In a significant ruling that could impact how foreign companies are taxed in India, the Supreme Court has held that a temporary gap in business activity does not amount to a complete closure of operations. The judgment came in the case of Pride Foramer S.A. vs Commissioner of Income Tax, where the bench of Justices Manoj Misra and Joymalya Bagchi overturned the Uttarakhand High Court’s decision denying tax deductions to the French oil drilling company.
Background
Pride Foramer S.A., a France-based company engaged in offshore oil drilling, had worked with ONGC under a 10-year contract from 1983 to 1993. After that contract ended, it continued communicating with ONGC and even submitted a fresh bid in 1996, though it did not secure a new contract until 1998.
During this interim period, the company maintained offices abroad, incurred administrative and professional expenses, and earned some interest income on tax refunds in India. It claimed these as business expenses under the Income Tax Act, arguing that its intention to continue operations never ceased. However, the tax authorities rejected the claim, saying the company had “no business activity” in India at the time.
While the Income Tax Appellate Tribunal (ITAT) sided with the company, recognizing the gap as merely a “lull in business,” the High Court reversed the ruling, prompting the company to approach the Supreme Court.
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Court’s Observations
The apex court closely examined whether Pride Foramer could still be considered to be “carrying on business” during the years in question.
Justice Bagchi, writing for the bench, observed that mere absence of an active contract or a physical office in India does not mean a business has ceased to exist. “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,” the bench noted.
The Court further said that the word business should be interpreted broadly - not just as earning profits but also including efforts to preserve and maintain business operations. Referring to earlier precedents, it pointed out that “acts incidental to the carrying on of a business,” such as bidding, correspondence, or administrative maintenance, also fall within this definition.
Rejecting the High Court’s restrictive view, the bench stated, “In an era of globalization, to say that a non-resident company communicating from its foreign office cannot be said to carry on business in India is wholly anachronistic.” The Court emphasized that the Income Tax Act nowhere mandates that a foreign company must maintain a permanent establishment within India to qualify as being “in business” for tax purposes.
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Decision
Setting aside the Uttarakhand High Court’s order, the Supreme Court restored the findings of the ITAT. It directed the Assessing Officer to issue fresh assessments for the years in question, allowing deductions for legitimate business expenses and depreciation carry-forward.
With this decision, the Court reaffirmed that a company’s intent and ongoing efforts to engage in business are as crucial as active contracts when determining tax liability in India.
Case Title: Pride Foramer S.A. vs Commissioner of Income Tax & Anr
Citation: 2025 INSC 1247
Case Type: Civil Appeal Nos. 4395–4397 of 2010
Date of Judgment: October 17, 2025
