight services in India can be said to have a Permanent Establishment (PE) in India. In this judgment with Hyatt International Southwest Asia Ltd. and the Additional Director of Income Tax clarifies the issues of when the presence of foreign entity in India renders it to taxation in India.
The Case History
Appellant is Hyatt International Southwest Asia Ltd., a company headquartered in the United Arab Emirates in Dubai and is a tax resident of the UAE. Its main business is providing consultancy and advisory services to the hotels under Hyatt Group that can be found in India as well. In 2008 Hyatt International Southwest Asia Ltd. signed Strategic Oversight Services Agreements (SOSA) with Asian Hotels Limited (later Asian Hotels (North) Limited) and the hotels in Delhi and Mumbai. Under these contracts Hyatt International Southwest Asia Ltd. was supposed to help in strategic planning and have know how to make the hotels run inter-efficiently and to be of international standards. According to SOSA services would be performed in Dubai with the visit by employees to India and that too (occasional and occasionality) at the discretion of appellant.
In the assessment year 09-10, Hyatt International Southwest Asia Ltd. has filed a Nil income return on the basis that its income could not be charged to tax in India as there was no particular provision in the Double Taxation Avoidance agreement (DTAA) to charge fees on the Technical Services. Another argument propped up by the company was that it had no fixed location of business or a Permanent Establishment (PE) in India as the presence of its employees was also not in excess of nine months, as prescribed in the DTAA.
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Nonetheless, the Assessing Officer, the Income Tax Appellate Tribunal (ITAT) and the Delhi High Court held that the activities of Hyatt International Southwest Asia Ltd. were found to represent a business connection and a PE in the India. This give rise to the current appeals in the Supreme Court.
What is Permanent Establishment (PE) and Business Profits?
The gist of this case is that of interpretation of a term called Permanent Establishment (PE) as stated in Article 5 of the Agreement of Avoidance of Double Taxation (DTAA) between India and the UAE. According to article 5(1) of this DTAA, the term PE is defined as the place of business namely, a fixed place of consultation or business through which the business of an enterprise is wholly or partly conducted. This definition is consistent with the Income Tax act of India, 1961.
The DTAA also lists the examples of what may be viewed as a PE having in mind a place of management, a branch, an office, a factory, or a workshop. Notably, it also involves supply of services including consultancy by an enterprise via employees in the other country, provided that such supply of services goes beyond a period of nine months in the span of a twelve months period of the same or related projects.
A business profit is covered by the article 7(1) of the DTAA. It provides that the profits of business are taxable anywhere except their place of residence unless qualified otherwise. But in the scenario when the company does its business in the other nation by means of a PE, there is a possibility of the profits that directly run to the PE being taxed in this other country.
Important Arguments and Contention
Hyatt International Southwest Asia ltd. stated that it lacked PE in India. It has explained that it was well mentioned on the SOSA that services were to be rendered through Dubai and there was no need to be stationed at India. They argued that any visitations they made by the employees were only occasional in a short period not more than the nine months as recommended by the law and that they had no fixed office or space in the hotel premises that was entirely theirs. The appellant also pointed out that it only performed strategy and the daily operations were performed by another contract, Hyatt India Pvt. Ltd. under a different agreement (HOSA).
However, the tax authorities on the other hand argued that Hyatt International Southwest Asia Ltd. was actually resident in India. They also indicated that the SOSA was a long-term contract (20 years), and the appellant had a great say in most of the activities of the hotel such as staffing, day to day running of the hotel, financial processes, and purchasing decisions. The documentation of such things like the employees of the appellant being in the hotel up to nine months as well as involved in significant operations was provided. The Revenue claimed that such a degree of control and participation implied that the premises of the hotel were technically in the possession of the appellant, which met the fixed place PE requirements.
Analysis and Ruling of the Court
In its analysis, the Supreme Court greatly depended on the earlier verdict of the court
Formula one World Championship limited case. This case law put two vital circumstances that a PE should be present: (i) that the place should be available to the enterprise, and (ii) that the business of the enterprise should be conducted with the help of that place. Moreover, a PE should have three fundamental features namely: stability, productivity, and an extent of dependence.
This is done by use of the so-called “disposal test” which means that the enterprise has a right to utilize the premises in a manner that enables him to carry out his business activities. The Court made it clear that eligibility has no requirements to own or even rent the premises it is all about whether the premises is availed to the enterprise i.e. the enterprise has the right and authority to utilize the place to carry out its business. Just being able to get access is not sufficient.
On that matter, the Supreme Court up held the decision of the High Court on the decision against Hyatt International Southwest Asia Ltd. The Court ruled that the provisions of the SOSA included the fact that the appellant had a perpetual and effective right to move ahead with its policies and accommodate compliance with all the facets of hotel operations. It was considered that the level of control and supervision used by Hyatt International Southwest Asia Ltd., was much more than an advisory one which was considered under the conditions of a Fixed Place PE under Article 5(1) of the India-UAE DTAA. The stability (20 years), productivity and dependency needed in a PE were indicated by the long term nature of the agreement (20 years), the fee structure tied to the financial and operational performance of the hotel and also by the fact that the appellant has exercised widespread control and constant contact.
Thus the appeals filed by the petitioners were dismissed by the Supreme Court that Hyatt International Southwest Asia Ltd. has a fixed place PE in India under the provisions of Article 5(1) of the DTAA and as such, the income accrued as per the SOSA would be liable to tax in India. This ruling supports the rule that the essence of an arrangement and especially the exercise of control and participation in the routine is the ultimate test of the existence of Permanent Establishment to pay taxes.
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