Delhi High Court Rules on Service Fees and Profit Attribution to PE in Hyatt Case December 2023

October 16, 2023

The Delhi High Court addressed a dispute involving Hyatt International Southwest Asia Ltd. and the Indian tax authorities concerning the classification of fees under a Strategic Oversight Service Agreement (SOSA) with Asian Hotels Limited. Hyatt, incorporated in the Dubai International Financial Centre, provided strategic services aligned with its global standards. The tax authorities contended that the service fees constituted royalties under Article 12 of the India-UAE DTAA.

The Court rejected the royalty characterization, holding that the fees were for services rendered and did not involve the use of any commercial or scientific experience. Access to proprietary information during service delivery, the Court emphasized, does not convert service fees into royalties. As a result, the fees were considered business profits, taxable in India only if attributable to a Permanent Establishment (PE).

The Court confirmed the existence of a PE, citing Hyatt’s control over hotel operations in India via its affiliate, Hyatt India Consultancy Private Limited. It also ruled that profits can be attributed to the PE even when the parent entity reports global losses. Overruling its prior stance in Nokia Solutions and Networks OY, the Court clarified that Article 7 of the India-UAE DTAA treats a PE as an independent entity for tax purposes. Thus, income attributable to the PE is taxable in India, regardless of the enterprise’s overall financial position.

Full Link to English Translation: Supreme Court Classifies License Fees as Capital Expenditure, Not Revenue Expenditure - LAW INSIDER INDIA- INSIGHT OF LAW (SUPREME COURT, HIGH COURT AND JUDICIARY