Non-Resident Assessee need not Mandatorily have PE in India: Supreme Court remands Disallowance to AO [Read Judgement]

Pride Foramer S.A., incorporated in France, was engaged in offshore oil drilling for ONGC under a 10-year contract between 1983 and 1993. After completion of the contract, it continued to correspond with ONGC and submitted bids for new projects from its offices in Dubai and France. In 1998, the company was awarded a new drilling contract formalised in January 1999.

During the interim period (1993–1998), although no contract was in operation, the company incurred expenses such as administrative and audit charges and claimed deductions under Section 37 and carry-forward of unabsorbed depreciation under Section 32(2). The Assessing Officer disallowed these claims, holding that the company was not carrying on business in India. The CIT(A) upheld this view, but the ITAT reversed it, terming the gap as a “temporary lull” rather than cessation of business.

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The Uttarakhand High Court disagreed with the ITAT, holding that since the company had neither a permanent establishment nor any active contract in India during the relevant period, it could not be said to be carrying on business in India, thereby denying it the claimed deductions.

The Supreme Court examined whether the assessee could be considered to have carried on business during the relevant period to avail deductions under Section 37 and depreciation carry-forward under Section 32(2).

The Bench held that business existence does not hinge solely on possession of an active contract or a permanent office in India. Citing earlier precedents including Vikram Cotton Mills (1988) and Malayalam Plantations Ltd. (1964), the Court observed that business continuity depends on the intention and conduct of the assessee, not the presence of income-generating activity.

It was noted that “Continuous correspondences between the appellant and ONGC with regard to supply of manpower for oil drilling purposes and its unsuccessful bid in 1996 demonstrates various acts aimed at carrying on business in India which unfortunately did not fructify in procuring a contract.”

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The Court noted that Pride Foramer’s continuous correspondence with ONGC and efforts to secure drilling contracts, including a bid in 1996, clearly indicated its intent to continue business operations. The absence of a permanent establishment in India, the Court said, does not imply cessation of business, as the Income Tax Act does not mandate such presence for a non-resident to be considered as carrying on business in India.

The Division Bench comprising Justice Manoj Misra and Justice Joymalya Bagchi delivered the judgment setting aside the Uttarakhand High Court order which had disallowed the company’s claims for the Assessment Years 1996-97, 1997-98, and 1999-2000.

Rejecting the High Court’s restrictive interpretation, the Supreme Court stated that in the modern globalised economy, cross-border business communications themselves constitute business activity, aligning with India’s commitment to the ease of doing business.

Allowing the appeal, the Supreme Court restored the ITAT’s order and directed the Assessing Officer to pass fresh assessment orders in line with the ITAT’s findings.

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