TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1759
X X X X Extracts X X X X
X X X X Extracts X X X X
....espect of the Assessment Years 2009-10, 2010-11, 2011-12, 2012-13, 2013-14, 2014-15, 2016-17 and 2017-18. The details of the impugned orders before this Court, before the High Court and before the Income Tax Appellate Tribunal, along with the corresponding tax effect involved in each case, are tabulated below : Case No. High Court ITAT AO Tax effect evolved SLP (C) No. 5710 of 2024 ITA No.216/2020 Order dated 22.12.2023 579/Del/2013 Order dated 04.12.2019 21.11.2012 AY 2009-10 85,14,156/- SLP (C) No. 10152 of 2024 ITA No.219/2020 Order dated 22.12.2023 1762/Del/2015 Order dated 04.12.2019 28.01.2015 AY 2011-12 2,98,96,262/- SLP (C) No. 10157 of 2024 ITA No.217/2020 Order dated 22.12.2023 957/Del/2016 Order dated 04.12.2019 18.12.2015 AY 2012-13 2,85,75,313/- SLP (C) No. 10796 of 2024 ITA No.201/2023 Order dated 22.12.2023 6363/Del/2019 Order dated 20.12.2022 19.06.2019 AY 2016-17 4,05,14,966/- SLP (C) No. 10797 of 2024 ITA No.215/2023 Order dated 22.12.2023 712/Del/2021 Order dated 20.12.2022 13.04.2021 AY 2017-18 4,05,14,966/- SLP (C) No. 10798 of 2024 ITA No.140/2021 Order dated 22.12.2023 727/Del/2017 Order dated 12.03.2021 24.11.2016 AY 2013-14....
X X X X Extracts X X X X
X X X X Extracts X X X X
....3(3) read with Section 144C of the Act, holding inter alia that the appellant's activities constituted (i) a business connection under Section 9(1)(i) of the Act; (ii) a PE under Article 5 of the DTAA; (iii) royalties and fees for technical services under Section 9(1)(vi)/(vii) of the Act; and (iv) royalties under Article 12 of the DTAA. 3.5. The appellant filed its objections dated 22.01.2012 before the Dispute Resolution Panel (DRP), which rejected the objections and upheld the Assessing Officer's findings. Consequently, the Assessing Officer passed a final assessment order dated 21.11.2012, for the assessment year 2009-10. Similar assessment orders were passed for the Assessment Years 2010-11, 2011-12 and 2012-13. 3.6. Challenging the above assessment orders, the appellant filed four appeals before the Income Tax Appellate Tribunal (ITAT). By a common order dated 04.12.2019, the ITAT rejected the appellant's contention that it did not have a PE in India and dismissed the appeals. In doing so, the ITAT relied on the decision of this Court in Formula One World Championship Limited v. Commissioner of Income Tax, International Taxation-3, Delhi & Anr. (2017) 15 SCC 602 and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Court regarding the existence of a Permanent Establishment (PE) in the form of a fixed place of business in India under the Indo-UAE DTAA, the learned Senior Counsel for the appellant / assessee vehemently contended that the appellant is a Dubai based company engaged in rendering hotel consultancy and advisory services from Dubai to hotels in the Hyatt Group of Hotels, including several located in India. These services are rendered under a SOSA entered into with each hotel owner individually. The SOSA explicitly stipulates that the appellant shall render its services from Dubai and is not obligated to send or station any employee in India. However, the agreement permits at the appellant's sole discretion, occasional and temporary visits by its employees to India. 4.1. It was further submitted that the income of the appellant is not taxable in India under the provisions of the Act, as there is no specific Article in the DTAA enabling taxation of Fees for Technical Services (FTS). Furthermore, the appellant does not maintain a fixed place of business, office, or branch in India. The limited and occasional presence of its employees in India, did not exceed the threshold of nine month....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in Goa, Bengaluru, Kochi, and Chennai. These oversight visits were intended to ensure brand uniformity and quality compliance. The short duration spread across multiple locations, and lack of exclusive use or control over any space do not satisfy the legal requirement of a fixed place of business PE. Furthermore, the Department failed to produce documentary evidence to establish that any such designated space was ever placed at the disposal of the appellant. 4.6. It was submitted that the High Court incorrectly inferred that the absence of an express prohibition in the SOSA on decision-making by appellant's employees during their stay at the hotel implies a right of disposal. In law, a fixed place of business PE cannot be presumed from the mere absence of a restriction; there must be an affirmative grant of a right to use a specific physical location to carry on the enterprise's own business. 