In a significant verdict impacting the taxation of multinational corporations (MNCs) operating in India, the Supreme Court has ruled that foreign companies can claim tax deductions and carry forward losses in India even if they do not have a physical office or active contract in the country. This ruling clarifies the scope of "business connection" under the Income Tax Act, 1961, and offers respite to non-resident companies engaged in commercial activities in India.
The decision came in the case of Pride Foramer S.A. vs Commissioner of Income Tax & Anr., where a French oil drilling company, Pride Foramer S.A., sought to claim deductions under Section 37(1), set-off under Section 71, and carry forward unabsorbed depreciation under Section 32(2) of the Income-tax Act, 1961, for assessment years during which it did not have an active contract in India. The company had previously operated under a contract with ONGC from 1983 to 1993, and although no new contract was awarded until 1998 (formalized in 1999), it maintained regular communication with ONGC and continued its efforts to secure future contracts.
The Income Tax authorities had denied the company's claims, arguing that the absence of a physical office or ongoing contract meant that the company had ceased its business activities in India. However, the Supreme Court overturned this decision, stating that a "lull in business cannot be equated with cessation of business". The court emphasized that business continuity is not solely dependent on having a contract or office, but also on the intention, effort, and strategic engagement of the company.
The ruling implies that even during inactive periods, foreign companies can claim tax benefits if they maintain a business connection in India, such as bidding for projects or handling administrative work. The court clarified that the Income Tax Act does not require a foreign entity to maintain a physical office to be considered as conducting business in India. The focus, instead, is on the source of income and its nexus with India.
The Supreme Court also addressed the relevance of the "permanent establishment" (PE) concept, typically used in Double Taxation Avoidance Agreements (DTAA). It clarified that the existence of a PE is not a prerequisite for determining tax liability under the Income Tax Act. The court stated that the PE concept becomes relevant only when determining taxation benefits under DTAA. The ruling clarifies that domestic tax provisions independently govern tax liability, irrespective of treaty considerations.
The judgment underscores that temporary inactivity does not necessarily mean the end of business operations. The court observed that a temporary discontinuance of business may indicate a lean period of transition, and if the intention of the assessee was never to completely cease business, it cannot be concluded that the business was discontinued.
This ruling has significant implications for foreign companies operating in India. It provides clarity on the circumstances under which they can claim tax deductions and carry forward losses, even during periods of inactivity. However, experts also suggest that while clarifying benefits for MNCs, it also increases their exposure before the tax department. The decision reinforces the principle that taxation should be based on real commercial activity and the intention to continue business operations, rather than strict adherence to physical presence or contractual arrangements.
