In a landmark judgment that strengthens India’s global business and tax jurisprudence, the Supreme Court of India in Pride Foramer S.A. v. Commissioner of Income Tax & Anr. (2025 INSC 1247) held that a permanent establishment (PE) is not a prerequisite for taxation of non-resident companies on income accruing or arising in India.
The Court clarified that the existence of a business connection—and not necessarily a physical office or establishment—is sufficient to bring non-resident entities within the ambit of Indian taxation laws when income is deemed to arise in India.
This decision is expected to have far-reaching implications for multinational corporations, offshore contractors, and tax authorities dealing with cross-border commercial activities. It reinforces India’s alignment with international taxation principles while maintaining clarity on domestic statutory interpretation.
Factual Background
The appellant, Pride Foramer S.A., is a French company engaged in offshore oil drilling operations. It had earlier undertaken a ten-year contract (1983–1993) with the Oil and Natural Gas Corporation (ONGC) for drilling operations off the coast of Mumbai. Upon completion of that contract, the company continued to engage with ONGC and other Indian entities from its offices in France and Dubai, exploring future drilling opportunities.
During the assessment years 1996–97, 1997–98, and 1999–2000, although no new contract had been executed, the company maintained correspondence with ONGC, submitted bids for new drilling contracts, incurred administrative and consultancy expenses, and received certain interest income from income-tax refunds. In its returns, the company declared “nil” income, claimed business expenditure deductions under Section 37(1) of the Income Tax Act, 1961, and sought to carry forward unabsorbed depreciation under Section 32(2).
Assessment Proceedings and Appellate History
Assessing Officer and CIT (Appeals)
The Assessing Officer (AO) disallowed the claimed deductions and depreciation on the ground that the company had not carried on any business during the relevant years. The CIT (Appeals) affirmed this view, reasoning that in the absence of a current drilling contract or physical presence in India, the appellant could not be deemed to have conducted business activities.
ITAT’s Findings
On further appeal, the Income Tax Appellate Tribunal (ITAT), New Delhi, reversed the lower authorities’ findings. The Tribunal held that a temporary lull in business cannot be equated with cessation of business activity. It found documentary evidence showing ongoing communications with ONGC and even an unsuccessful bid submitted in 1996. Eventually, a fresh drilling contract was awarded in 1998 and formalised in 1999.
Relying on Hindustan Chemical Works Ltd. v. CIT (124 ITR 561 Bom), the ITAT distinguished between “lull in business” and “going out of business.” It concluded that the company’s intention to continue business in India remained intact, and thus, business expenditures were allowable. Importantly, it observed that the absence of a permanent establishment did not imply cessation of business, since business operations could still be carried out through correspondence or contractual negotiations abroad.
Accordingly, ITAT allowed deduction of administrative and professional expenses under Section 37(1) and permitted set-off under Section 71 as well as carry-forward of depreciation under Section 32(2).
High Court’s Reversal
The Uttarakhand High Court overturned the ITAT decision, holding that because the assessee had no permanent office or ongoing contract in India, it could not be considered as carrying on business in India. Therefore, deductions and depreciation could not be allowed. The High Court’s reasoning effectively made the existence of a permanent establishment a necessary condition for claiming business deductions.
Issue
The Supreme Court framed the central issue as:
“Whether, in the facts of the case, the appellant can be said to have been carrying on business during the relevant period so as to avail deduction of business expenditure under Section 37(1) read with Section 71 and carry forward unabsorbed depreciation under Section 32(2) of the Income-tax Act?”
The Court’s Analysis
1. Interpretation of “Carrying on Business”
The Court began its analysis with the statutory framework of Sections 37(1), 71, and 32(2) of the Act. It emphasised that for deduction or carry-forward benefits to apply, the assessee must show that it was engaged in business or had not abandoned it during the relevant period.
Referring to Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954 SCR 957) and CIT v. Malayalam Plantations Ltd. (53 ITR 140 SC), the Court reiterated that the term “business” has a wide connotation, encompassing “some real, substantial and systematic or organised course of activity with a set purpose.” Acts incidental to business—such as maintaining correspondence, pursuing tenders, or paying consultants—may constitute business activities even in the absence of revenue generation.
2. Lull vs. Cessation of Business
The Supreme Court approved the ITAT’s distinction between a temporary lull and cessation of business. Citing CIT v. Vikram Cotton Mills (169 ITR 597 SC), it observed that a temporary discontinuance due to market or operational factors does not signify abandonment of business if the assessee’s conduct shows a continuing intention to resume operations.
