Lull in Business Is Not Cessation: Supreme Court Allows Tax Deductions to Non-Resident Without Office or Contract in India

“Whether the Office Is in France or Dubai Is Immaterial – Intention to Carry On Business Is the Deciding Factor”: Supreme Court Rebukes Restrictive Interpretation of ‘Business Activity’ by Revenue Authorities

Today, On October 17, 2025, the Supreme Court of India delivered a landmark judgment in Pride Foramer S.A. vs Commissioner of Income Tax & Anr., holding that a non-resident company which continued engaging in commercial efforts and correspondence to secure contracts in India could not be said to have ceased business, merely because it lacked a physical office or an ongoing contract in the country during the assessment years. The Court allowed the company 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.

Reversing the Uttarakhand High Court’s judgment, the Bench comprising Justice Manoj Misra and Justice Joymalya Bagchi revived the orders of the Income Tax Appellate Tribunal (ITAT), stating that the High Court had adopted a "wholly fallacious" and "anachronistic" view in assuming that the absence of a permanent establishment or contract meant business activity had ceased.

“Temporary Inactivity Does Not Mean the Business Is Dead”: SC Differentiates ‘Cessation’ from ‘Lull’ in Business

The Supreme Court began its analysis with a pointed observation: “A temporary discontinuance of business may, in certain circumstances, give rise to an inference that a business is going through a lean period of transition… Thus, when the intention of the assessee was never to go completely out of business, it cannot be concluded that the assessee had discontinued its business.”

The appellant, Pride Foramer S.A., a French oil drilling company, had operated under a contract with ONGC from 1983 to 1993. Though no new contract was awarded till October 1998 (formalised in 1999), the company maintained regular and strategic communication with ONGC, submitted a bid in 1996, and incurred various expenses related to legal, consultancy, and administrative services. The revenue authorities, including the CIT (Appeals), disallowed deductions and depreciation set-offs for the assessment years 1996–1997, 1997–1998, and 1999–2000 on the ground that the company had “ceased” doing business in India.

However, the ITAT found that there was sufficient evidence that the assessee had not exited the business, but was going through a “lull”. It cited continuous bidding efforts and preparations to secure a new contract. The Tribunal also relied on Hindustan Chemical Works Ltd. v. CIT, 124 ITR 561 (Bom), to underline that a lull is not the same as cessation.

The Supreme Court affirmed this view and held: “Whether failure to procure the drilling contract with ONGC was owing to the appellant’s disinterest to carry on business… 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.”

“Permanent Establishment Is Irrelevant for Domestic Tax Liability – Only Relevant Under DTAA”: SC Clarifies Scope of Business Connection for Non-Residents

Rejecting the High Court’s insistence on a “permanent establishment” as a necessary requirement to claim deductions, the Supreme Court gave a categorical finding:

“None of these provisions [Sections 4, 5(2), 9(1)(i), and 28] 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 Bench observed that the concept of Permanent Establishment (PE) arises only in the context of Double Taxation Avoidance Agreements (DTAAs) and not under the charging or computation provisions of the Income-tax Act. The High Court’s reliance on the absence of a PE to deny deductions was thus deemed legally unsustainable.

Addressing the broader implications of such an approach, the Court remarked: “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.”

“Business Activity Exists Even Without Immediate Profit or Contract – Preservation, Bidding, Compliance Are Valid Indicators of Continuity”: SC Expands Interpretation of Section 37(1)

The Court invoked CIT v. Malayalam Plantations Ltd., (1964) 53 ITR 140 (SC), to emphasise that the term “for the purpose of business” is broader than “for the purpose of earning profits”. It noted:

“The expression ‘for the purpose of business’ is wider in scope… it may include measures for preservation of business and for protection of its assets and property… it may comprehend many other acts incidental to the carrying on of a business.”

Applying this principle, the Bench concluded that expenses incurred by the appellant for maintaining business continuity—such as audit fees, legal consultancy for tax matters, and preparation for bidding—qualified as business expenditure under Section 37(1). These were allowable deductions and could be set off against income under Section 71.

The company had received interest on income-tax refunds during the relevant years, which was classified under “Income from Other Sources.” However, given that business activity was held to be ongoing, the expenses could be set off against such income.

“Unabsorbed Depreciation Available If Business Continues – Proviso to Section 32(2) Not Breached”: SC Applies Pre-2002 Law

Under the legal regime applicable before April 1, 2002, the first proviso to Section 32(2) required that the business in which depreciation had been claimed must continue in subsequent years to allow carry-forward. The Court found that this requirement was satisfied on facts:

“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.”

Since the appellant’s intention to continue business was evident and supported by material conduct, the condition under the proviso was met. The Court also noted that this proviso was removed by the Finance Act, 2001 w.e.f. 01.04.2002, further confirming the legislative intent to liberalise depreciation claims.

The Supreme Court allowed the appeals, restoring the ITAT’s orders and directing the Assessing Officer to pass fresh assessment orders for AYs 1996–97, 1997–98, and 1999–2000 in accordance with the ITAT’s findings. It reinforced that tax interpretation must not be overly restrictive, particularly when dealing with global business realities.

The ruling affirms that:

“Lull in business cannot be equated with cessation of business. Business continuity is not confined to having a contract or office—intention, effort, and strategic engagement are equally vital.”

This decision sets a transformative precedent for non-resident businesses in India, confirming that strategic inactivity does not strip them of their tax rights under domestic law.

Date of Decision: 17 October 2025