4.7. Ultimately, the learned senior counsel submitted that the High Court's findings are legally untenable and factually erroneous. The essential legal requirements for the constitution of a fixed place of business PE were not satisfied in the present case. 4.8. Accordingly, it was prayed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng operational presence in line with the terms of the SOSA. In view of the same, it was submitted that the appellant had full and effective control over the hotel premises and that the premises were indeed at its disposal for conducting its business. Therefore, the hotel satisfies the definition of a fixed place of business PE under Article 5(1) of the DTAA. Consequently, in terms of Article 7(1) of the DTAA, the profits attributable to such PE are liable to be taxed in India and the appellant be taxed in India on the income derived from such activities. 5.5. To substantiate his contention, the learned Senior Counsel placed reliance on the decision of this Court in Formula One (supra). In that case, the assessee (FOWC) incorporated in the UK, entered into a Race Promotion Contract (RPC) with Jaypee Sports International Ltd. to host the Formula One Grand Prix in India. The Court had to determine whether Jaypee constituted a fixed place PE of FOWC in India under the terms of the RPC. The Court held in paragraphs 74 and 76.5 of the judgment that for a fixed place PE to exist, two conditions must be met: (a) there must be a fixed place of business, and (b) through that place, the busi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....following interim order: "We have heard learned senior counsel for the petitioner and learned Additional Solicitor General for the respondent-department. It is stated at the Bar that the tax demand has been fully met by the petitioners (under protest). However, the apprehension is with regard to the initiation of penalty proceedings pending consideration of the matter before this Court. It was submitted that the petitioner has a good case on merits and therefore, initiation of penalty proceedings and the demand made thereon would ultimately be prejudicial to the petitioner herein. Per contra, learned Additional Solicitor General submitted that having regard to the fact that three authorities, including the High Court, having held against the petitioner herein on the basis of the judgments of this Court, there is no reason as to why the penalty proceedings should be stayed or frustrated at this stage. However, we find that since notices have been issued in these matters pending consideration of these special leave petitions and bearing in mind the fact that the tax demand has been made by the petitioners herein, the penalty proceedings shall remain stayed till the next dat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f business through which the business of an enterprise is wholly or partly carried on". This is consistent with the definition provided in Section 92F(iii-a) of the Income Tax Act, 1961. For better appreciation, Article 5 of the India - UAE DTAA is extracted below: "PERMANENT ESTABLISHMENT 1. For the purposes of this Agreement, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 2. The term "permanent establishment" includes especially: (a) a place of management ; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; (g) a farm or plantation; (h) a building site or construction or assembly project or supervisory activities in connection therewith, but only where such site, project or activity continues for a period of more than 9 months; (i) the furnishing of services including consultancy services by an enterprise of a Contracting State through employees or other personnel in the other Contracting State, provided that such activities continue for the same project or c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tablishment (PE) situated therein. In such a case, only so much of the profits as is attributable to that PE may be taxed in the other State. The provision reads as follows: "Article 7 - Business profits (1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment." 12. Insofar as the SOSA is concerned, the relevant clauses have already been extracted by the High Court in the impugned order; hence, we do not consider it necessary to reproduce them here once again. However, for contextual clarity, it may be noted that Section 4 of Article I of the SOSA deals with the 'title to the hotel'. It provides that if the hotel owner desires to obtain financial assistance for the construction or refinancing of the hotel - or if the hotel is to be used as collateral for any borrowing unrelated to the hotel business - the owner is required to obtain ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d income - whether directly or indirectly derived from the hotel's operations - as well as cumulative gross operating profit. This remuneration structure clearly reflects an active commercial involvement, linking the assessee's income to the financial and operational performance of the hotel. 