Income can deem to accrue or arise in India even if Co has no permanent establishment in India
Supreme Court Revives ITAT Orders in Favor of Non-Resident Company Pride Foramer S.A.. High Court's Restrictive Interpretation Overturned; Business Communications Considered as Carrying on Business in India
In a significant ruling, the Supreme Court of India has overturned a judgment by the High Court of Uttarakhand, reviving orders passed by the Income Tax Appellate Tribunal (ITAT) in favor of Pride Foramer S.A., a non-resident company incorporated in France. The Supreme Court, comprising Justices Manoj Misra and Joymalya Bagchi, held that the company was indeed carrying on business in India during the relevant assessment years, despite the absence of a permanent establishment or a subsisting contract.
The case revolved around whether Pride Foramer S.A., engaged in oil drilling activities, was eligible for deductions on business expenditures and the carry forward of unabsorbed depreciation under Sections 37(1) and 32(2) of the Income Tax Act, 1961, respectively. The company had been actively engaging in business communications and bids for contracts with the Oil and Natural Gas Corporation (ONGC) from its offices in Dubai and France, although no drilling contract was awarded during the said period.
The High Court had earlier set aside ITAT's orders, agreeing with the Commissioner of Income Tax (Appeals) that the lack of a permanent office in India and the absence of an active contract meant that the company was not carrying on business in India. However, the Supreme Court found this interpretation to be contrary to the scheme of the Income Tax Act, which does not mandate a non-resident company to have a permanent establishment in India to be deemed as carrying on business.
Highlighting the appellant's continuous business correspondences with ONGC and its bid submission in 1996, the Supreme Court emphasized that such activities demonstrate a clear intention to carry on business. The Court reiterated that a temporary lull in business should not be equated with cessation of business, and mere failure to secure a contract does not imply the company's exit from business activities in India.
The judgment underscores the importance of recognizing global business practices and communication as viable indicators of business activity, aligning with India's commitment to ease of doing business internationally. The Supreme Court's decision reaffirms the notion that globalisation and trans-national trade necessitate a broader understanding of business operations beyond physical establishments.
With this ruling, Pride Foramer S.A. is entitled to set off its business expenditures against income from other sources and carry forward unabsorbed depreciation, as originally allowed by the ITAT. The Assessing Officer has been directed to pass fresh Assessment Orders for the relevant years in line with the ITAT's findings.
Bottom Line:
Non-resident company making business communications with an Indian entity from its foreign office can be considered as carrying on business in India for tax purposes.
Statutory provision(s): Income Tax Act, 1961 Sections 37(1), 32(2), 71, 9(1)(i), 4, 5(2)
Pride Foramer S.A. v. Commissioner of Income Tax, (SC) : Law Finder Doc Id # 2795959
