Megha Agarwal:
Hello everyone! I’m Megha Agarwal, Hospitality Partner at Khaitan & Co. In today’s episode, we will be exploring a significant Supreme Court ruling that’s making waves in the international tax circles — the Hyatt International case. This ruling is reshaping India’s approach to Permanent Establishment exposure. Joining me is Shaily Gupta, my colleague and Direct Tax Partner at Khaitan & Co, to unpack the ramifications of this ruling. Welcome to the podcast, Shaily.
Shaily Gupta:
Thank you, Megha, great to be with you for this important conversation.
Megha Agarwal:
Let’s start with the background. Hyatt, through a UAE tax resident entity, entered into two long-term Strategic Oversight Services Agreements with an Indian hotel owner for properties in Delhi and Mumbai. Under these agreements, Hyatt provided strategic planning and “know-how” to ensure that the hotels were developed and operated as high-quality, international-standard properties.
The Indian tax authorities argued that these activities created a Permanent Establishment in India. This view was upheld by both the Income Tax Appellate Tribunal and the Delhi High Court. The key issue before the Supreme Court was whether Hyatt’s presence in India constituted a fixed place of business under the India–UAE tax treaty.
Shaily Gupta:
Exactly. The controversy lies in the Supreme Court’s finding that Hyatt had established a fixed place PE in India. And this was largely due to sustained employee travel and continuous and substantive control Hyatt exercised over the operations of the Indian hotels. The Court basically held that Hyatt’s activities demonstrated a clear commercial nexus with the core functions of the hotel. That’s what triggered a Fixed Place PE under Article 5(1) of the tax treaty.
But here’s where it gets more interesting. The Court also made it clear that profits attributable to the PE must be assessed as if the PE were an independent taxable entity. This means that Hyatt would be liable to pay tax in India on the income attributable to its PE, even if the foreign enterprise as a whole reported losses. As a result, the licensing revenue earned by Hyatt from India became taxable in India.
Megha Agarwal:
That’s a game-changer. From a factual perspective, the Supreme Court looked closely at how much operational control Hyatt exercised over the Indian hotels — not just through enforcement of its brand standards, but also through control over bank accounts and decision-making power over procurement, pricing, marketing, and reservations. That goes beyond advisory oversight, doesn’t it?
Shaily Gupta:
Absolutely, Megha. The Court noted that these weren’t just high-level guidelines or mere advisory — they reflected real, substantive control over how the hotels were run on a day-to-day basis.
In addition, Hyatt’s employees made frequent and sustained visits to India to oversee operations. The Court viewed this as more than just support or monitoring — it was seen as active participation in the hotel’s core business functions.
Taken together, the Court found that these elements established a Fixed Place PE under Article 5(1). What tipped the balance was the commercial nexus — the clear link between Hyatt’s activities in India and the generation of revenue from the hotel operations. This wasn't just a passive licensing arrangement — it was active business conduct within India.
The Court also clarified that once a PE is established, profit attribution must be done as if the PE were an independent enterprise.
Megha Agarwal:
Thanks, Shaily. Do you think the impact of this ruling is limited to hotels, or could it spill over to other industries as well?
Shaily Gupta:
This isn’t just about hospitality, Megha. This definitely has wider implications. Just like the hospitality sector, many foreign brand owners, in sectors like apparel, electronics, watches, quick-service restaurants, often retain similar rights or operational controls for their brand protection and a globally consistent customer experience. Basically, any licensing arrangement by a foreign brand owner can get impacted.
Megha Agarwal:
Right — even in the industries you mentioned, brand owners often define pricing, marketing, procurement standards, and so forth. And employee visits to India for monitoring or oversight is quite common across these industries too.
Shaily Gupta:
Exactly. That’s a key area that companies across sectors need to reassess — regardless of their business model. If foreign staff regularly visit India for operations-related reasons, tax authorities may view that as a sign of active business conduct in India, which could trigger PE exposure. So any business where foreign staff regularly visit India for operational oversight needs to pay close attention.
