*Vaibhav Mishra and Anushka Bansal

(Source: Taxmann)

This post examines the decision of the Supreme Court in the case of Hayatt International Southwest Asia Limited expands the definition of ‘Permanent Establishment’ (PE) under the Indian tax law by redefining the test of ‘disposal’ and associating remuneration with profit, thus interlinking two distinct legal entities. The author argues that the decision indicates a wider, more aggressive tax examination of foreign firms in India and may undermine India’s attractiveness for foreign investors, as seen in a drop in FDI inflows. The article contrasts the Hayatt ruling with the Tiger Global case to set out the unsettled nature of PE’s scope and how this is to be understood for future jurisprudence. It calls for an even-handed judicial approach which takes into account both economic interests and commercial realities in order to reduce investment uncertainty and preserve India’s business-friendly reputation.

Introduction: 

The concept of ‘Permanent Establishment’ (‘PE’) in the international taxation framework plays a pivotal role in determining the taxable presence of an enterprise in a jurisdiction. As Phillips Baker explains, PE helps a country determine whether a business is ‘trading with’ a country or ‘trading in’ the country – a distinction essential for determining the tax liability of a business. However, the scope of PE varies depending on how it is defined in country’s domestic law or under nation’s Double Taxation Avoidance Agreements (‘DTAA’) with other countries. Any country’s interpretation of PE could have important implications for the MNCs & foreign companies operating within a country.

Recently, in Hayatt International Southwest Asia Limited (‘Hayat Ltd’) v. Additional Director of Income tax, the Supreme Court (‘SC’) has broadened the scope of ‘PE’ in the Indian Tax Regime. The judgment has important implications for foreign businesses operating in the country, especially those involved in cross-border service arrangements with an Indian entity, who might have to rework their existing strategy in their dealings.

In this context, authors critically examine this judgment, analyzing the court’s interpretation of the ‘disposal test’ & remuneration structure of Hayaat ltd. Further, It highlights the unsettled position of PE’s scope by contrasting it with the Tiger Global case. It ends by highlighting the implications of judgment & calls for decisions that take economic interest & commercial realities into account.

Understanding background of the case  & The Judgment

In this case, Hayat Ltd, UAE tax-resident, was involved in providing oversight services to Asian Hotels Limited (‘Asian Ltd’) – an Indian company, under Strategic oversight services agreements (‘SOSA’). The court’s conclusion in the case depended upon three key factors, viz, firstly, the Terms of SOSA, secondly, the “Place of Disposal Test” as laid down in Formula One World Championship Limited v. CIT (‘Formula Case’), and the remuneration structure of Hayat.

In the judgment, despite Hayat Ltd operating from Dubai with no physical presence in India, the SC concluded that Hayat operations constituted a ‘PE’ under Article 5 of the India-UAE DTAA.

Hayat Ruling & India’s Increasing Tax Scrutiny Of Foreign Business

This Hayat Ruling reflects the trend of increased oversight on foreign business by tax authorities in India. For example, recently in March 2025, India made its highest-ever demand of ‘back taxes’ of $1.4 billion from Volkswagen Shipments. This comes after a 12-year investigation by Indian authorities. Volkswagen has sued Indian tax authorities, claiming it is a ‘matter of survival’. Further, companies engaged in the automaker sector like Hyundai, Honda, Toyota and Maruti Suzuki are also facing tax demands worth 6 billion from various tax departments. Such lengthy tax investigations create a negative impact on the business plans of foreign firms in the country while also creating an uncertain environment for foreign investors.

Similarly, in 2023, Netflix was attributed tax liability for its income of 552 million for the assessment year 2021-2022 in India. The reasoning was that Netflix Inc., a US-based company, has seconded i.e transferred its employees to Netflix India, an Indian subsidiary, along with its infrastructure to support its existing services in India. Similarly, the Income Tax Department has searched for potential tax evasion by Chinese solar module manufacturer, Trinar Solar, etc., through income earned by their Indian channels.

Therefore, judgment is nothing but a part of a larger aggressive approach by the country to tax foreign nationals and businesses, which could hamper ease of doing business in the country, further impacting foreign investment in the country. This remains concerning, as reflected in RBI data, FDI inflows have plunged by 96% in 2024-2025. The expansive scope of PE in the post-Hayatt scenario would contribute to the investment uncertainty in the country.

