Non resident assessee need not have a permanent establishment in India to be said to carry on business in India
In a recent judgment, Hon’ble Supreme Court has held that did not it is not necessary for a non resident assessee to have a permanent establishment in India to be said to carry on business in India.
ABCAUS Case Law Citation:
4789 (2025) (10) abcaus.in SC
In the instant case, Petitioner had challenged the judgment of Uttarakhand High Court setting aside the orders passed by the ITAT and affirming the orders passed by CIT (Appeals) who disallowed deduction of business expenditure under Section 37 of the Income Tax Act, 1961 (the Act) as well as carrying forward of unabsorbed depreciation under Section 32(2) of the Act.
The appellant was a non-resident company incorporated in Europe and was engaged in oil drilling activities. The appellant had been awarded a 10-year contract for drilling operations in India. After five years from the expiry of the said contract, the appellant was again awarded another drilling contract.
In the interregnum period i.e., the relevant assessment years, though no drilling contract was awarded, the appellant carried on business correspondences with ONGC from its office at Dubai and headquarters at Europe and had also submitted a bid for oil exploration. During the gap, appellant undertook various expenditures including administrative charges, audit fees etc. with the intention of carrying out its business activities as well as realising tax refunds from the Income Tax Department.
For the relevant assessment years, the appellant filed its return showing ‘NIL’ income. The only income credited was under the head ‘Income from Business’ on account of interest received on income tax refunds. Against this, business expenditures were claimed as deductions and appellant also claimed set-off against unabsorbed depreciation on assets brought forward from earlier years.
However, the Assessing Officer disallowed deduction of business expenditure as well as carry forward of unabsorbed depreciation on the ground that the appellant was not carrying on any business during the relevant assessment years. The findings of the AO were upheld by CIT (Appeals).
ITAT, however, reversed the findings of the CIT (Appeals), holding a temporary lull in business for whatever reason cannot be termed as cessation of business.
The High Court thoigh agreed with the proposition that mere lull in business does not mean the assessee had ceased to do business in India, reversed the finding of ITAT observing that when the assessee has neither permanent office, nor any other office in India, nor any contract was in execution during the relevant period, it cannot be said that they were in business in India, as such, it cannot be said that assessee was entitled to set off claimed by it under Section 71 of the Act.
The Hon’ble Supreme Court pondered over the issue whether failure to procure the drilling contract with ONGC was owing to the appellant’s disinterest to carry on business during relevant period and amounted to cessation of business or not 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.
The Hon’ble Supreme Court opined that The Tribunal rightly noted a business going through a lean period of transition which could be revived if proper circumstances arose, must be termed as lull in business and not a complete cessation of the business.
The Hon’ble Supreme Court observed that 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 expression ‘for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profits’ and would encompass in its fold “many other acts incidental to the carrying on of a business”.
The Hon’ble Supreme Court opined that continuous correspondences between the appellant and ONGC with regard to supply of manpower for oil drilling purposes and its unsuccessful bid demonstrates various acts aimed at carrying on business in India which unfortunately did not fructify in procuring a contract.
The Hon’ble Supreme Court further held that High Court misdirected itself to infer as the appellant did not have a permanent establishment and corresponded with ONGC from its foreign office, it cannot be said to carry on business in India.
The Hon’ble Supreme Court held that the view taken by High Court was wholly fallacious and contrary to the provisions of Section 4, Section 5(2) read with Section 9(1)(i) of the Act which does not require a non-resident company to have a permanent office within the country to be chargeable to tax on any income accruing in India. The issue of ‘permanent establishment’ may be relevant for the purposes of availing the beneficial provisions of the Double Tax Avoidance Agreement (DTAA) which was not a relevant consideration for the purposes of this case.
The Hon’ble Supreme Court stated that 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.
Accordingly, the Hon’ble Supreme Court set aside the judgment and order of the High Court and orders passed by the ITAT were revived.
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