In a significant ruling, the Supreme Court (SC) has declared that expenditures incurred by companies, including foreign entities, for exploring business opportunities in India are eligible for income tax deductions, even if those efforts don't immediately materialize into a contract. This decision comes more than two decades after a French oil exploration company was initially denied these deductions.
The case in question involved Pride Foramer SA, a French oil drilling company that had a 10-year contract with ONGC (Oil and Natural Gas Corporation) in India from 1983 to 1993. After the contract's completion, the company continued to pursue new opportunities in India, engaging in correspondence with ONGC and even submitting a bid in 1996. However, these efforts were unsuccessful, and Pride Foramer SA did not secure another contract until October 1998.
During the intervening period from 1993 to 1998, the company claimed deductions for business expenditures. While the Commissioner of Income Tax initially allowed these deductions, the Uttarakhand High Court reversed the decision in 2009, leading Pride Foramer SA to appeal to the Supreme Court.
The Supreme Court overturned the High Court's decision. Justices Manoj Misra and Joymalya Bagchi stated that the High Court's view that a company without an office in India could not be considered as conducting business in India was incorrect. The Supreme Court clarified that the Income Tax Act does not mandate a non-resident assessee to have a permanent establishment in India to carry on business or have any business connection in India.
Justice Bagchi, writing the judgment, emphasized that the concept of a "permanent establishment" is relevant for Double Tax Avoidance Agreements but not a necessary condition for determining whether a company is conducting business in India. The court also noted that in an increasingly globalized world, a restrictive interpretation that prevents a non-resident company from claiming business expenditures simply because they are communicating with an Indian entity from a foreign office is outdated and contrary to India's commitment to facilitating ease of doing business.
The Supreme Court emphasized that the term "business" should be interpreted broadly, encompassing day-to-day operations and activities that are incidental to carrying on a business. The court added that if a company's conduct demonstrates an intention to continue business, the failure to secure a contract should not be the sole determining factor in deciding whether the company had ceased its business operations.
The ruling also addressed the issue of "lull" versus "cessation" of business. The Assessing Officer and Commissioner (Appeals) had previously disallowed deductions under Section 37 of the Income Tax Act, 1961, and denied the carry-forward of depreciation under Section 32(2), arguing that the company was not actively conducting business in India during the relevant period. However, the Income Tax Appellate Tribunal (ITAT) disagreed, stating that the period represented a "lull in business" rather than a permanent closure, a view that the Supreme Court ultimately upheld.
Experts note that the Supreme Court has recognized that as long as a company remains engaged in efforts to pursue its business objectives, it continues to be "in business" for tax purposes. This includes expenditure on administrative and audit functions, which the court deemed incidental to the continuation of its business and thus eligible for deduction. The court also allowed the company's claim for carry-forward of unabsorbed depreciation, as the underlying business had not ceased.
This ruling clarifies that foreign companies can be considered as conducting business in India even without active contracts, a physical office, or employees, provided they maintain a business connection. While this provides clarity and potential benefits for multinational corporations (MNCs) with project-based or intermittent operations, it may also increase their exposure to scrutiny from the tax department.
