Hyatt International Southwest Asia Ltd. vs. ACIT: Permanent Establishment Dispute under UAE-India Tax Treaty for AY 2016-17

Case Overview

The case Hyatt International Southwest Asia Ltd., United Arab Emirates vs. ACIT (International Taxation)- 2(1)(1), New Delhi (ITA 6363/DEL/2019) pertains to the assessment year 2016-17. The appeal was filed by Hyatt International Southwest Asia Ltd. on 29th July 2019, challenging the order passed by the Assessing Officer (AO) and later upheld by the Dispute Resolution Panel (DRP). The final tribunal order was pronounced on 20th December 2022 by the Income Tax Appellate Tribunal (ITAT) Delhi Bench ‘D.’

Background of the Case

Hyatt International Southwest Asia Ltd., a company based in the United Arab Emirates (UAE), provides strategic oversight and consultancy services to hotel owners, including those in India. The company filed its income tax return for the assessment year 2016-17. During the assessment proceedings, the AO determined that Hyatt International had a Permanent Establishment (PE) in India under the provisions of Article 5(1) and 5(2)(i) of the UAE-India Double Taxation Avoidance Agreement (DTAA). Consequently, the AO attributed a portion of the company’s global income to the Indian PE and sought to tax it in India.

Why the Case Was Filed

The appellant, Hyatt International Southwest Asia Ltd., filed the case challenging the AO’s conclusion that it had a Permanent Establishment (PE) in India. The company argued that it did not have a fixed place of business or presence in India that could constitute a PE under the terms of the UAE-India Tax Treaty. The appellant also contested the AO’s attribution of profits to the alleged PE and the characterization of the income as ‘Royalty’ under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA.

Tribunal Proceedings

The appeal was heard by a bench comprising Sh. N.K. Billaiya, Accountant Member, and Sh. Yogesh Kumar US, Judicial Member. The case involved multiple grounds of appeal raised by the appellant, focusing primarily on three key issues:

• The existence of a Permanent Establishment (PE) in India.
• The attribution of profits to the alleged PE.
• The alternative taxation of the income as ‘Royalty.’

Permanent Establishment Dispute

The primary issue in this case was whether Hyatt International had a Permanent Establishment (PE) in India under Article 5 of the UAE-India DTAA. The AO, supported by the DRP, concluded that Hyatt had a PE in India based on the presence of its personnel in India, who were involved in strategic oversight services at the hotel premises. The AO argued that the hotel premises and the activities conducted there constituted a fixed place of business, thereby establishing a PE.

In contrast, the appellant argued that its personnel were not on secondment to the hotel but were merely providing consultancy services to third-party customers. The appellant further contended that the hotel premises were not at its disposal and that the duration of its personnel’s stay in India was less than nine months, which is the threshold for establishing a PE under the DTAA.

Attribution of Profits

The second major issue was the AO’s decision to attribute 25% of the gross receipts to the alleged PE in India as taxable income. The appellant challenged this attribution, arguing that it primarily operated from the UAE and that only a minimal portion of its activities were conducted in India. The appellant contended that, even if a PE was established, the profits attributable to the PE should be limited to the activities actually carried out in India.

Alternative Taxation as Royalty

The third issue concerned the AO’s alternative characterization of the income as ‘Royalty’ under Section 9(1)(vi) of the Income Tax Act and Article 12 of the DTAA. The AO argued that the consultancy services provided by the appellant involved the provision of know-how, skill, experience, and commercial information, which fell under the definition of ‘Royalty.’ The appellant countered this by stating that the essence of the agreement was to provide strategic oversight and consultancy services, and the provision of know-how was merely incidental.

Tribunal’s Decision

The tribunal addressed each of these issues in its order dated 20th December 2022:

Permanent Establishment

Regarding the existence of a PE, the tribunal upheld the AO and DRP’s findings, stating that the appellant’s personnel operated from the hotel premises in India, which constituted a fixed place of business. The tribunal referenced earlier cases, including those involving the appellant in previous assessment years, where similar conclusions were reached. As such, the tribunal dismissed the appellant’s contention that it did not have a PE in India.

Attribution of Profits

On the issue of profit attribution, the tribunal referred the matter back to the AO for fresh adjudication. The tribunal directed the AO to follow the principles laid down in previous orders, specifically those concerning the appellant’s earlier assessment years. The tribunal emphasized the need for a detailed examination of the appellant’s global operations and the extent of activities conducted in India before determining the appropriate profit attribution to the PE.

Alternative Taxation as Royalty

The tribunal also restored the issue of alternative taxation as ‘Royalty’ to the AO for reconsideration. The tribunal instructed the AO to re-examine the nature of the services provided by the appellant, particularly in light of the strategic oversight agreements and the scope of consultancy services rendered. The AO was directed to determine whether the income should indeed be classified as ‘Royalty’ or if it should be treated differently under the provisions of the DTAA and the Income Tax Act.

Significance of the Case

This case is significant because it highlights the complexities involved in determining the existence of a Permanent Establishment (PE) under international tax treaties, particularly in service-oriented businesses. The tribunal’s decision reinforces the principles established in earlier rulings while providing clear guidelines for profit attribution and the classification of income in cross-border transactions.

The ruling serves as a reference for multinational companies operating in India, especially those providing consultancy and strategic services. It underscores the importance of carefully structuring contracts and operations to avoid unintended tax liabilities in jurisdictions where services are rendered.

Conclusion

The case of Hyatt International Southwest Asia Ltd. vs. ACIT (International Taxation)- 2(1)(1), New Delhi (ITA 6363/DEL/2019) serves as a crucial reminder of the intricate nature of international tax laws and the importance of thorough compliance with DTAA provisions. While the tribunal upheld the existence of a PE in India for the appellant, it also provided an opportunity for a reassessment of profit attribution and the classification of income as ‘Royalty.’

This case will likely influence future disputes involving Permanent Establishment and cross-border taxation under similar international tax treaties, providing clarity on how such cases should be approached and resolved.

Hyatt International Southwest Asia Ltd. vs. ACIT: Permanent Establishment Dispute under UAE-India Tax Treaty for AY 2016-17