International Taxation Where the Premises are at the Disposal of the Enterprise and are Used for Conducting its Core Business Functions, it Can Constitute a PE

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The Tax Publishers Income Tax--International Taxation Where the Premises are at the Disposal of the Enterprise and are Used for Conducting its Core Business Functions, it Can Constitute a PE Akhilesh Kumar Sah Under DTAAs, the taxing rights of the source State over the business profits of a foreign enterprise are contingent upon the existence of a Permanent Establishment (for short 'PE') in the source country. One of the sine qua non for a fixed place PE is that the place through which the business is carried on must be 'at the disposal' of the enterprise - a principle commonly referred to as the 'disposal test'. There is no straightjacket formula applicable to all cases. Typically, trading operations require a continuously used fixed place, whereas service-oriented business may not. Some jurisdictions consider mere use of a place sufficient, while others require legal or operational control over the premises. For determining whether a Fixed place PE exists must involve a fact-specific inquiry, including: the enterprise's right of disposal over the premises, the degree of control and supervision exercised, and the presence of ownership, management, or operational authority. 1. Introduction On the basis of existence of PE of a foreign enterprise, taxation in India has come to limelight in many cases. 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 necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. 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. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required. 2. A recent case In Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (Civil Appeal No 9766 to 9773 of 2025, decided on 24-7-2025), appellant, being a company incorporated under the Companies Law, Dubai International Financial Centre in the United Arab Emirates (for short, 'UAE'), was a tax resident of UAE under Article 4 of the Double Taxation Avoidance Agreement (for short 'DTAA') between the Government of India and the UAE for the avoidance of double taxation. Appellant entered into two Strategic Oversight Services Agreements (for short, 'SOSA') with Asian Hotels Ltd. (for short, 'AHL'), India - one for AHL, Delhi and another for AHL, Mumbai. Under SOSA, appellant agreed to provide strategic planning services and 'know-how' to ensure that the hotel was developed and operated as an efficient and a high-quality international full-service hotel. Subsequently, AHL underwent reorganization and its name was changed to Asian Hotels (North) Ltd, which continued to own the hotel. Later on SOSA was partially amended. Appellant filed its return of income declaring 'Nil' income and claiming a refund. After scrutiny, Assessing Officer (for short, 'AO') issued a notice under section 142(1) read with section 143(3) of the Income Tax Act, 1961 (for short, 'the Act'). In response, appellant submitted a reply asserting that its income was not taxable under the Act as there was no specific Article under the DTAA for taxing Fees for Technical Services and stated that it did not have any fixed place of business, office, or branch in India, and that the presence of its employees in India during the relevant previous year did not exceed the nine-month threshold under Article 5(2) of the DTAA. Appellant claimed that it did not have a PE in India and that its business income was not taxable under Article 7 of the DTAA. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers

Income Tax--International Taxation

Where the Premises are at the Disposal of the Enterprise and are Used for Conducting its Core Business Functions, it Can Constitute a PE

Akhilesh Kumar Sah

Under DTAAs, the taxing rights of the source State over the business profits of a foreign enterprise are contingent upon the existence of a Permanent Establishment (for short 'PE') in the source country. One of the sine qua non for a fixed place PE is that the place through which the business is carried on must be 'at the disposal' of the enterprise - a principle commonly referred to as the 'disposal test'. There is no straightjacket formula applicable to all cases. Typically, trading operations require a continuously used fixed place, whereas service-oriented business may not. Some jurisdictions consider mere use of a place sufficient, while others require legal or operational control over the premises. For determining whether a Fixed place PE exists must involve a fact-specific inquiry, including: the enterprise's right of disposal over the premises, the degree of control and supervision exercised, and the presence of ownership, management, or operational authority.

1. Introduction

On the basis of existence of PE of a foreign enterprise, taxation in India has come to limelight in many cases.

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 necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. 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. A certain amount of space at the disposal of the enterprise which is used for business activities is sufficient to constitute a place of business. No formal legal right to use that place is required.

2. A recent case

In Hyatt International Southwest Asia Ltd. v. Additional Director of Income Tax (Civil Appeal No 9766 to 9773 of 2025, decided on 24-7-2025), appellant, being a company incorporated under the Companies Law, Dubai International Financial Centre in the United Arab Emirates (for short, 'UAE'), was a tax resident of UAE under Article 4 of the Double Taxation Avoidance Agreement (for short 'DTAA') between the Government of India and the UAE for the avoidance of double taxation. Appellant entered into two Strategic Oversight Services Agreements (for short, 'SOSA') with Asian Hotels Ltd. (for short, 'AHL'), India - one for AHL, Delhi and another for AHL, Mumbai. Under SOSA, appellant agreed to provide strategic planning services and 'know-how' to ensure that the hotel was developed and operated as an efficient and a high-quality international full-service hotel. Subsequently, AHL underwent reorganization and its name was changed to Asian Hotels (North) Ltd, which continued to own the hotel. Later on SOSA was partially amended.

Appellant filed its return of income declaring 'Nil' income and claiming a refund. After scrutiny, Assessing Officer (for short, 'AO') issued a notice under section 142(1) read with section 143(3) of the Income Tax Act, 1961 (for short, 'the Act'). In response, appellant submitted a reply asserting that its income was not taxable under the Act as there was no specific Article under the DTAA for taxing Fees for Technical Services and stated that it did not have any fixed place of business, office, or branch in India, and that the presence of its employees in India during the relevant previous year did not exceed the nine-month threshold under Article 5(2) of the DTAA. Appellant claimed that it did not have a PE in India and that its business income was not taxable under Article 7 of the DTAA.