2025 (7) TMI 1759 - SC - Income Tax

SC rules UAE tax resident has fixed place PE in India under Article 5(1) of India-UAE DTAA due to coordinated business presence

The SC affirmed that the appellant, a UAE tax resident, has a fixed place PE in India under Article 5(1) of the India-UAE DTAA. Despite no single employee ... Income deemed to accrue or arise in India - Permanent Establishment (PE) in India - royalty/Fees for Technical Services -service charges received by the appellant under the various SOSA agreement - assessee submitted it did not have any fixed place of business, office, or branch in India, and that the presence of its employees in India during the relevant previous year did not exceed the nine-month threshold under Article 5(2) of the DTAA - assessee being a company incorporated in Dubai and a tax resident of the UAE HELD THAT:- There is no strait- jacket formula applicable to all cases. Typically, trading operations require a continuously used fixed place, whereas service-oriented business may not. Some jurisdictions consider mere use of a place sufficient, while others require legal or operational control over the premises. In our view, determining whether a Fixed place PE exists must involve 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. It is undisputed that the appellant’s executives and employees made frequent and regular visits to India to oversee operations and implement the SOSA. The findings of the assessing officer, based on travel logs and job functions, establish continuous and coordinated engagement, even though no single individual exceeded the 9-month stay threshold. Under Article 5(2)(i) of the DTAA, the relevant consideration is the continuity of business presence in aggregate – not the length of stay of each individual employee. Once it is found that there is continuity in the business operations, the intermittent presence or return of a particular employee becomes immaterial and insignificant in determining the existence of a permanent establishment. Accordingly, the High Court was correct in concluding that the appellant’s role was not confined to high-level decision making, but extended to substantive operational control and implementation. The appellant’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. This nexus satisfies the conditions necessary for the constitution of a Fixed Place Permanent Establishment under Article 5(1) of the India – UAE DTAA. At this juncture, we also note the reference made to a Larger Bench of the Delhi High Court in Hyatt International Southwest Asia Ltd [2023 (1) TMI 1416 - DELHI HIGH COURT] where it was held that profit attribution to a PE in India is permissible even if the overall foreign enterprise has incurred losses. Accordingly, the question as answered in the affirmative, reinforcing the principle that taxability is based on business presence and not the global profitability of the enterprise. We affirm the findings of the High Court that the appellant has a fixed place PE in India within the meaning of Article 5(1) of the DTAA, and that, the income received under the SOSA is attributable to such PE and is therefore taxable in India. ISSUES: Whether the service charges received under the Strategic Oversight Services Agreement (SOSA) constitute taxable royalty under the applicable tax laws and DTAA.Whether the appellant has a Permanent Establishment (PE) in India within the meaning of Article 5 of the India-UAE Double Taxation Avoidance Agreement (DTAA).Whether the findings of the Tribunal regarding the existence of a PE are perverse and contrary to the terms of the SOSA.Whether Article 7(1) of the DTAA applies to the appellant considering the appellant incurred losses during the relevant financial years. RULINGS / HOLDINGS: The Court held that the service charges under the SOSA were not taxable as royalty, answering that question in favor of the appellant.The Court affirmed that the appellant has a Permanent Establishment (PE) in India under Article 5(1) of the India-UAE DTAA, as the appellant had a 'fixed place of business through which the business of an enterprise is wholly or partly carried on.'The Court found the Tribunal's findings on the existence of PE to be neither perverse nor contrary to the SOSA, emphasizing the appellant's pervasive and enforceable control over hotel operations.The Court referred the question regarding applicability of Article 7(1) of the DTAA in the context of appellant's losses to a Larger Bench, noting that taxability is based on business presence and not global profitability. RATIONALE: The Court applied the definition of Permanent Establishment under Article 5 of the India-UAE DTAA, consistent with Section 92F(iii-a) of the Income Tax Act, 1961, and international models such as the OECD and UN Model Tax Conventions.The Court relied heavily on the precedent set in Formula One World Championship Limited v. Commissioner of Income Tax, which established the 'disposal test' requiring that the place be 'at the disposal' of the enterprise and that business is carried on through that place, with key attributes being stability, productivity, and a degree of independence.The Court rejected the appellant's contention that absence of exclusive physical space or formal right to use premises negates PE, holding that exclusive possession is not essential and temporary or shared use suffices if business is carried on through the place.The Court emphasized that the appellant's role under the SOSA went beyond advisory functions to include strategic, operational, and financial control, including appointment and supervision of key personnel, formulation and enforcement of policies, and assignment of employees to India without owner approval.The Court distinguished the facts from E-Funds IT Solutions Inc., where back-office support was held insufficient for PE, noting that the appellant's involvement was core and continuous, not merely auxiliary.The Court noted that the aggregate presence and activities of employees in India, even if individual stays were under nine months, satisfied the continuity requirement under Article 5(2)(i) of the DTAA.The Court invoked the principle that legal form does not override economic substance in determining PE status, rejecting the separation of the appellant's and Hyatt India Pvt. Ltd.'s operations for PE determination.The Court referred to authoritative commentary by Philip Baker and Klaus Vogel on the interpretation of 'place' and 'fixed place of business,' highlighting the importance of control and the nature of the business activity in assessing PE.The Court noted prior decisions clarifying that activities of a preparatory or auxiliary character are excluded from PE under Article 5(3)(e), but found the appellant's activities to be core and substantive.The Court affirmed that under Article 7(1) of the DTAA, profits attributable to the PE may be taxed in India, independent of the overall profitability of the enterprise, as supported by the Larger Bench decision cited.