2025 (10) TMI 964 - SC - Income Tax

Non-resident company found carrying on business despite no permanent office; entitled to business expense deductions and carry forward depreciation

Pride Foramer S.A. Versus Commissioner of Income Tax & Anr.

SC allowed the appeal, holding that the non-resident company was carrying on business in India during the relevant years despite lacking a subsisting ... Disallowance of deduction of business expenditure as well as carry forward of unabsorbed depreciation - appellant was not carrying on any business during the relevant assessment years - scope of term/word ‘business’ High Court while agreeing with the proposition that mere lull in business does not mean the assessee had ceased to do business in India, reversed the finding of ITAT, holding that when the assessee has neither permanent office, nor any other office in India, nor any contract was in execution during the relevant period, it cannot be said that they were in business in India, as such, it cannot be said that assessee was entitled to set off claimed by it under Section 71 Whether appellant can be said to have been carrying on business during the relevant period, so as to avail deduction of business expenditure u/s 37(1) r/w Section 71 of the Act, and carry forward unabsorbed depreciation of previous years u/s32(2) of the Act? HELD THAT:- In the present case, the appellant, a non-resident company had been awarded 10 years’ drilling contract by ONGC in 1983. The contract continued till 1993. Thereafter, the appellant failed to procure another contract till October, 1998. But ample materials have been placed on record to show 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. Whether failure to procure the drilling contract with ONGC was owing to the appellant’s disinterest to carry on business during relevant period and amounted to cessation of business or not must be construed from the appellant’s conduct. 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. [CIT v. Vikram Cotton Mills, [1987 (12) TMI 1 - SUPREME COURT] Tribunal rightly noted a business going through a lean period of transition which could be revived if proper circumstances arose, must be termed as lull in business and not a complete cessation of the business. The word ‘business’ has a wide import and connotes some real, substantial and systemic or organised course of activity or activity with a set purpose. [Narain Swadeshi Weaving Mills v. Commissioner of excess Profits Tax [1954 (10) TMI 11 - SUPREME COURT In CIT v. Malayalam Plantations Ltd [1964 (4) TMI 9 - SUPREME COURT] this Court further underlined that the expression ‘for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profits’ and would encompass in its fold “many other acts incidental to the carrying on of a 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. 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. 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. Thus, we allow the appeals and set aside the judgment and order of the High Court. ISSUES PRESENTED AND CONSIDERED 1. Whether, on the facts, the assessee (a non-resident company) was carrying on business in India during the relevant assessment years so as to avail deduction of business expenditure under Section 37(1) read with Section 71 of the Income Tax Act, and carry forward unabsorbed depreciation under Section 32(2) of the Act? 2. Whether mere absence of a subsisting contract, absence of a permanent establishment in India, or business communications conducted from a foreign office precludes the conclusion that a non-resident was carrying on business in India? ISSUE-WISE DETAILED ANALYSIS Issue 1: Whether the assessee was carrying on business in India during the relevant years for purposes of Sections 37(1), 71 and 32(2). Legal framework: Section 37(1) allows deduction of expenditure wholly and exclusively for the purpose of business or profession; Section 71 permits set-off of business losses against income under other heads; Section 32(2) permits carry forward of unabsorbed depreciation subject to the proviso (operative for the years in question) that the business for which depreciation was originally computed continued in the previous year relevant to the assessment year. Precedent treatment: The Court relied on established principles that a temporary lull or discontinuance is distinguishable from cessation of business; authorities cited include decisions treating 'lull in business' differently from 'going out of business' and pronouncements that 'for the purpose of business' is wide in scope (including acts incidental to carrying on business and measures for preservation or rationalisation). Interpretation and reasoning: The Court examined the objective conduct of the assessee during the interregnum between contracts: continuous correspondence with the Indian counterparty, submission of a bid in 1996, consultancy charges paid to pursue the bid, and eventual award of a contract in 1998/1999. From the standpoint of a prudent businessman these acts evinced an intention to carry on and revive business rather than an intention to cease business entirely. The Court held that failure to procure a contract by itself is not determinative of cessation; a business undergoing a lean period that takes steps to procure contracts and maintain business relations constitutes a 'lull in business' and remains in business for the purposes of Sections 37(1), 71 and 32(2). Ratio vs. Obiter: Ratio - where factual matrix shows continuous business efforts (correspondence, tenders, bids, expenditure aimed at securing contracts) a non-resident does not cease to carry on business in India despite temporary absence of contract; such facts permit allowance of business expenditure under Section 37(1), set-off under Section 71, and carry forward of depreciation under Section 32(2) (subject to statutory conditions). Obiter - general remarks on the breadth of 'for the purpose of business' and examples of acts incidental to business (though supported by precedent, these are explanatory). Conclusion: The Court concluded that on the facts the assessee was carrying on business in India during the relevant period. Consequently, deductions claimed as business expenditure (and set-off against income under other heads) and carry forward of unabsorbed depreciation were permissible in principle and the ITAT's allowance of these claims was warranted. Issue 2: Whether absence of a permanent establishment or conduct of business communications from a foreign office precludes carrying on business in India. Legal framework: Charging provisions (Sections 4, 5(2), and 9(1)(i)) deem income to accrue or arise in India if arising through or from a business connection in India; the domestic charging provisions do not make a permanent establishment in India a pre-condition for liability. DTAA considerations (permanent establishment) are separate and relevant only for treaty benefits. Precedent treatment: The Court relied on the statutory scheme and prior principles distinguishing domestic taxability of income arising from a business connection in India from treaty concepts of permanent establishment. The High Court's reliance on absence of permanent office as determinative was treated as inconsistent with this scheme. Interpretation and reasoning: The Court held that correspondence and business dealings conducted from a foreign office do not preclude carrying on business in India. Whether a non-resident has a permanent establishment is a separate inquiry primarily relevant for DTAA relief; absence of permanent establishment does not, ipso facto, mean absence of business activities or business connection in India under domestic law. The Court criticized the High Court's restrictive approach as anachronistic in a globalised commercial context and contrary to the scheme of Sections 4, 5(2) and 9(1)(i). Ratio vs. Obiter: Ratio - absence of a permanent establishment or the location from which communications occur (foreign office) is not decisive against a finding of carrying on business in India; domestic taxability under Sections 4, 5(2) and 9(1)(i) depends on business connection and facts, not on existence of a permanent establishment. Obiter - policy observation on globalisation and ease of doing business (contextual commentary). Conclusion: The High Court erred in treating lack of permanent establishment and correspondence from foreign offices as fatal to the assessee's claim of carrying on business in India; the Tribunal's contrary conclusion was correct insofar as domestic law is concerned. Cross-reference and operative conclusion Both issues are interlinked: factual evidence of continuous commercial efforts (Issue 1) sufficed to establish carrying on of business despite absence of a subsisting contract or permanent establishment (Issue 2). The Court therefore set aside the High Court's order, revived the ITAT's findings that business expenditure and carry forward of unabsorbed depreciation were allowable, and directed reassessment in terms of the ITAT's orders.