International Tax Updates

published on 31st October 2025 I reading time approx. 5 minutes

1. Supreme Court (SC) applies substance over form doctrine, affirms Permanent Establishment (‘PE’) constitution of Hyatt International considering pervasive control over Indian operations

In the present case, the taxpayer, a company incorporated in the United Arab Emirates (‘UAE’), entered into Strategic Oversight Services Agreements (‘SOSA’) — with Asian Hotels Limited (‘AHL’), an Indian entity. The term of the contract was 20 years, with an option to extend it to another 10 years. As per SOSA, the taxpayer was 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. The Indian subsidiary of the taxpayer entered into a separate agreement with AHL, namely, Hotel Operating Services Agreement (‘HOSA’) to undertake day-to-day operations of the hotel.

Some of the key facts / clauses of the SOSA are as follows:

Hotel to be operated in accordance with standards comparable to Hyatt international hotels
The taxpayer formulated policies relating to human resources, procurement, guest admittance, use of premises, pricing, sales and marketing, and reservations and operating bank accounts.
The taxpayer had complete control over formulating and establishing strategic plans for all aspects of hotel operations, including branding, marketing, product development and daily operations.
The taxpayer assigned employees to India without needing prior approval from the hotel owner or management.
The taxpayer formulated policies governing the hotel’s operating bank accounts
The taxpayer had the authorization to identify, recruit and assist in appointing non-local hotel employees including the General Manager, key personnel, and members of the executive committee
The taxpayer’s executives and employees made frequent and regular visits to India to oversee operations and implement SOSA.
The taxpayer was entitled to strategic fees, calculated as a percentage of room revenues, other revenues and income.
Where financial assistance was required for construction or refinancing of the hotel, or if the hotel was to be used as collateral for any borrowing unrelated to the hotel business, a non-disturbance and attornment agreement had to be obtained from the lender, which must be acceptable to the taxpayer.

The tax officer passed the final assessment order for various years under appeal inter-alia holding that the taxpayer’s activities constituted a PE of Hyatt in India. The appeal against the final order was dismissed by the Tribunal and the HC.

Aggrieved by the HC order, the taxpayer filed an appeal before the SC. The SC after hearing both the parties to the appeal, held as follows:

Determining a Fixed place PE involves 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.
The “disposal test” is to be applied contextually, considering the commercial and operational realities of the arrangement.
The functions performed through its staff operating from the hotel premises, were not just limited for setting up a pattern of activities for the hotel, but were core and essential functions, clearly establishing their control over the day-to-day operations of the hotel.
The legal form does not override economic substance in determining PE status. The extent of control, strategic decision-making, and influence exercised by the taxpayer clearly establish that business was carried on through the hotel premises.
Frequent and regular visits of the taxpayer executives and employees at the hotel to oversee SOSA compliance indicated continuity in business operations and thus, the intermittent presence or return of a particular employee (resulting in stay of less than 183 days) becomes immaterial and insignificant in determining the existence of a PE.
The taxpayer’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 attributes of PEs as per Dr. Philip Baker was satisfied as follows:

Stability - 20-year duration for SOSA;
Productivity - Actual role of Hyatt is not just advisory in nature but extends to various other operational, administrative and financial roles;
Dependence – Hyatt’s staff was operating through the hotel premises in India

Accordingly, the SC held that the taxpayer had a Fixed Place PE in India considering its substantive and pervasive operational control over the operations of the AHL hotels in India. Once again, the substance over form doctrine was expounded while evaluating the rights assigned to the taxpayer and its Indian entity under the SOSA and HOSA, respectively. The SC also referred to its observation on disposal test in its earlier SC ruling in Formula One, to hold that the taxpayer has the hotels at its disposal in India.

2. Mumbai Tax Tribunal (‘ITAT’) holds that Principal Purpose Test (‘PPT’) introduced in Multilateral Instrument (‘MLI’) requires separate notification for the applicable tax treaty

In the instant case, the taxpayers are foreign companies incorporated in Ireland holding a valid Tax Residency Certificate (‘TRC’) issued by Irish Revenue Authorities. They are engaged in the business of aircraft leasing business. The taxpayers filed their tax return in India declaring nil taxable income, claiming that lease rentals were excluded from royalty under Article 12(3)(a) of the India-Ireland Double Taxation Avoidance Agreement (‘DTAA’), business profits taxable only in Ireland as no PE existed in India, and without prejudice, exempt under Article 8(1) of the DTAA (International Traffic) as income from aircraft operations.

The Tax officer also denied the treaty benefit by invoking PPT under Articles 6 and 7 of the MLI and held that the taxpayers were incorporated in Ireland principally to access benefits under the DTAA, citing various factors such as the parent being based in the Cayman Islands, common directorships, outsourced operations and outsourced lease management. The Dispute Resolution Panel (‘DRP’) upheld the above view, and consequently, the final assessment order was issued denying treaty benefits and holding that the rentals constituted as ‘royalty’ under the domestic law, the Appellants have a fixed place PE in India, Article 8 was inapplicable since the lessee was a domestic airline and the leases were in fact finance leases.

The Tribunal held that the MLI modifies but does not replace the Covered Tax Agreement, and applies only when both the countries have ratified and issued matching notifications. Relying on the Supreme Court’s ruling in Nestle SA [Assessing Officer (I.T.) v Nestle SA (2023) 458 ITR 756], the Tribunal observed that any treaty modification requires separate domestic notification. Since no notification was issued to incorporate Articles 6 and 7 of the MLI into the India–Ireland DTAA, the PPT provisions could not apply.

The ITAT held that the MLI is inapplicable on procedural grounds and clarified that mere tax benefits or efficient structuring do not trigger PPT if genuine commercial objectives exist. Citing Ireland’s status as a global aviation hub, it held that using a country’s treaty network for bona fide purposes is not abuse. Referring to Bombay High Court ruling in Bid Services Division (Mauritius) Ltd vs Authority of Advance Ruling (Income-tax) [2023] 453 ITR 461, it noted that the parent’s Cayman Islands base alone doesn’t prove abuse. A valid Irish TRC creates a presumption of residence and legitimacy, rebuttable only by clear evidence of fraud or misuse.

The ITAT, after examining the agreements, held the leases to be operating leases since ownership remained with the lessor, aircraft had to be redelivered, and repossession rights were protective. It contrasted these with finance lease features, relied on Directorate General of Civil Aviation and Reserve Bank of India circulars, and supported its view with the ruling in InterGlobe Aviation Ltd. [2022] 95 ITR (T) 586 (Delhi -Trib) (SB) and international precedents.

It further held that mere physical presence of aircraft in India under the lessee’s control does not create a fixed place PE. Article 8(1) of the DTAA treats “operation” and “rental” as separate income sources, unlike the Organization for Economic Cooperation and Development (‘OECD’) Model, and does not require rental activity to be incidental or ancillary to the enterprise’s own operations of the aircraft in the context of international traffic.

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