TaxTMI 
TaxTMI 
2025 (7) TMI 1759
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....Court" in the Income Tax Appeals preferred by the appellant / assessee, in respect 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....
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....in India and that its business income was not taxable under Article 7 of the DTAA. 3.4. On 28.12.2011, the Assessing Officer passed a draft assessment order under Section 143(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 dismiss....
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....nt of the UAE, had a Permanent Establishment (PE) in India in the form of a fixed place of business. Aggrieved by this part of the High Court's judgment, the appellant has preferred the present appeals. 4. Challenging the findings of the High 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 taxa....
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....due emphasis on the fact that six employees of the appellant visited India and stayed at the hotel premises during the relevant years. These visits, however, were brief and routine in nature and the same executives visited other Hyatt hotels across India including those 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, ....
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....mentary evidence mentioned in the impugned orders, which include records of names, roles, and durations of stay of the appellant's employees posted at the hotel. Some individuals remained in India for up to nine months and were involved in substantive hotel operations, clearly indicating 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 whe....
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....d. 6. We have heard the learned senior counsel appearing for the appellant and the learned Additional Solicitor General appearing for the respondents and also perused the materials available on record. 7. On 16.05.2024, when these matters were taken up for consideration, this Court passed the 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 proceedi....
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....s are found in international models such as the UN Model Double Taxation Convention (2021) and the OECD Model Tax Convention (2017). These model conventions provide an inclusive yet exhaustive definitions of PE, with the precise scope depending upon the terms of the bilateral DTAA. Article 5(1) of the India - UAE DTAA defines a PE as "a fixed place of 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 b....
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....business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of independent status within the meaning of this paragraph." 11.1. Article 7 of the DTAA governs the taxation of business profits. Article 7(1) provides that the profit of an enterprise shall be taxable only in the State of its residence, unless the enterprise carries on business in the other Contracting State through a permanent establishment (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 ....
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....utive Committee - on behalf of the hotel owner. The assessee is further required to align the hotel's human resource policies with Hyatt Operating Standards. It may also temporarily assign its own employees to serve as full-time executive staff at the hotel. 12.3. Section 1(a) and 1(b) of Articles V of the SOSA sets out the assessee's entitlement to "Strategic Fees" for the services provided. The consideration is not a fixed fee; instead, it is calculated as a percentage of room revenue and other revenues and 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 clea....
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....ional meaning, Philip Baker discerns two types of PEs contemplated under Article 5 of OECD Model. First, an establishment which is part of the same enterprise under common ownership and control-an office, branch, etc., to which he gives his own description as an "associated permanent establishment". The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a PE. Such PE is given the nomenclature of "unassociated permanent establishment" by Baker. He, 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 th....
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....d and the taxing powers of the State. This territorial link serves as the basis not only for the distributive rules which are tied to the existence of PE but also for a considerable number of other distributive rules and, above all, for the assignment of a person to either contracting State on the basis of residence (Article 1, read in conjunction with Article 4 OECD and UN MC)." 37. We would also like to extract below the definition to the expression "place" by Vogel, which is as under: "A place is a certain amount of space within the soil or on the soil. This understanding of place 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....
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....ll be regarded as a resident of State B only [Article 4(3) OECD and UN MC]. In the absence of both actual facilities and a dependent agent in State A, income of this company will be taxable only in State B under the 1st sentence of Article 7(1) OECD and UN MC. There is no minimum size of the piece of land. Where the qualifying business activities consist (in full or in part) of human activities by the taxpayer, his employees or representatives, the mere space needed for the physical presence of these individuals is not sufficient (if it were sufficient, Article 5(5) OECD MC and Article 5(5)(a) UN MC and the notion of agent 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 t....
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....e the OECD MC Comm. suggests that it is sufficient to require not more than the type and extent of control necessary for the specific business activity which the taxpayer wants to exercise in the source State, the Canadian and Indian decisions advocate for stricter standards for the control threshold. The OECD MC shows a paramount tendency (though no strict rule) that PEs should be treated like subsidiaries [cf. Article 24(3) OECD and UN MC], and that facilities of a subsidiary would rarely be unusable outside the office hours of one of its customers (i.e. a third person), the view of the two courts is still more convincing. Along these lines, a POB will usually 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 a....
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....anently used area in a customs depot (e.g. for the storage of dutiable goods). Again the place of business may be situated in the business facilities of another enterprise. This may be the case for instance where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise. At the same time, it is also clarified that the mere presence of an enterprise at a particular location does not necessarily mean that the location is at the disposal of that enterprise." 14. In Union of India & Anr. v. U.A.E Exchange Centre (2020) 9 SCC 329, this Court had occasion to clarify the scope of "permanent establishment" in the context of cross- border taxation under the India - UAE DTAA. The issue involved 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 ....
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....be given a wider and liberal play. Once an activity is construed as being subsidiary or in aid or support of the main activity it would, according to us, fall within the exclusionary clause. To say that a particular activity was necessary for completion of the contract is, in a sense saying the obvious as every other activity which an enterprise undertakes in earning profits is with the ultimate view of giving effect to the obligations undertaken by an enterprise vis-à-vis its customer. If looked at from that point of view, then, no activity could be construed as preparatory or of an "auxiliary" character. On this aspect of the matter, the Supreme Court in CIT v. Morgan Stanley & Co. Inc. [(2007) 7 SCC 1] amongst other issues was called upon to decide 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....
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...., - Implement human resource and procurement policies, - Control pricing, branding, and marketing strategies, - Manage operational bank accounts, - Assign personnel to the hotel without requiring the owner's consent. These rights go well beyond mere consultancy and indicate that the appellant was an active participant in the core operational activities of the hotel. 17. The appellant's contention that the absence of an exclusive or designated physical space within the hotel precludes the existence of a PE, is misconceived. In Formula One, this Court expressly held that exclusive possession is not essential - temporary or shared use of space is sufficient, provided business is carried on through that space. The actual role of the appellant is not just advisory 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 functi....
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....tay 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. 22. 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. 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 answ....