SC ruling will force international cos to rework India business model: Experts
Jul 30, 2025
The recent Supreme Court ruling on Hyatt International’s appeal questioning the Delhi HC order establishing tax liabilities in India as a Permanent Establishment (PE), will push others to re-examine their business models in India.
The recent Supreme Court order upholding the Delhi HC ruling that UAE-headquartered Hyatt International Southwest Asia, which provides hotel consultancy and advisory services in India as part of its business operations, is liable to tax liabilities in India as it has a fixed place Permanent Establishment (PE) in India for tax purposes, will definitely have implications beyond Hyatt International, says industry watchers and experts in the hospitality sector who are in the know of the management contracts and other technical service matters between hotel owners and management companies.
The apex court while affirming the findings of the Delhi HC in this matter that Hyatt had a fixed place PE in India within the meaning of Article 5(1) of the Double Taxation Avoidance Agreement (DTAA), and that, the income received under the Strategic Oversight Services Agreements (SOSA) is attributable to such PE, unequivocally said that such income is taxable in India.
The argument by Hyatt International that its income was not taxable under IT or DTAA Acts as there are no specific Articles under the DTAA for taxing fees for Technical Services nor it has any fixed place of business, office, or branch in India, and that the presence of its employees did not exceed the nine-month threshold of stay under Article 5(2) of the DTAA in India, was rejected by the apex court, saying that the Dubai-based company’s ability to enforce compliance, oversee operations, and derive profit-linked fee from the hotel's earnings, demonstrate a clear and continuous commercial nexus, and control with the hotel's core functions. This nexus, the court said, satisfied the condition necessary for the constitution of a fixed place of PE under Article 5(1) of the India – UAE DTAA.
It has been a practice by many international hotel management companies to create multiple agreements—one principal hotel management contract agreement and then a couple of ancillary agreements for other technical services—with hotel owners. The ancillary agreements are often executed by offshore group entities of the management company to avoid tax liabilities, confirms legal experts.
“International chains typically exercise significant control over hotels in India through a suite of documents. The principal agreement is the hotel management agreement, supported by ancillary agreements such as the brand licensing agreement and technical services agreements. The ancillary agreements are often executed by offshore group entities,” confirmed Megha Agarwal, partner at Khaitan & Co., a leading law firm.
Analysing the SC order, she said, “In the Hyatt case, despite an Indian Hyatt entity being party to the Hotel Operating Services Agreement (the principal document), the Supreme Court held that the foreign Hyatt entity under the Strategic Oversight Services Agreement exercised significant control. This ruling may prompt international operators to re-think their business models in India.”
“The ruling will have far reaching implications, just not on hotel chains, but all other international consulting and management companies operating out of India,” felt Sudhir Sinha, CEO, Ananta Solutions, a hotel consultancy company.
As far as Hyatt International was concerned, they had been following the norms and terms so as to not be categorised under PE in India so far. The new ruling and observations to qualify them as being a PE in India was a derivation of their continued business from the same premises, but on the other hand they had been complying to other clearly outlined guidelines on number of days of continued stay and not having their permanent office in India, Sinha observed, adding that this ruling would definitely have implications on other international operators in India who had been operating in the same fashion for decades, he added.
A number of international hotel brands have either set up or shifted their regional offices to UAE (Dubai) in the last decade or so for reasons known to everyone.
Commenting on the matter, Beni Agrawal, founder and principal consultant of GK Hospitality Services, a leading hospitality consultancy firm in Delhi NCR, also confirmed the prevalent practice by international hotel companies to insist on paying part of the management fee to the India office and another part to the foreign office.
Consultants who mediate the management agreements between the international managers and Indian owners also confirmed that in a lot of cases the conversion charges and other fees which were incurred in the transfer of the fee to foreign office accounts of these international brands were also pushed to accounts of the owners.
“Now, if these companies have to pay taxes in India, they will try really hard to push that into the bucket of the owners. If it applies to Hyatt, it can apply to others as well,” he said,talking about the implications of the SC ruling,” said another consultant who didn’t want to be named.
A number of international operators had seen the writing on the wall pretty in advance and taken corrective action or were in the process of doing so for compliance purposes. This was evident in the contracts signed in recent times, confirmed Agarwal of Khaitan & Co.
“While the case has generated considerable interest in the industry, most international operators (including, Hyatt) had already course-corrected by housing their key management rights in agreements executed with an Indian group entity,” she said.
For Indian hotel companies which have been crying against ‘unfair advantage’ of international operators, this ruling by SC will offer some solace. Speaking at a recent industry conference by CII a prominent hotelier from eastern India had spoken about the absence of ‘level playing field’ for Indian operators and demanded international operators should be mandated to spend 25 percent of the profits in India itself.
[The Economic Times]