12.4. From the contractual provisions detailed above, it is evident that the appellant's role was not confined to mere policy formulation. On the contrary, the SOSA conferred upon the appellant a continuing and enforceable right to implement its policies and ensure compliance in all operational aspects of the hotel. The degree of control and supervision exercised by the appellant clearly transcends a mere advisory capacity and aligns with the criteria for a Fixed Place Permanent Establishment (PE) under Article 5(1) of the India - UAE DTAA. 13. The question of what constitutes a "place of business" under Article 5(1) of the DTAA is no longer res integra. In Formula One (supra), this Court unequivocally held that for a Permanent Establishment (PE) to exist, two essential conditions must be satisfied: (i)the place must be "at the disposal" of the enterprise, and (ii)the business of the enterpr....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., however, pointed out that there is a possibility of a third type of PE i.e. a construction or installation site may be regarded as PE under certain circumstances. In the first type of PE i.e. associated permanent establishments, primary requirement is that there must be a fixed place of business through which the business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled: (a) there must be a business of an enterprise of a contracting State (FOWC in the instant case); and (b) PE must be a fixed place of business i.e. a place which is at the disposal of the enterprise. It is universally accepted that for ascertaining whether there is a fixed place or not, PE must have three characteristics: stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on. ........ 33. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be "at the disposal" of the enterprise. For this purpose, it is not n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lace as a three-dimensional zone rather than a single point on the earth can be derived from the French version (installation fixe) as well as the term "establishment". As a rule, this zone is based on a certain area in, on, or above the surface of the earth. Rooms or technical equipment above the soil may qualify as a PE only if they are fixed on the soil. This requirement, however, stems from the term "fixed" rather than the term "place", given that a place (or space) does not necessarily consist of a piece of land. On the contrary, the term "establishment" makes clear that it is not the soil as such which is the PE but that the PE is constituted by a tangible facility as distinct from the soil. This is particularly evident from the French version of Article 5(1) OECD MC which uses the term "installation" instead of "place". The term "place" is used to define the term "establishment". Therefore, "place" includes all tangible assets used for carrying on the business, but one such tangible asset can be sufficient. The characterization of such assets under private law as real property rather than personal property (in common law countries) or immovable rather than movable property....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... PEs were superfluous). This can be illustrated by the example of a salesman who regularly visits a major customer to take orders, and conducts meetings in the purchasing director's office. The OECD MC Comm. has convincingly denied the existence of a PE, based on the implicit understanding that the relevant geographical unit is not just the chair where the salesman sits, but the entire office of the customer, and the office is not at the disposal of the enterprise for which the salesman is working." 38. Taking cue from the word "through" in the article, Vogel has also emphasised that the place of business qualifies only if the place is "at the disposal" of the enterprise. According to him, the enterprise will not be able to use the place of business as an instrument for carrying on its business unless it controls the place of business to a considerable extent. He hastens to add that there are no absolute standards for the modalities and intensity of control. Rather, the standards depend on the type of business activity at issue. According to him, "disposal" is the power (or a certain fraction thereof) to use the place of business directly. Some of the instances given by Vogel....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... exist only where the taxpayer is free to use the POB: - at any time of his own choice; - for work relating to more than one customer; and - for his internal administrative and bureaucratic work. In all, the taxpayer will usually be regarded as controlling the POB only where he can employ it at his discretion. This does not imply that the standards of the control test should not be flexible and adaptive. Generally, the less invasive the activities are, and the more they allow a parallel use of the same POB by other persons, the lower are the requirements under the control test. There are, however, a number of traditional PEs which by their nature require an exclusive use of the POB by only one taxpayer and/or his personnel. A small workshop [cf. Article 5(2)(e) OECD and UN MC] of 10 or 12 sq m can hardly be used by more than one person. The same holds true for a room where the taxpayer runs a noisy machine." 