Supreme Court Rules Business Lull Doesn’t Mean Business Cessation for Tax Benefits
In a landmark judgment that clarifies the distinction between temporary business slowdown and complete cessation of business activities, the Supreme Court has delivered a significant verdict favoring international companies operating in India. The case involved Pride Foramer S.A., a French company engaged in oil drilling activities, which found itself in a legal battle with Indian tax authorities over business expenditure deductions and depreciation benefits during periods when it had no active contracts in India.
The dispute centered around whether a company can claim tax benefits during periods when it’s not actively generating revenue but is still making efforts to secure business. This judgment has far-reaching implications for how businesses, particularly international companies, are treated under Indian tax law during transitional phases between contracts.
The Case Background
Pride Foramer S.A., a non-resident company incorporated in France, had been awarded a 10-year contract for drilling operations in offshore Mumbai from 1983 to 1993. After this contract ended, the company went through a period where it had no active drilling contracts until October 1998, when it was awarded another contract that was formalized in January 1999.
During the intervening years – the assessment years 1996-1997, 1997-1998 and 1999-2000 – the company continued to maintain business correspondences with ONGC from its offices in Dubai and France. It submitted a bid for oil exploration in 1996 and incurred various expenditures including administrative charges and audit fees while pursuing business opportunities and realizing tax refunds from the Indian Income Tax Department.
For these assessment years, the company filed returns showing ‘NIL’ income, with the only income being interest received on income tax refunds. Against this income, the company claimed business expenditure deductions and set-off against unabsorbed depreciation brought forward from earlier years.
The Tax Authorities’ Position
The Assessing Officer disallowed both the business expenditure deductions and the carry forward of unabsorbed depreciation, stating that “the appellant was not carrying on any business during the relevant assessment years.” This position was upheld by the Commissioner of Income Tax (Appeals).
The tax authorities argued that since the company had no permanent establishment in India and no active contracts during this period, it couldn’t be considered as carrying on business in India, and therefore wasn’t entitled to the tax benefits it was claiming.
The ITAT’s Favorable Ruling
The Income Tax Appellate Tribunal (ITAT) took a different view, reversing the findings of the lower authorities. The Tribunal made a crucial distinction that would become central to the Supreme Court’s final decision. The ITAT held that “a temporary lull in business for whatever reason cannot be termed as cessation of business.”
The Tribunal noted that “there is enough evidence on record to suggest that the assessee had not completely gone out of business. Copies of correspondence dated 1996 with ONGC show that the assessee was in constant touch with ONGC for supply of manpower in respect of expert key personnel for deep water drilling and a tender in this regard was in fact submitted in September 1996.”
Importantly, the Tribunal observed that “there is a marked distinction between ‘lull in business’ and ‘going out of business’. A temporary discontinuance of business may, in certain circumstances, give rise to an inference that a business is going through a lean period of transition and it could be revived if proper circumstances arise.”
The High Court’s Reversal
The Uttarakhand High Court, however, reversed the ITAT’s orders, taking a restrictive view. While agreeing with the proposition that mere lull in business doesn’t mean cessation, the High Court held 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 Supreme Court’s Analysis
The Supreme Court, in its judgment delivered by Justices Manoj Misra and Joymalya Bagchi, conducted a thorough analysis of the legal provisions and factual circumstances. The 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 of the Act, and carry forward unabsorbed depreciation of previous years under Section 32(2) of the Act?”
The Court emphasized that to avail the benefits of these provisions, the appellant had to demonstrate that it was carrying on business in India during the relevant period. The Court noted that while the Tribunal believed that mere failure to procure a business contract or maintain a permanent establishment in India wasn’t decisive, the High Court had taken the opposite view.
The Supreme Court made several crucial observations in its analysis. It stated that “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 Court reinforced the Tribunal’s distinction, noting 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.”
Broad Interpretation of ‘Business’
In a significant part of the judgment, the Supreme Court elaborated on the wide interpretation of the term ‘business’. The Court cited its earlier judgment in CIT v. Malayalam Plantations Ltd., stating that “The expression ‘for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profits’. Its range is wide: it may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for preservation of business and for protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for carrying on a business; it may comprehend many other acts incidental to the carrying on of a business.”
The Court found that the continuous correspondences between the appellant and ONGC regarding supply of manpower for oil drilling purposes and its unsuccessful bid in 1996 demonstrated various acts aimed at carrying on business in India, even though these efforts didn’t immediately result in procuring a contract.
Rejection of Permanent Establishment Argument
The Supreme Court strongly rejected the High Court’s reliance on the absence of a permanent establishment in India. The Court stated that “The other issue on which the High Court misdirected itself was 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. This view is wholly fallacious and contrary to the very scheme 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 Court explained that “A combined reading of the charging provisions under Section 4 and Section 5(2) of the Act read with Section 9(1)(i) makes it amply clear that a non-resident person shall be liable to pay tax on income which is deemed to accrue or arise in India. Under Section 9(1)(i), income accruing or arising, directly or indirectly, through or from any business connection in India is deemed to accrue or arise in India and is accordingly chargeable to tax as business income under Section 28 of the Act. None of these provisions make it mandatory for a non-resident assessee to have a permanent establishment in India to carry on business or have any business connection in India.”
Modern Business Realities
In a particularly forward-looking observation, the Supreme Court noted that the High Court’s interpretation was out of touch with modern business realities. The 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.”
Conclusion and Impact
The Supreme Court allowed the appeals, set aside the High Court’s judgment, and revived the orders passed by the ITAT. The Assessing Officer was directed to pass fresh assessment orders for the relevant assessment years in terms of the ITAT orders.
This judgment establishes important principles for businesses operating in India, particularly international companies. It recognizes that business activities aren’t limited to periods of active revenue generation but include preparatory and transitional phases. The decision acknowledges the reality that businesses often go through lean periods while still maintaining their business character and intentions.
The judgment also sends a strong message about India’s commitment to creating a business-friendly environment for international companies, aligning with global business practices and supporting the country’s economic growth objectives. By rejecting narrow interpretations of business presence and activity, the Supreme Court has provided clarity and certainty for companies navigating the Indian market during transitional business phases.
Petitioner Name: Pride Foramer S.A..Respondent Name: Commissioner of Income Tax & Anr..Judgment By: Justice Manoj Misra, Justice Joymalya Bagchi.Place Of Incident: Mumbai offshore and various locations in India.Judgment Date: 17-10-2025.Result: allowed.
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