Tax claims in India by foreign companies without office or active contracts valid: Supreme Court

The judgment, delivered on 17 October by a bench of Justices Manoj Misra and Joymalya Bagchi, clarified that a temporary lull in business does not amount to cessation. What matters is whether there is a continuing business connection and demonstrable intent to operate in India.

The ruling allows non-resident entities to claim tax deductions, carry forward unabsorbed depreciation, and set off losses during periods of inactivity.

The ruling came in a case involving Pride Foramer SA, a French offshore drilling company that had a 10-year contract with Indian oil explorer ONGC in the 1980s and early 1990s. After the contract expired, the company had no active projects for several years but continued administrative operations, paid expenses, and bid for new contracts.

Its claim on deductions over expenses and depreciation carried forward was denied by the Income Tax department, which argued the company had ceased business in India.

“In an era of globalisation, whose lifeblood is transnational 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 Goals relating to ease of doing business across borders,” the judgment noted.

The case involved Sections 37(1) and 32(2) of the Income Tax Act, which allow companies to deduct business expenses such as salaries, rent, or administrative costs, and to carry forward unabsorbed depreciation to future years if it cannot be fully used in a given year.

Tax lawyers said the ruling provides long-overdue clarity for project-based foreign companies in sectors like oil drilling, construction, consultancy, and engineering.

“Continuity of business is recognized even between contracts, preventing tax authorities from denying deductions or carry-forward of depreciation during idle periods. Preparatory activities such as correspondence, bidding, or maintaining readiness to execute contracts will be accepted as ‘carrying on business,’” said Rahul Charkha, Partner, Economic Laws Practice.

According to Ved Jain, Partner at Ved Jain & Associates, the ruling helps companies under goods and services tax laws also because they can keep unused tax credits during short pauses as long as they plan to restart business. This shows that tax benefits depend on the business continuing, not just while being active. Input tax credits let businesses reduce tax liability by claiming credit for tax paid on purchases to avoid double taxation.

Background of the case

French drilling company Pride Foramer had a 10-year contract with ONGC from 1983 to 1993. After the contract expired, the company had no active projects for several years but continued administrative operations, paid expenses, and bid for new contracts.

For assessment years 1996-97, 1997-98, and 1999-2000, Pride Foramer sought deductions and carry-forward of unabsorbed depreciation. The Income Tax Department turned down the claims, arguing the company had ceased business.

While the Income Tax Appellate Tribunal, a quasi-judical body that’s the first option to appeal tax disputes, sided with Pride Foramer, the Uttarakhand High Court reversed the decision and denied the company the tax benefits. This led the company to challenge its ruling in the Supreme Court.

Lawyers caution that while the ruling allows tax benefits, it could also increase tax exposure.

“It exposes project-based or episodic foreign operations to potential Indian tax liability even during intervals between contracts, provided a demonstrable link to Indian operations persists,” said Tushar Kumar, an advocate in the Supreme Court. Companies are advised to maintain detailed records showing where decisions are made, where contracts are executed, and how business is controlled.

While domestic law provides benefits under the Income Tax Act, conflicts may arise under international treaties such as double taxation avoidance agreements, or DTAAs, which require a so-called permanent establishment (PE) in India.

In tax parlance a PE is a fixed place where business is carried out and depending on the income or value addition, it becomes a taxable presence in a foreign jurisdiction.

The determination of what makes for a PE has been a big tussle between tax authorities and multinational companies, leading to long-standing legal disputes.

Recently, in July 2025, the Supreme Court denied tax exemption to Hyatt International Southwest Asia, a UAE hotel advisory firm, ruling that Hyatt’s Indian PE was indeed taxable regardless of the company’s global profitability. Hyatt argued only its parent company’s profits should be taxed. Simply put, having business activity and control in India is enough for tax, even if staff aren’t permanently based there.

In October 2025, NITI Aayog proposed an optional presumptive tax scheme for foreign companies to improve tax certainty and predictability. The think tank noted that unclear rules on PE and profit attribution have caused confusion, heavy compliance burdens, and long court disputes, often lasting up to12 years. The proposed scheme aims to simplify taxation for multinationals and encourage greater foreign direct investment by reducing ambiguity and litigation.

It is not clear whether the NITI Aayog proposal will lead to change in law or the income tax department’s approach on the matter.