39. OECD commentary on Model Tax Convention mentions that a general definition of the term "PE" brings out its essential characteristics i.e. a distinct "situs", a "fixed place of business". This definition, therefore, contains the following conditions: (i) the exis....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed was whether the liaison offices (LOs) of the UAE Exchange Centre in India constituted a PE. The Court held in the negative, as the LOs performed only preparatory and auxiliary activities, and there was no right of disposal or control over a fixed placed through which core business was carried on. The following paragraph from the judgment is especially pertinent in this regard: "13. And again, whilst analysing the scope of Articles 5 and 7 of the DTAA in para 12 of the impugned judgment [UAE Exchange Centre Ltd. v. Union of India, 2009 SCC OnLine Del 337: (2009) 313 ITR 94], the High Court noted thus: "12. ... In the case of DTAA under consideration in the present case under Article 5 read with Article 7, profits of an enterprise are liable to tax in India if an enterprise were to carry on business through permanent establishment, meaning thereby fixed place of business through which business of an enterprise is wholly or partly carried on. Under Article 5(2)(c), amongst others, permanent establishment includes an office. However, Article 5(3) which opens with a non obstante clause, is illustrative of instances where- under the DTAA various activities have been deemed as ones....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e as to whether back office operations carried on by Morgan Stanley Company for one of its Morgan Stanley Advantages Services Pvt. Ltd. would qualify as having a permanent establishment in India. The Supreme Court, while holding that back office operations fall within the exclusionary clause Article 5(3)(e) of Indo-US Double Taxation DTAA, which is, identical to DTAA under consideration in the present case, came to the conclusion that back office operations came within the purview of Article 5(3)(e). It is laid down by the Supreme Court in CIT v. Morgan Stanley & Co. Inc., [(2007) 7 SCC 1] that in ascertaining what would constitute a "permanent establishment" within the meaning of Article 5(1) of the Indo-US DTAA, one had to undertake what is called a functional and factual analysis of each of the activities undertaken by an establishment. In that case, the Supreme Court came to the conclusion that the entity located in India which was engaged in only supporting the front office functions of Morgan Stanley & Co., a non-resident, in fixed income and equity research and information technology enabled services such as data processing support centre, technical services and reconciliati....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y in nature but extends to various other administrative roles. In this case, the 20-year duration of the SOSA, coupled with the appellant's continuous and functional presence, satisfies the tests of stability, productivity and dependence. From the nature of functions carried out by the appellant, it cannot be said that they were performing merely "auxiliary" functions. Rather, the functions performed by the appellant, 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. Moreover, they were to be continuously performed over a period of twenty years, under an agreement that included revenue sharing. Therefore, the hotel premises clearly satisfy the criteria required to be classified as a "fixed place of business" or PE. 18. The argument that the absence of a specific clause in the SOSA permitting the conduct of business from the hotel premises negates the existence of a PE is also without merit. As held in Formula One, the test is not whether a formal right of use is granted, but whether, in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dia - UAE DTAA. 23. At this juncture, we also note the reference made to a Larger Bench of the Delhi High Court in Hyatt International Southwest Asia Ltd v. Additional Director of Income Tax, 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 no.(iv) referred was answered in the affirmative, reinforcing the principle that taxability is based on business presence and not the global profitability of the enterprise. The relevant paragraph is profitably reproduced below: "66. On an overall consideration of the above, we come to the firm conclusion that the submission of global income being determinative of the question which stood referred, is wholly unsustainable. The activities of a permanent establishment are liable to be independently evaluated and ascertained in the light of the plain language in which article 7 stands couched. The fact that a permanent establishment is conceived to be an independent taxable entity cannot possibly be doubted or questioned. The wealth of authority referred to hereinabove clearly negates the contention to the contrary and which was commend....