India’s Supreme Court issued a landmark decision on 24 July 2025 in which it concluded that the operations of a nonresident in India gave rise to a permanent establishment (PE), making the nonresident liable for Indian tax. The Supreme Court held that the nonresident’s substantive control over Indian operations—even without leasing or owning the physical premises—gave rise to a fixed place PE in India under article 5(1) of the India–UAE tax treaty. The court emphasised the importance of the substance over form principle in international tax and confirmed that taxability arises even if the foreign enterprise reports global losses, as long as profits are attributable to the Indian PE.
Business profits earned in a source country are taxable in that country only if the taxpayer has a PE in the source country to which the profits are attributable. The determination of whether a PE is present has long been a complex and contentious issue, as it directly affects a country’s right to tax the business income of foreign enterprises. The definition and scope of a PE is laid out in article 5 of most tax treaties, which typically include various forms of a PE such as a fixed place PE, an agency PE and a service PE.
Multinational enterprises (MNEs) with operations in various jurisdictions commonly seek to maintain a standardised infrastructure—frequently in the form of standard operating procedures (SOPs)—to ensure efficiency, quality and operational uniformity across locations. As part of implementing these SOPs, designated employees may travel to different locations to monitor compliance, oversee operations and ensure alignment with global standards. In these cases, it becomes relevant to analyse whether such operational control and oversight of Indian operations would give rise to a PE in India.
The case before the Supreme Court involved a taxpayer incorporated and tax resident in the United Arab Emirates (UAE) that was engaged in the provision of consultancy services in the hotel sector. The taxpayer entered into two 20-year Strategic Oversight Services Agreements (SOSAs) with Asian Hotels Limited, India (AHL), a company that managed hotels in India. Under the SOSAs, the taxpayer agreed to provide strategic planning services and know-how to ensure that the managed hotels were developed and operated as efficient, high-quality international full-service establishments and in compliance with the hotel brand. The taxpayer treated the consideration received from these services as not taxable in India based on the fact that the India-UAE tax treaty does not have an article on technical services fees and the amounts received by the taxpayer constitute business income; thus, in the absence of a PE in India, that income is not taxable in India under the treaty.
The Indian tax authorities, however, took the position that the taxpayer did have a PE in India under article 5(1) of the India-UAE treaty and taxed the income arising from the services rendered to the hotels. The taxpayer appealed to multiple appellate forums—the Dispute Resolution Panel, the Delhi Income Tax Appellate Tribunal, the Delhi High Court and finally the Supreme Court, arguing that it did not have a fixed place of business in India, as it lacked an exclusive office or permanent staff present in the country, and its services were provided from Dubai, with occasional routine visits from employees to India. The taxpayer also argued that its global losses should prevent the attribution of profits to an Indian PE.
The Supreme Court rejected all of the taxpayer’s arguments, ruling that the operational and strategic oversight of Indian operations created a fixed place PE in India andthe income received under the SOSAs is attributable to such PE and is therefore taxable in India. In reaching its decision, the court relied on the India-UAE tax treaty, judicial precedent and the SOSAs. In particular, the court analysed article 5(1) of the treaty, which defines a PE as a “fixed place of business through which the business of an enterprise is wholly or partly carried on” and the main test for determining the establishment of a fixed place of business, which is whether premises are “at the disposal” of the foreign enterprise for use in carrying out its own business activities. The Supreme Court held as follows:
Disposal Test
The decision broadens the interpretation of a PE—substantive control over Indian operations may give rise to a PE even without an exclusive physical office in India. The risk of a PE cannot be negated merely because employee presence does not exceed the threshold period prescribed under an applicable tax treaty. What matters is the continuity and nature of the business presence, not the individual duration of employee stay or the offshore nature of certain services.
Foreign entities with service, licensing or management agreements involving Indian operations should be aware of and understand the Supreme Court’s decision. It is crucial to reassess contractual and operational structures, especially where employees of the foreign entity share space with Indian affiliates, even informally. Such arrangements may inadvertently trigger PE exposure and associated tax risk.
Niranjan Govindekar
Shilpa Sethia
Tejashree Waje
BDO in India
Background
Business profits earned in a source country are taxable in that country only if the taxpayer has a PE in the source country to which the profits are attributable. The determination of whether a PE is present has long been a complex and contentious issue, as it directly affects a country’s right to tax the business income of foreign enterprises. The definition and scope of a PE is laid out in article 5 of most tax treaties, which typically include various forms of a PE such as a fixed place PE, an agency PE and a service PE.Multinational enterprises (MNEs) with operations in various jurisdictions commonly seek to maintain a standardised infrastructure—frequently in the form of standard operating procedures (SOPs)—to ensure efficiency, quality and operational uniformity across locations. As part of implementing these SOPs, designated employees may travel to different locations to monitor compliance, oversee operations and ensure alignment with global standards. In these cases, it becomes relevant to analyse whether such operational control and oversight of Indian operations would give rise to a PE in India.
