Non-Resident Company Not Required to Maintain Permanent Office in India for Taxation on Income Arising from Business Connection : Supreme Court Restores ITAT Order Allowing Business Deductions
Kiran Raj
The Supreme Court Division Bench of Justice Manoj Misra and Justice Joymalya Bagchi clarified that under the Income Tax Act, a non-resident company may be taxed in India on income accruing or arising from a business connection within the country, even without a permanent office or physical establishment. Interpreting Sections 4, 5(2), and 9(1)(i) of the Act, the Court held that taxability depends on income sourced through such business connection. Allowing the appeal, the Bench reinstated the ITAT’s order permitting a foreign drilling company to claim business expenditure and depreciation, directing the Assessing Officer to pass fresh assessments accordingly.
The appellant, a non-resident company incorporated in France, was engaged in offshore oil drilling operations for ONGC under a ten-year contract from 1983 to 1993. After the expiry of that contract, the company did not secure a new contract until October 1998, which was formalized in January 1999. During the intervening assessment years, the company continued to maintain business correspondences with ONGC from its offices in Dubai and France, including submitting a bid for oil exploration in 1996. It incurred expenses such as administrative charges, audit fees, and consultancy payments in relation to its intended business activities and recovery of tax refunds.
For the relevant assessment years, the company filed returns declaring ‘NIL’ income but credited interest received on income tax refunds under “Income from Business.” It claimed deduction of business expenditure and set-off of unabsorbed depreciation carried forward from earlier years under Sections 37(1), 32(2), and 71 of the Income Tax Act, 1961. The Assessing Officer disallowed these claims, holding that the company had not carried on any business during those years. The Commissioner of Income Tax (Appeals) affirmed that view.
On appeal, the Income Tax Appellate Tribunal observed that the absence of an active contract did not signify cessation of business and that the company’s ongoing efforts with ONGC showed a temporary lull rather than discontinuance. It permitted the deduction of business expenses and the carry forward of depreciation. The Department challenged this before the High Court, which reversed the Tribunal’s finding, noting the absence of a permanent office or contract in India.
Before the Supreme Court, the matter involved interpretation of Sections 4, 5(2), and 9(1)(i) concerning whether a non-resident company could be regarded as carrying on business in India without a permanent establishment, and whether the claimed deductions were allowable under the Act
The Bench stated that under Section 37(1), “any expenditure which is undertaken wholly and exclusively for the purpose of business and profession shall be allowed to be deducted in computing income chargeable under the head ‘Profits and Gains from Business and Profession’.” It further explained that under Section 32(2), “unabsorbed depreciation allowance of a previous year may be carried forward and set off against income of the following assessment years.” The proviso requiring continuation of business for the allowance to apply had been omitted by the Finance Act, 2001, but was in force during the relevant years.
The Court stated, “It is evident that to avail the benefit of the aforesaid provisions, the appellant had to demonstrate that it was carrying on business in India during the relevant period.”
The Bench accepted that while Pride Foramer had not undertaken drilling activities between 1993 and 1998, “ample materials have been placed on record to show that during the interregnum, the appellant had continuous business correspondences with ONGC with regard to hiring of manpower services in respect of expert key personnel for drilling in deep waters and had even unsuccessfully submitted a bid in 1996.” The Court observed that the appellant’s conduct demonstrated its continuing intention to carry on business, and that mere non-receipt of contracts could not be equated with cessation of business.
Referring to the precedent in CIT v. Vikram Cotton Mills (1988) 169 ITR 597 (SC), the Court recorded that “if such conduct, from the standpoint of a prudent businessman, evinces intention to carry on business, mere failure to obtain a business contract by itself would not be a determining factor to hold the appellant had ceased its business activities in India.” It agreed with the Tribunal’s characterization of the period between 1993 and 1998 as “a lean period of transition” rather than a cessation.
Further elaborating on the meaning of ‘business’, the Court cited the principle from Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 2 SCC 546, that the term has a wide import encompassing “some real, substantial and systematic or organised course of activity.” In reference to CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC), the Court recorded, “The expression ‘for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profits’ and may comprehend many other acts incidental to the carrying on of a business.”
The Court observed that the continuous correspondences and the unsuccessful bid “demonstrate various acts aimed at carrying on business in India which unfortunately did not fructify in procuring a contract.” It stated that the High Court erred in holding that the absence of a contract meant the appellant was not in business.
The Bench also disagreed with the High Court’s reasoning that lack of a permanent establishment in India indicated cessation of business. It stated, “The view that a non-resident company not having a permanent office within the country cannot be said to carry on business in India is wholly fallacious and contrary to the scheme of the Act.” The Court explained that under Sections 4, 5(2), and 9(1)(i) of the Act, “a non-resident person shall be liable to pay tax on income which is deemed to accrue or arise in India, and none of these provisions make it mandatory for a non-resident assessee to have a permanent establishment in India to carry on business.”
The Court recorded that “in an era of globalisation whose life blood is trans-national trade and commerce, the High Court’s restrictive interpretation... is wholly anachronistic with India’s commitment to sustainable development goal relating to ease of doing business across national borders.”
The Bench stated, “For the aforesaid reasons, we allow the appeals and set aside the judgment and order of the High Court. Orders passed by the ITAT are revived and Assessing Officer is directed to pass fresh Assessment Orders for the relevant Assessment Years in terms of the ITAT orders.”
Case Title: Pride Foramer S.A. v. Commissioner of Income Tax & Anr.
Neutral Citation: 2025 INSC 1247
Case Number: Civil Appeal Nos. 4395–4397 of 2010
Bench: Justice Manoj Misra, Justice Joymalya Bagchi
