Not Mandatory For Non-Resident Assessee To Have Permanent Establishment In India To Carry On Business Or Have Any Business Connection: Supreme Court
The apex Court held that a non-resident assessee need not have a permanent establishment in India to carry on business or establish a business connection in the country, ruling that such a condition is not mandated under the Income Tax Act, 1961.
The Supreme Court has held that no provisions of Income Tax Act,1961 makes 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 Apex Court was hearing appeals filed by a French company engaged in offshore drilling operations, challenging the Uttarakhand High Court’s decision disallowing deductions of business expenditure and the carry-forward of unabsorbed depreciation under the Income Tax Act, 1961.
A Bench comprising Justice Manoj Misra and Justice Joymalya Bagchi, while setting aside the order of the Uttarakhand High Court, observed that “in an era of globalisation whose life blood is trans-national trade and commerce, the High Court’s restrictive interpretation that a non-resident company making business communications with an Indian entity from its foreign office cannot be construed to be carrying on business in India is wholly anachronistic with India’s commitment to Sustainable Development Goal relating to ‘ease of doing business’ across national borders.”
Advocate Vaibhav Kulkarni represented the appellants, while the respondents were represented by N Venkatraman, A.S.G.
Background
The appellant, a French Non-Resident Company, was engaged in oil drilling operations and had executed a 10-year contract with ONGC for offshore drilling from 1983 to 1993. After the contract ended, it continued to correspond with ONGC from its Dubai office and headquarters in France, including submitting a bid for oil exploration in 1996, which was not successful.
During the interim years between 1993 and 1998, the appellant incurred various administrative and operational expenditures in pursuit of future drilling projects and while securing tax refunds. For the assessment years 1996–1997, 1997–1998, and 1999–2000, it filed ‘NIL’ income returns, claiming business expenditure deductions and set-off of unabsorbed depreciation.
The Assessing Officer and the Commissioner of Income Tax disallowed the deductions on the ground that the company was not carrying on business in India during the relevant years. However, the Income Tax Appellate Tribunal (ITAT) reversed these findings, holding that there was merely a “lull in business” and not a cessation of it. The High Court later overturned the ITAT’s decision, prompting the present appeal before the Supreme Court.
Court’s Observation
The Supreme Court, on hearing the matter, held that the Uttarakhand High Court erred in interpreting the absence of a permanent office or ongoing contract in India as cessation of business. The Bench observed that “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.”
Referring to CIT v. Malayalam Plantations Ltd. (1964), the Court reiterated that the expression “for the purpose of business” is broader than “for the purpose of earning profits” and encompasses acts incidental to the carrying on of business. The Bench also cited Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax and Vikram Cotton Mills v. CIT to emphasise that temporary inactivity does not amount to discontinuance of business.
While clarifying that under Sections 4, 5(2), and 9(1)(i) of the Income Tax Act, a non-resident is chargeable to tax in India on income deemed to accrue or arise in India through any business connection, the Bench highlighted that “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.”
Stating that “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 Bench concluded that such an interpretation is inconsistent with India’s commitment to global economic integration and the principle of facilitating “ease of doing business” across borders.
Conclusion
Allowing the appeal, the Supreme Court set aside the High Court’s judgment and restored the orders of the ITAT, directing the Assessing Officer to pass fresh assessment orders in accordance with the Tribunal’s findings.
Cause Title: Pride Foramer S.A. v. Commissioner of Income Tax & Anr. (Neutral Citation: 2025 INSC 1247)
Appearances
Appellant: Advocates Vaibhav Kulkarni, Rohit Jain, Geetanjali Mohan, AOR, K.K. Mohan, and Saumya Tiwari
Respondents: N Venkatraman, A.S.G., and Senior Advocate Arijit Prasad, with Advocates Vivek Narayan Sharma, V. Chandrashekhar Bharathi, Abishek R., Shashank Bajpai, Udai Khanna, Raj Bahadur Yadav, AOR.