Facts of the Case

The appellant, Hyatt International Southwest Asia Ltd., is a company incorporated in the UAE and a tax resident under the India-UAE Double Taxation Avoidance Agreement (DTAA).

The appellant entered into Strategic Oversight Services Agreements (SOSA) with Asian Hotels Limited for hotels in India. Under these agreements, the appellant provided strategic planning, operational guidance, and brand-related services to ensure international standards.

For multiple assessment years (2009–10 to 2017–18), the appellant filed returns claiming that its income was not taxable in India. However, the Assessing Officer held that:

  • The appellant had a business connection in India under Section 9(1)(i),
  • It constituted a Permanent Establishment (PE) under Article 5 of DTAA,
  • Income was taxable in India.

The Dispute Resolution Panel and ITAT upheld the assessment orders, leading to appeals before the Delhi High Court under Section 260A.

Issues Involved

  1. Whether service charges received under SOSA are taxable as royalty.
  2. Whether the appellant has a Permanent Establishment (PE) in India under Article 5 of DTAA.
  3. Whether ITAT findings were perverse and contrary to agreement terms.
  4. Whether Article 7(1) applies when the assessee has overall losses.

Petitioner’s Arguments

  • The appellant provided services from Dubai, without maintaining any office or fixed place in India.
  • Occasional visits of employees did not satisfy PE requirements under DTAA.
  • No specific article in DTAA allowed taxation of Fees for Technical Services (FTS).
  • No fixed place of business at disposal of the appellant in India.
  • ITAT wrongly relied on Formula One World Championship Ltd. vs CIT without satisfying essential conditions of PE.

Respondent’s Arguments

  • The appellant exercised significant operational control over hotel activities in India.
  • Presence of employees and continuous oversight indicated a fixed place PE.
  • Income derived from SOSA is attributable to Indian operations and thus taxable.
  • Article 5 of DTAA includes “fixed place of business through which business is carried out”, which was satisfied.

Court Order / Findings

  • Issue (i): Service charges were not taxable as royalty – decided in favour of the assessee.
  • Issue (ii): The appellant had a Permanent Establishment in India (fixed place PE).
  • Issue (iii): ITAT findings were upheld (against assessee).
  • Issue (iv): Referred to a larger bench 

Important Clarification

  • Even if the enterprise suffers global losses, income attributable to a Permanent Establishment in India can still be taxed independently.
  • Determination of PE depends on control, continuity, and disposal of premises, not merely formal agreements.
  • Splitting agreements (SOSA, HOSA, etc.) does not negate PE if substance shows business presence.

Sections Involved

  • Section 9(1)(i) – Income deemed to accrue in India
  • Section 142(1), 143(3), 144C – Assessment provisions
  • Section 260A – Appeal to High Court
  • Section 92F – Transfer Pricing definitions
  • Article 5 – Permanent Establishment (India-UAE DTAA)
  • Article 7 – Business Profits (DTAA)

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/VIB22122023ITA2162020_161402.pdf

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