Broadening Scope Of Pe: Assessing Court’s Interpretation Of ‘Disposal Test’ & ‘Remuneration’

As noted above, judgment has two important aspects, i.e, the ‘disposal test’ & linking of the remuneration structure of Hayat Ltd & Asian Ltd. The section analyzes the court’s reasoning on the aspects above –

Firstly, the Hon’ble court relied upon the Formula case for interpreting the “Place of disposal test”. The Formula case posits two conditions for establishing PE – First, the place to be “at disposal” of the enterprise, and Second, business to be carried from that place. Under ‘disposal test’, the court referred to Article II & III of SOSA. The court observed expansive control of Hayat Ltd on the day-to-day operations of Asian Hotel Limited due to its role in managing accounts, employing employees, controlling pricing and marketing strategies, etc. Thus, the court concluded that Hayat Ltd was in extensive control of the business operation of Asian Ltd and its role was not limited to mere strategic and consultancy services. This fulfilled the requirement of Article 5(1) of DTAA that requires a fixed place of business through which business operations are carried on, for establishing a ‘PE’. The court in this case adopted a ‘substance over form’ approach. Although Hayat Ltd lacked physical presence, the court employing the ‘disposal test’ concluded that it had a ‘fixed place of business at its disposal, constituting PE under DTAA.

This judgment by expanding the scope of PE could help to address the issue of ‘artificial avoidance’ of PE status by foreign companies, which has been highlighted in OECD BEPS action plan (Action 6). The plan highlights how companies could restructure their operations or use a commissionaire arrangement to evade PE status. The expanding scope of PE could help tax authorities to prevent the shifting of profits and evasion of tax liability. However, the court’s interpretation of the ‘disposal test’ constitutes a case of overreach and remains debatable. According to established principles of interpretation, laid in Heyden’s Case, any clauses in an agreement need to be interpreted in light of the objectives of that agreement. In the present instance, various powers with Hayat Ltd are circumscribed to its role of providing strategic and consultancy services. Thus, interpreting terms of agreement for concluding extensive control of Hayat over Asian Ltd, while ignoring the objectives of the agreement, could be a sign of overreach.

Secondly, in its interpretation of remuneration structure, the court has linked the business operations of Hayat Ltd & Asian Ltd. This was because under the terms of SOSA, fees were linked to the profits of Asian Ltd. Thus, merely due to the linkage of fees with profits, it disregarded the separate legal entity principle under company law & concluded active ‘commercial involvement’ of Hayat Ltd with Asian Ltd, thereby interlinking their operations.

According to the author, interlinking of two separate legal entities violates the proposition laid in Vodafone International Holdings B.V. v. Union of India & Anr, where it was held that the corporate veil could only be pierced in case an entity lacks commercial or economic substance. Thus, as both entities are independent entities linked through a service agreement, linking the revenue of two companies may lack legal tenability.

Post Hayat Jurisprudence – Potential Consequences For the Tiger Global Case?

The SC has recently stayed the Delhi High Court Ruling in Tiger Global Advance Ruling v Authority for Advance Ruling (‘AAR’). In this case, assessee, i.e, Tiger Global International (‘TGI’) – Mauritius-based company & subsidiary of Tiger Global Management (‘TGM’) (Delaware, US), was involved in purchasing shares of Flipkart, Singapore in 2015. These shares were sold to Walmart with a profit of USD 1.89 billion. It approached the income tax authorities under Section 97 to claim a nil withholding certificate as a benefit under the India-Mauritius DTAA. AAR rejected its request, concluding that TGI, based in Mauritius, lacked independence, doubting its economic substance. However, the Delhi High Court, overruling the AAR ruling, concluded that there is no evidence to suggest dependence of TGI on TGM.

Evidently, the stay of the Delhi HC ruling implies that it failed to understand the true nature of the transaction. As the Division of JB Pardiwala & R Mahadevan notes, the ruling requires “thorough consideration”. Thus, the approach of the Delhi HC was inclined more towards form rather than substance. A similar approach of the Delhi HC could be witnessed in the Blackstone Capital Partners (Singapore) vs ACIT. In this case, it held that Indian authorities can’t pierce the Tax residency certificates of the company to deny benefits of tax exemption under the India-Singapore DTAA. This ruling has also been stayed by the SC.