Facts of the Case
The case before the Supreme Court involved a taxpayer incorporated and tax resident in the United Arab Emirates (UAE) that was engaged in the provision of consultancy services in the hotel sector. The taxpayer entered into two 20-year Strategic Oversight Services Agreements (SOSAs) with Asian Hotels Limited, India (AHL), a company that managed hotels in India. Under the SOSAs, the taxpayer agreed to provide strategic planning services and know-how to ensure that the managed hotels were developed and operated as efficient, high-quality international full-service establishments and in compliance with the hotel brand. The taxpayer treated the consideration received from these services as not taxable in India based on the fact that the India-UAE tax treaty does not have an article on technical services fees and the amounts received by the taxpayer constitute business income; thus, in the absence of a PE in India, that income is not taxable in India under the treaty.The Indian tax authorities, however, took the position that the taxpayer did have a PE in India under article 5(1) of the India-UAE treaty and taxed the income arising from the services rendered to the hotels. The taxpayer appealed to multiple appellate forums—the Dispute Resolution Panel, the Delhi Income Tax Appellate Tribunal, the Delhi High Court and finally the Supreme Court, arguing that it did not have a fixed place of business in India, as it lacked an exclusive office or permanent staff present in the country, and its services were provided from Dubai, with occasional routine visits from employees to India. The taxpayer also argued that its global losses should prevent the attribution of profits to an Indian PE.
Supreme Court Decision
The Supreme Court rejected all of the taxpayer’s arguments, ruling that the operational and strategic oversight of Indian operations created a fixed place PE in India andthe income received under the SOSAs is attributable to such PE and is therefore taxable in India. In reaching its decision, the court relied on the India-UAE tax treaty, judicial precedent and the SOSAs. In particular, the court analysed article 5(1) of the treaty, which defines a PE as a “fixed place of business through which the business of an enterprise is wholly or partly carried on” and the main test for determining the establishment of a fixed place of business, which is whether premises are “at the disposal” of the foreign enterprise for use in carrying out its own business activities. The Supreme Court held as follows:Disposal Test
- The “disposal test” is pivotal, meaning that the enterprise must have a right to use the premises in a way that enables it to carry on its business activities.
- The OECD commentary to the model tax treaty supports a flexible, facts-based analysis of the disposal test, depending on the nature and degree of control, not formal ownership or presence.
- The disposal test exceeds mere physical presence and requires an analysis of the extent to which a foreign entity has the authority to use, manage and control Indian premises in such a way that forms the basis for its substantive profit-making activities.
- The 20-year duration of the SOSA, coupled with the taxpayer’s continuous and functional presence, met the tests of stability, productivity and dependence, which are the core attributes essential to establish a PE.
- Exclusive possession of a space is not essential—temporary or shared use of space is sufficient, provided business is carried on through that space.
Degree of Control and Nature of Functions Performed
- The SOSAs demonstrated that the taxpayer exercised pervasive and enforceable control over the hotels’ strategic, operational and financial functions. It had the authority to:
- Appoint key personnel (including the general manager) and train staff;
- Formulate HR, procurement, pricing and marketing policies;
- Monitor daily operations of the facilities;
- Manage bank accounts and exercise financial oversight; and
- Deploy personnel without the owner's consent.
- The taxpayer’s authority went well beyond advisory services, establishing core operational control. Its role was not auxiliary—it was central and continuous, reinforced by a profit-linked fee structure.
- The taxpayer’s core business was carried out from the hotels’ premises under direct supervision, making it the situs of business.
- The taxpayer’s submission that daily operations were managed by its Indian counterpart, a separate legal entity did not negate the creation of a PE, because economic substance overrides legal form.
Employee Presence
- Article 5(2)(i) of the treaty provides that a PE can arise from the furnishing of services including consultancy services by an enterprise of a contracting state through employees or other personnel in the other contracting state if the activities continue for the same project or connected project for a period or periods aggregating more than nine months within any 12-month period.
- The relevant consideration under article 5(2)(i) is the continuity of a business presence in the aggregate and not the length of stay of each individual employee.
- Even though no individual employee exceeded the nine-month stay threshold, the aggregate and recurring visits by employees for overseeing implementation of the SOSAs demonstrated continuity of business presence, sufficient to support the creation of a PE.
Profit Attribution
- Under article 7 of the treaty, only profits attributable to the PE are taxable in the source country. The Delhi High Court had held that PE-based taxation is permitted even if the overall enterprise incurs losses, reinforcing that taxability hinges on business presence, not global profitability.
BDO Insights
The determination of a PE in India has been a contentious matter and the attribution of profits has frequently been subject to litigation. The Supreme Court has re-affirmed that, with respect to the "disposal test," exclusive possession is not a prerequisite, and that even temporary or shared use of premises is sufficient to constitute a PE if business activities are carried on through that space. Importantly, the existence of a PE must be determined based on substance and the overall factual matrix, rather than legal form or formal access rights.The decision broadens the interpretation of a PE—substantive control over Indian operations may give rise to a PE even without an exclusive physical office in India. The risk of a PE cannot be negated merely because employee presence does not exceed the threshold period prescribed under an applicable tax treaty. What matters is the continuity and nature of the business presence, not the individual duration of employee stay or the offshore nature of certain services.
Foreign entities with service, licensing or management agreements involving Indian operations should be aware of and understand the Supreme Court’s decision. It is crucial to reassess contractual and operational structures, especially where employees of the foreign entity share space with Indian affiliates, even informally. Such arrangements may inadvertently trigger PE exposure and associated tax risk.
Niranjan Govindekar
Shilpa Sethia
Tejashree Waje
BDO in India