- A treaty-resident foreign company is taxable in India on business profits only if it has a permanent establishment (PE) here; without a treaty, the wider 'business connection' test in section 9 of the Income-tax Act, 2025 applies.
- The Supreme Court in Hyatt International (July 2025) found a fixed-place PE where a foreign company exercised enforceable operational control over Indian hotels through its agreements and visiting staff — no owned office, no employee stationed permanently.
- Service PEs arise from employees furnishing services in India beyond a day-count threshold (90 days in any twelve months under India–US; longer in some treaties; none for related-party services in some).
- Employees working remotely from India for a foreign employer, seconded staff, and Indian subsidiaries that negotiate and conclude contracts are the three fact patterns that most often create PEs for technology groups.
Two tests, depending on treaty access
Under domestic law, section 9 of the Income-tax Act, 2025 deems income to accrue in India where a non-resident has a business connection in India — a concept wider than PE, which includes dependent agents who habitually conclude contracts or play the principal role leading to contracts, and, since 2018, significant economic presence through transactions or user engagement above prescribed thresholds. A company resident in a treaty country can instead rely on the treaty's Article 5 (permanent establishment) and Article 7 (business profits), under which India may tax business profits only if, and to the extent that, they are attributable to a PE. Most foreign groups dealing with India are treaty-protected, so PE is the operative question.
The PE categories
| PE type | Trigger | Typical fact pattern |
|---|---|---|
| Fixed place (Art. 5(1), 5(2)) | A fixed place of business through which the enterprise's business is wholly or partly carried on — at the enterprise's disposal | Branch, office, factory; a desk in the subsidiary's office used by the parent's staff; home office of a senior employee in India |
| Construction / installation (Art. 5(2)(k)-type) | Building site or installation project lasting beyond a threshold (120–183 days or 6 months depending on treaty) | EPC and installation contracts |
| Service PE (Art. 5(2)(l) in India–US and others) | Furnishing of services in India through employees or other personnel beyond a day-count (90 days in any 12 months under India–US; any period for services to a related enterprise under India–US) | Parent's engineers on site; management teams visiting; seconded staff |
| Agency PE (Art. 5(4)/(5)) | A dependent agent who habitually concludes contracts, or — under post-MLI treaties — habitually plays the principal role leading to their conclusion | Indian subsidiary's sales team negotiating and 'closing' deals for the parent |
| Exclusions (Art. 5(3)) | Preparatory or auxiliary activities: storage, display, purchasing, information collection | Narrowed by the MLI anti-fragmentation rule |
What Hyatt decided
In Hyatt International Southwest Asia Ltd v ADIT (24 July 2025), the Supreme Court held that a UAE-resident company that managed Indian hotels under strategic oversight and operating services agreements had a fixed-place PE in India under Article 5(1) of the India–UAE treaty, even though it owned no premises and no single employee stayed beyond the service-PE threshold. The Court looked at substance: the agreements gave Hyatt enforceable control over hotel operations, pricing, staffing and standards; its personnel visited frequently; the hotel premises were therefore "at its disposal" for carrying on its business. Two lines from the judgment matter for every foreign group: continuity of the business operation, not the presence of any particular individual, is what counts; and the degree of operational control exercised through contract and conduct can convert a customer's premises into the foreign company's fixed place.
The consequence for technology and services groups is that a foreign parent which runs its Indian subsidiary's operations as if they were its own — directing staff day to day, controlling the premises, using the office as its own base — risks a fixed-place PE at the subsidiary's office, over and above the arm's length service fee it pays. The defence is the one this hub describes repeatedly: the Indian company must be a genuine, separately managed enterprise providing services under a contract, not a department of the parent.
Three fact patterns to manage
1. Remote employees of the foreign company in India
An engineer or sales lead employed directly by the US parent, living and working in Bengaluru from home, is working in India for the foreign company. A home office used regularly for the employer's business can be a fixed place at its disposal; a sales employee who negotiates contracts is a dependent agent. Groups that allowed this during the pandemic are now unwinding it by moving such staff to the Indian subsidiary's payroll under a services agreement, or using a compliant employer-of-record arrangement with care.
2. Seconded staff and visiting teams
Parent employees seconded to India remain the parent's personnel for service-PE counting unless the secondment is a genuine transfer of employment (the Indian company controls, pays and bears the risk of the work). Visiting management, implementation teams and auditors count towards the day threshold; under India–US, services to a related enterprise create a service PE with no day threshold at all. Track days by person and project.
3. The subsidiary that sells
Where the Indian subsidiary's team identifies customers, negotiates terms and the parent merely signs, the subsidiary may be a dependent agent — particularly under treaties modified by the MLI's "principal role" language. The remedy is either to keep the Indian role to marketing support with real decisions abroad, or to accept the PE and attribute profits (or, often cleaner, have the Indian subsidiary contract with Indian customers as a distributor or reseller at an arm's length margin).
If there is a PE
India taxes the profits attributable to the PE under Article 7 — the profits the PE would have earned as a distinct and separate enterprise. Where the Indian subsidiary is remunerated at arm's length for everything it does for the parent, Indian courts have generally held that nothing further is attributable to a dependent-agent PE (the Morgan Stanley principle), which is why a defensible transfer pricing position is also the first line of PE defence. A fixed-place or service PE of the parent itself requires the parent to register, file an Indian return, and maintain accounts for the PE; withholding by Indian payers then follows the PE's position, often with a section 395 certificate.
Frequently asked questions
What is a permanent establishment?
A fixed place of business through which a foreign enterprise carries on business in India, or a dependent agent, service presence or construction project meeting the treaty's conditions. A treaty-resident company's business profits are taxable in India only to the extent attributable to a PE.
Does an Indian subsidiary automatically create a PE of the parent?
No. A subsidiary is a separate enterprise. It creates a PE only if it acts as a dependent agent concluding or substantially negotiating the parent's contracts, or if the parent's own staff use its premises as their fixed place, or if the parent controls its operations to the extent found in Hyatt.
How many days can parent employees spend in India before a service PE arises?
It depends on the treaty. Under India–US, more than 90 days in any twelve-month period — and any period where the services are for a related enterprise. Other treaties use 183 days or six months. Days are counted per enterprise, not per employee.
What did the Supreme Court decide in Hyatt?
That a foreign company exercising enforceable operational control over Indian hotels through management agreements and visiting personnel had a fixed-place PE in India under the India–UAE treaty, even without owned premises or permanently stationed staff. Continuity of business operations, not individual presence, was decisive.
Is an employee working from home in India for a foreign company a PE risk?
Yes. A home office used regularly for the employer's business can be a fixed place at the employer's disposal, and an employee who negotiates contracts can be a dependent agent. Many groups move such employees to the Indian subsidiary under a services agreement.
If the subsidiary is paid at arm's length, is the parent still taxable?
For a dependent-agent PE, Indian courts have generally held that an arm's length payment to the agent extinguishes further attribution. For the parent's own fixed-place or service PE, profits attributable to that PE remain taxable in India.
Sources
Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.
- Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
- Double Taxation Avoidance Agreements — Income Tax Department
Last reviewed on 1 November 2026 by Suchit Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.
