Institute of Legal and Management Studies

The Supreme Court has clarified that under the Income Tax Act, a non-resident company can be taxed in India on income that accrues or arises from a business connection within the country, even if it does not maintain a permanent office or physical establishment here.

A Bench of Justice Manoj Misra and Justice Joymalya Bagchi, in its judgment examined the scope of Sections 4, 5(2), and 9(1)(i) of the Income Tax Act, 1961, and held that the statute does not make it mandatory for a non-resident assessee to have a “permanent establishment” in India to be considered as carrying on business in the country. The Court explained that what determines tax liability is whether the income has accrued or arisen, directly or indirectly, through any business connection in India.

The judgment authored by Justice Bagchi observed :

"The Act does not require a non-resident company to have a permanent office within the country to be chargeable to tax on any income accruing in India. A combined reading of the charging provisions under Section 4 and Section 5(2) of the Act read with Section 9(1)(i) makes it amply clear that a non-resident person shall be liable to pay tax on income which is deemed to accrue or arise in India. Under Section 9(1)(i), income accruing or arising, directly or indirectly, through or from any business connection in India is deemed to accrue or arise in India and is accordingly chargeable to tax as business income under Section 28 of the Act. None of these provisions make it mandatory for a non-resident assessee to have a permanent establishment in India to carry on business or have any business connection in India. The issue of 'permanent establishment' may be relevant for the purposes of availing the beneficial provisions of the Double Tax Avoidance Agreement (DTAA) between India and France which is not a relevant consideration for the purposes of this case."

The Court allowed appeals filed by Pride Foramer S.A., a non-resident French company, against a judgment of the Uttarakhand High Court. The High Court had reversed the orders of the Income Tax Appellate Tribunal (ITAT) and upheld the disallowance of business expenditure deductions under Section 37 of the Income Tax Act and the carry-forward of unabsorbed depreciation under Section 32(2). The Supreme Court revived the ITAT orders, holding that Pride Foramer was in fact carrying on business in India during the interregnum period and that the High Court's restrictive approach to the doctrine of “permanent establishment” and “business connection” was erroneous.

In doing so, the Court rejected the restrictive approach of the Uttarakhand High Court, which had held that the French company, Pride Foramer S.A., could not be said to be carrying on business in India during the years in question as it had no ongoing contract or office in the country. The Supreme Court restored the findings of the Income Tax Appellate Tribunal (ITAT), which had accepted that the company's activities, though temporarily halted, amounted to a “lull in business” rather than cessation.

Background

Pride Foramer had been awarded a 10-year offshore drilling contract in 1983, which was valid until 1993. After the expiry of that contract, in the assessment years under dispute (1996-97, 1997-98, 1999-2000), the company claimed business expenses (such as administrative charges, audit fees) and sought to carry forward unabsorbed depreciation from previous years. However, it did not have any active contract with the Indian entity (ONGC) during those years. The Assessing Officer and the CIT (Appeals) held that the company had ceased business and disallowed the claimed deductions. The ITAT reversed that view, treating the hiatus as a “lull in business,” allowing the deductions and depreciation carry-forward. The High Court, disagreeing, held the company was not carrying on business in India because it had no ongoing contract and no permanent establishment in India.

The issue before the Supreme Court was whether Pride Foramer could be said to be carrying on business during the lull period so as to claim deductions and depreciation set-offs under Sections 37 and 32(2).

Distinction Between “Lull in Business” and Cessation

The Court endorsed the ITAT's reasoning that a temporary lull or hiatus in operations cannot automatically be equated with cessation of business. The Court observed that one must examine the conduct, intent, and business activities of the taxpayer to determine continuity. The mere failure to secure a contract does not imply abandonment of business if other contemporaneous actions show ongoing engagement or attempts to revive business.

Drawing on precedents, the Court reiterated that “business” is not narrowly restricted to profit-earning operations alone, but also includes acts incidental to carrying on business, preservation, administration, or protection of its assets. Under this expanded view, correspondence with ONGC, bidding efforts, administrative and audit arrangements, even though they did not yield a contract immediately, could plausibly show intent and continuity of business.

"Continuous correspondences between the appellant and ONGC with regard to supply of manpower for oil drilling purposes and its unsuccessful bid in 1996 demonstrates various acts aimed at carrying on business in India which unfortunately did not fructify in procuring a contract.

In this factual backdrop, the High Court erred in holding that the appellant was not carrying on business as it had no subsisting contract with ONGC during the relevant period," the Court held.

The High Court's view that the absence of a permanent establishment in India or that all communications occurred from foreign offices meant that Pride Foramer could not be said to be doing business in India was also rejected.

Case : Pride Foramer S.A. v Commissioner of Income Tax

Citation : 2025 LiveLaw (SC) 1015

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