The Hayat ruling’s adoption of the ‘substance over the form’ approach could have critical implications on pending cases, especially the Tiger Global Case. In case SC continues the trend, the position of increased ambit of PE could further solidify. However, if SC chooses to deviate from the Hayat Ruling by refusing to pierce the TGI’s transaction, this could add to the existing uncertainty for foreign investors looking to enter India. This legal ambiguity undermines  India’s image as an investor & business-friendly jurisdiction. The situation calls for the tax and judicial authorities to adopt an approach that aligns with the economic interests of the country.

Implications For Foreign Business Post-Hayat Ruling: Critical Analysis

In light of the aforementioned analysis, the Hayat ruling has crucial implications for foreign businesses operating or looking to enter the Indian jurisdiction:

Firstly, the judgment relies on the Functions, Assets and Risk Analysis (FAR) approach under which profit attribution now focuses squarely on the local substance of the business activities in India rather than being tied to consolidated global results [Para 23]. However, the court has deviated from the income tax department’s earlier approach by taking this stand. In Motorola Inc. v Deputy Commissioner of Income Tax, the Income Tax Appellate Tribunal (ITAT) held that, according to Rule 10 of the Income Tax Rules, global profits and losses play an important role in determining the tax liability attributed to the company. Similarly, in Commissioner of Income Tax v Nokia Solutions and Networks OY, the ITAT held that no profit or income can be attributed to the company in India if it has a global net loss as per its audited accounts. This ruling raises the stakes considerably for foreign businesses, as ignoring the ruling could lead to unexpected tax liabilities and disputes.

Secondly, affirming the taxable status of a PE independently of global profitability inherently raises the risk of retrospective tax assessments in India. Under Section 147 and Section 149 of the Income Tax Act, tax authorities can reopen assessments within prescribed limitation periods, up to 5 years from the end of the relevant assessment year for income escaping assessment. This means past transactions where foreign companies operated in India without recognizing or registering a PE may now face renewed scrutiny. With this, the transactions and operations previously deemed outside taxable ambit could be reassessed. Given the timeline for reopening cases, this could expose MNEs to retrospective tax demands going back several years.

Thirdly, the Hyaat judgement also fundamentally changes how Indian tax authorities view service contracts, shifting the focus from mere contractual labels to the actual substance of the arrangement. It’s no longer enough to simply claim that a contract provides “advice” or “consulting” services; the important question is whether the agreement grants decision-making power, operational control, or the ability to influence business activities in India. If so, the foreign entity risks being deemed to have a taxable PE, regardless of how the contract is titled. This means companies must carefully review and potentially restructure their service agreements to clearly limit control and decision-making authority to avoid unintended PE exposure.

Lastly, companies seeking to avoid PE status in India may need to restructure their transfer pricing policies. This involves aligning with OECD BEPS action plan, particularly Action 13, by ensuring all related-party transactions with Indian entities are conducted at arm’s length and thoroughly documented. It is essential to clearly define the functions, assets, and risks assigned to Indian operations within intercompany agreements and to avoid granting any real decision-making authority or control to personnel in India. Such measures not only ensure compliance but also establish clear economic substance, providing a strong defense against aggressive PE assertions by Indian tax authorities.

Way Forward

The aforementioned analysis underscores the existing uncertainty in India due to the expansive scope of the PE post-Hayat ruling. The ruling, although beneficial for the authorities to widen their tax net, hampers the ease of doing business in India. It significantly impacts the operations of foreign businesses in India. Consequently, Foreign investors and companies may decide to shift their Indian operations due to reduced profitability & increased costs of running business. The decision now rests with the Supreme Court in the Tiger Global case, where the court has a chance to give a balanced decision, keeping in mind economic interest and commercial realities on the ground.

*Vaibhav Mishra and Anushka Bansal are 4th year B.A., LL.B. (Hons.) students at HNLU Raipur. Their academic interests lie in taxation, securities and corporate laws.