Court: | Supreme Court |
Head Notes: | Permanent Establishment: 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. The degree of control and supervision exercised, and the presence of ownership, management, or operational authority have to be seen. On facts, the assessee exercised pervasive and enforceable control over the hotel’s strategic, operational, and financial dimensions. It had powers which went well beyond mere consultancy and indicated that the assessee was an active participant in the core operational activities of the hotel. (i) Evidently, 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 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”. It is noteworthy that the Organisation for Economic Co-operation and Development does not rigidly define this test, but provides illustrative examples. There is no strait- jacket 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. In our view, 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. (ii) In the present case, a detailed review of the SOSA executed between the appellant and Asian Hotels Limited demonstrates that the appellant exercised pervasive and enforceable control over the hotel’s strategic, operational, and financial dimensions. Specifically, the agreement vested the appellant with powers to: – Appoint and supervise the General Manager and other key personnel, – 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. (iii) 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 functions performed by the appellant, through its staff operating from the hotel premises, were not just limited for setting up a pattern of activities for the hotel, but were core and essential functions, clearly establishing their control over the day to-day operations of the hotel. Moreover, they were to be continuously performed over a period of twenty years, under an agreement that included revenue sharing. Therefore, the hotel premises clearly satisfy the criteria required to be classified as a “fixed place of business” or PE. (iv) The argument that the absence of a specific clause in the SOSA permitting the conduct of business from the hotel premises negates the existence of a PE is also without merit. As held in Formula One, the test is not whether a formal right of use is granted, but whether, in substance, the premises were at the disposal of the enterprise and were used for conducting its core business functions |
Law: | Income-Tax Act |
Section(s): | Article 5 of DTAA |
Counsel(s): | S. Ganesh, Sr. Adv. N Venkatraman, A.S.G. |
Dowload Pdf File | Click here to download the file in pdf format |
Uploaded By | Advocate Swati Khandelwal |
Date of upload: | July 25, 2025 |
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