Megha Agarwal:
What should foreign companies be doing differently now, Shaily?
Shaily Gupta:
Megha, that’s exactly the question businesses should be asking right now. Typically, foreign companies often exercise control over the Indian operations in various capacities — as a shareholder; a service recipient, say from its Indian GCC; or as a licensor or franchisor.
Megha Agarwal:
And I suppose that makes it harder to draw a clear distinction between what constitutes operational control and what’s merely advisory.
Shaily Gupta:
Precisely. And this blurred line is where the risk lies. Separating them is both difficult and highly fact-specific. This exercise can be inherently overlapping, difficult to delineate, and subjective — but quite critical. Without clear boundaries, tax authorities may interpret operational control, even when exercised for brand consistency or oversight, as indicative of a business presence in India, and therefore a Permanent Establishment.
This ruling signals that companies can no longer rely on formal contracts alone. They must assess the substance of their arrangements — who is doing what, from where, and with how much authority. Otherwise, they risk unexpected tax exposure.
Megha Agarwal:
Got it. That brings us to Global Capability Centres — especially those built using the Build-Operate-Transfer model. These tend to involve significant employee travel during setup. Is that a red flag now?
Shaily Gupta:
Yes, Megha, this is something that companies should be especially cautious about. The BOT model, by design, involves extensive involvement from the foreign parent — especially during the setup and transition phases.
Not only employee travel, but even things like Indian staff reporting to or being appraised by overseas managers could be seen as signs of overseas operational control. Not that this was not an issue earlier as well, but it gives additional ammunition to the tax officers to contend that these factual aspects indicate that operational control vests with the overseas entities.
Megha Agarwal:
So, documentation becomes critical?
Shaily Gupta:
Yes — companies should clearly document the purpose of each visit, the duration, and the functions performed. And they should ensure the contractual safeguards are backed up by actual conduct on the ground.
Also worth noting — the Supreme Court in this ruling did acknowledge that its earlier decision in the case of E-Funds remains on a factually different footing, since that involved back-office functions, in comparison to Hyatt’s facts. Similarly, in my view, the Morgan Stanley ruling of the Supreme Court in the context of stewardship functions in case of non-core functions being performed in India should still stand on a different footing. The Hyatt case is fact-driven, but it broadens the lens on operational control.
Megha Agarwal:
Shaily, what would be your closing thoughts for multinational companies operating in India?
Shaily Gupta:
The Hyatt ruling tells us one thing very clearly: substance rules. If you can pull operational levers in India and run your business through an Indian site, you can create a Fixed Place PE — even without a formal office or long-term staff.
It is important to remember PE is not a one-size-fits-all assessment. Contracts should be revisited to limit rights that resemble day-to-day control, while on-ground protocols must evidence that strategic direction remains offshore. Fee models need to reflect genuine functions performed, with clear attribution to Indian activities, and corporate structures should demonstrate real — not cosmetic — separation of roles. And yes, once PE is found, profit attribution will follow.
Megha Agarwal:
Well said, Shaily. From a hospitality standpoint, international operators may need to rethink their India models. Hotel chains typically exercise control through a suite of agreements — the core being the hotel management agreement (HMA), supported by brand licensing and service agreements. In this case, alongside the SOSA, the parties had a Hotel Operating Services Agreement (HOSA), signed by an Indian entity. Yet, the Supreme Court held that the foreign Hyatt entity under the SOSA was exercising significant control. The clear takeaway: hotel chains must reassess their contractual structures to mitigate potential PE risks.
Shaily Gupta:
Agreed. And it’s important for boards and CFOs to also proactively flag potential PE exposure in their risk frameworks and disclosures. Because in the end, regulators will look not just at paperwork — but at how businesses are actually run in India.
Megha Agarwal:
Thank you, Shaily Gupta, for joining me today. And thank you to our listeners — we hope this conversation helps you navigate the evolving tax landscape in India.
