Non-Resident Firms Need Not Have India Office to Be Taxable: Supreme Court

The Supreme Court has held that a non-resident company is not required to maintain a permanent establishment in India to be regarded as carrying on business or to be chargeable to tax on income accruing or arising within the country under the Income Tax Act, 1961.

Setting aside a 2009 judgment of the Uttarakhand High Court, the court restored the order of the Income Tax Appellate Tribunal (ITAT) in favour of French oil drilling company Pride Foramer S.A., which had been denied business expenditure deductions and carry-forward of unabsorbed depreciation for three assessment years i.e. 1996–97, 1997–98, and 1999–2000.

A bench of Justices Manoj Misra and Joymalya Bagchi held that the High Court erred in concluding that the absence of a permanent office or subsisting contract in India amounted to cessation of business activity. Court said such an interpretation was “wholly fallacious and contrary to the scheme of the Act".

Court said under Section 4 and Section 5(2) of the Act, read with Section 9(1)(i), a non-resident person would be liable to pay tax on income which is deemed to accrue or arise in India. Court explained, 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.

Court said, ''In an era of globalisation whose life blood is trans-national trade and commerce, 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".

The case arose after the company’s drilling contract with ONGC ended in 1993. While it secured a fresh contract in October 1998, the intervening years saw no active drilling operations. During this period, Pride Foramer continued correspondence with ONGC from its offices in Dubai and France, submitted a bid for oil exploration in 1996, and incurred administrative and professional expenses. The company filed returns for the relevant years showing NIL income, claiming deductions for business expenditure and unabsorbed depreciation from earlier years.

The Assessing Officer and the Commissioner of Income Tax (Appeals) disallowed these claims, holding that the company had not carried on business in India. The ITAT reversed these findings, holding that the company’s activities reflected a temporary lull and not cessation of business. The Tribunal allowed the deductions, finding that the company’s efforts to secure new contracts demonstrated a continuing intention to carry on business.

The Uttarakhand High Court, however, overturned the ITAT’s decision, stating that since the company had no permanent office, active contract, or business operation in India during the relevant years, it was not entitled to claim deductions under Sections 37(1), 32(2), or 71 of the Income Tax Act.

The Supreme Court disagreed. It said the High Court misdirected itself to infer that the company did not have a permanent establishment and corresponded with ONGC from its foreign office, so it could not be said to carry on business in India.

Court noted, 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 had 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.

Court observed that the question of whether the appellant’s failure to secure a fresh drilling contract with ONGC signified a loss of interest in continuing its business, or amounted to cessation of operations, had to be assessed from the company’s overall 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,'' the bench stressed.

Court held that the Tribunal rightly noted that a business going through a lean period of transition, which could be revived if proper circumstances arose, must be termed as a 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,'' the bench underscored.

Holding that the company’s correspondence with ONGC and its efforts to secure contracts reflected continued intention to engage in business, the court found no justification for denying deductions.

Thus, the bench held, "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.''

Accordingly, the Supreme Court allowed the appeals, set aside the Uttarakhand High Court’s judgment, and restored the orders of the ITAT. It directed the Assessing Officer to pass fresh assessment orders for the relevant years in terms of the Tribunal’s findings.

Case Title: Pride Foramer S A Vs Commissioner of Income Tax & Anr

Judgment Date: October 17, 2025

Bench: Justices Manoj Misra and Joymalya Bagchi