Pride Foramer’s consistent engagement with ONGC, its bid submissions, and subsequent success in obtaining a new contract in 1998 clearly indicated continuity of business intent. Therefore, the High Court erred in assuming cessation merely because of the absence of an active contract.
3. Permanent Establishment: Not a Statutory Requirement
The Court emphatically rejected the High Court’s view that the absence of a permanent establishment in India implied the absence of business. It clarified that the concept of “permanent establishment” arises only under Double Tax Avoidance Agreements (DTAAs) for determining tax liability allocation between contracting states, not for determining whether an assessee carries on business under domestic law.
Under Sections 4, 5(2), and 9(1)(i) of the Income Tax Act, a non-resident is taxable on income accruing or arising, directly or indirectly, through or from any business connection in India. The statute nowhere mandates that such a business connection must manifest through a permanent office or fixed place of business.
Hence, even if the appellant communicated from abroad and had no office in India, the activities directed toward Indian entities for commercial gain constituted a business connection sufficient to attract Indian tax jurisdiction.
4. Globalisation and the Modern Business Context
In an important policy-oriented observation, the Supreme Court noted that in an age of globalisation and digital connectivity, restrictive interpretations based on physical presence are outdated. Business today transcends territorial boundaries through electronic communication, virtual offices, and international collaborations.
To insist upon a brick-and-mortar establishment would be “anachronistic” and contrary to India’s commitment to the Sustainable Development Goal of facilitating ease of doing business across borders.
5. Applicability of Deductions and Depreciation
Given that Pride Foramer S.A. was deemed to have continued its business in India, the Court held that its administrative and professional expenses qualified as legitimate business expenditure under Section 37(1). Further, unabsorbed depreciation from prior years could be carried forward under Section 32(2), as the business for which depreciation was originally claimed had continued during the relevant period.
Accordingly, the Court restored the ITAT’s orders and directed the Assessing Officer to recompute the appellant’s income consistent with those findings.
Key Judicial Pronouncements Cited
The judgment relied upon and reaffirmed several precedents elucidating the meaning of “business” and the continuity of operations:
- CIT v. Vikram Cotton Mills (1988) 169 ITR 597 (SC) – Temporary closure due to financial difficulties does not amount to discontinuance of business if the intention to restart remains.
- Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax (1954) 2 SCC 546 – The word “business” signifies an organised course of activity, not necessarily one yielding immediate profit.
- CIT v. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) – “For the purpose of business” extends beyond profit-earning to include preservation and protection of business assets.
- Hindustan Chemical Works Ltd. v. CIT (1980) 124 ITR 561 (Bom) – A lull in business is not cessation; the intention to resume operations maintains continuity.
Broader Legal and Economic Implications
1. Clarifying the Scope of “Business Connection”
The decision reiterates that the business connection under Section 9(1)(i) is the operative test for taxing non-residents, not the existence of a PE. This clarification prevents confusion between domestic law concepts and treaty law, ensuring that domestic taxability is determined independently of treaty thresholds.
2. Facilitating Cross-Border Commerce
By rejecting anachronistic notions of physical presence, the Court has endorsed a modern interpretation of cross-border business, reflecting realities of digital transactions and remote project management. This approach aligns with international tax frameworks, acknowledging “significant economic presence” as a valid nexus for taxation.
3. Relevance to Offshore and Service Contracts
The ruling particularly affects offshore contractors, exploration companies, IT service providers, and digital platforms engaging with Indian entities from abroad. Even without local offices, such entities may be considered to “carry on business in India” if their operations or communications are directed toward Indian markets or projects.
4. Reinforcing India’s Image as a Predictable Tax Jurisdiction
The Court’s reliance on statutory interpretation and global economic logic enhances India’s image as a stable and predictable jurisdiction. It ensures that taxation principles remain consistent with commercial realities, supporting both investor confidence and equitable revenue collection.
Conclusion
The Supreme Court’s decision in Pride Foramer S.A. marks a significant milestone in Indian international tax jurisprudence. It unequivocally holds that a permanent establishment is not a precondition for taxation of non-resident companies when income is deemed to accrue or arise in India through a business connection.
By adopting a commercially realistic approach, the Court preserved the balance between tax enforcement and investor fairness. It recognised that modern businesses—often operating across multiple jurisdictions through digital and contractual means—should not be judged by outdated territorial standards.
The judgment not only reinstates the ITAT’s reasoned findings but also sends a powerful message: India’s tax law evolves with global commerce, fostering an environment of legal certainty and economic openness.