Introduction

In a judgment with significant implications for cross-border and project-based businesses, the Supreme Court of India has clarified that a non-resident company can be “carrying on business” in India even during a period of no active contract and without a permanent establishment (PE) in India, provided its conduct evinces a sustained intention to conduct business. This recognition of a “lull” rather than “cessation” of business preserves the taxpayer’s eligibility to:

• Claim business expenditure under Section 37(1) of the Income-tax Act, 1961;
• Set off the resulting business loss against income under other heads under Section 71; and
• Carry forward unabsorbed depreciation under Section 32(2) (as it then stood).

The case arose from Pride Foramer S.A., a French non-resident company engaged in offshore oil drilling, which had completed a 10-year ONGC contract (1983–1993), entered a new contract only in 1998/1999, and in the interim maintained bidding and correspondence efforts from Dubai/France while incurring administrative expenses. The Assessing Officer and CIT(A) disallowed deductions, finding cessation of business. The ITAT reversed. The High Court reinstated the disallowance, heavily influenced by the absence of an Indian office/PE and a subsisting contract. The Supreme Court now restores the ITAT’s approach.

Summary of the Judgment

• The Supreme Court holds that during AYs 1996–97, 1997–98, and 1999–2000, Pride Foramer S.A. was still “carrying on business” in India despite:
  • The absence of a subsisting drilling contract in those years; and
  • Conducting business communications and bidding from overseas offices and having no Indian permanent establishment.
• It affirms that a mere lull in business does not amount to cessation; a pragmatic appraisal of facts showed the taxpayer consistently pursued Indian business (continuous ONGC correspondence, a 1996 bid, consultancy payments, and eventual award in 1998/1999).
• It rejects the High Court’s insistence that lack of a permanent office/PE or a current contract necessarily means no business activity. The concept of PE is treaty-specific and not a prerequisite under domestic law for being “in business” or having a “business connection.”
• The Court revives the ITAT’s orders:
  • Business expenditure was allowable (as the business continued) and the resulting business loss could be set off against income under the head “Other Sources” (interest on income-tax refunds) under Section 71.
  • Unabsorbed depreciation carried forward was allowable under Section 32(2) (as applicable in the relevant years, including the then proviso requiring continuation of business).
• The Court reiterates that “business” and the phrase “for the purpose of business” have wide amplitude, encompassing acts incidental to business, not just contract execution.

Factual Background and Procedural History

• Pride Foramer S.A., a French non-resident, executed ONGC drilling operations from 1983 to 1993. It later received a fresh contract in October 1998, formalised in January 1999.
• Between 1993 and 1998, it:
  • Maintained business correspondence with ONGC;
  • Submitted a bid in 1996 for deep-water drilling manpower;
  • Incurred administrative and professional expenses, including consultancy to pursue the ONGC bid;
  • Earned interest on income-tax refunds (offered as “Income from Other Sources”).
• Returns showed NIL income; only interest on tax refunds was credited as income. Business expenditure and unabsorbed depreciation were claimed.
• AO and CIT(A): Disallowed expenditure and carry-forward depreciation, holding no business was carried on.
• ITAT: Allowed claims, treating the period as a “lull” and permitting set-off under Section 71; unabsorbed depreciation allowed under Section 32(2).
• High Court: Reversed ITAT, reasoning no office/PE and no executing contract meant no business in India.
• Supreme Court: Allows the appeals; reinstates ITAT’s orders; directs fresh assessments in line with ITAT’s findings.

Issues

Whether, on the facts, the assessee was “carrying on business” in India during the relevant years so as to:

• Claim deduction of business expenditure under Section 37(1) and set off the resulting loss under Section 71; and
• Carry forward unabsorbed depreciation under Section 32(2) (subject to the then-applicable proviso requiring continuation of business).

Statutory Framework (Concise)

• Section 37(1): Residual deduction for expenditure (not covered by Sections 30–36), if laid out wholly and exclusively for the purposes of business/profession.
• Section 71: Permits set-off of loss from one head against income from another head (subject to statutory exceptions).
• Section 32(2): Carry forward and set off of unabsorbed depreciation. For the relevant years, the first proviso (since omitted w.e.f. AY 2002–03) required the business to continue.
• Sections 4, 5(2), 9(1)(i): Charging and scope provisions for non-residents; income deemed to accrue/arise in India includes income through or from any “business connection” in India. No domestic-law requirement of a PE.

Precedents Cited and Their Influence

• Hindustan Chemical Works Ltd. v. CIT, 124 ITR 561 (Bom):
  • Draws a pragmatic distinction between “lull in business” and “going out of business.”
  • Influenced ITAT and the Supreme Court’s acceptance that temporary discontinuance, when paired with acts evincing intent to continue, is not cessation.
• CIT v. Vikram Cotton Mills, (1988) 169 ITR 597 (SC):
  • Emphasizes evaluating cessation of business from the standpoint of a prudent businessman, based on conduct and surrounding circumstances.
  • Supports the Court’s view that failure to secure contracts alone does not equal closure.
• Narain Swadeshi Weaving Mills v. Commissioner of Excess Profits Tax, (1954) 2 SCC 546:
  • Defines “business” in broad terms as real, substantial, systematic activity with a set purpose.
  • Underpins the conclusion that bid submissions and proactive correspondence are “business” acts.
• CIT v. Malayalam Plantations Ltd., (1964) 53 ITR 140 (SC):
  • Clarifies that “for the purpose of business” is wider than “for earning profits,” covering many acts incidental to carrying on a business.
  • Justifies allowance of administrative, professional, and protective activities as business expenditure even in the absence of current revenue-generating contracts.

Legal Reasoning

1) The “Lull, Not Cessation” Test Applied

The Court evaluates the taxpayer’s conduct across the “lean period” (post-1993 until the 1998/1999 award) and finds a consistent pattern evidencing the intention to continue business in India:

• Continuous business correspondence with ONGC regarding manpower for deep-water drilling;
• A concrete bid in 1996 and consultancy payments to pursue that bid;
• Subsequent successful contract award in late 1998 (formalised in 1999).

On these facts, and applying the pragmatic lens endorsed in Vikram Cotton Mills and Hindustan Chemical Works, the Court holds that a mere failure to procure a contract in specific years is not determinative of cessation; it is a temporary lull.

2) “Business” and “For the Purpose of Business” Are Expansive

Relying on Narain Swadeshi Weaving Mills and Malayalam Plantations, the Court reiterates:

• “Business” connotes real, substantial, organised activity with a set purpose; and
• “For the purpose of business” is wider than “for earning profits” and includes acts incidental or ancillary to carrying on a business (e.g., maintaining market presence, pursuing bids, administration, audits, safeguarding tax positions).

Administrative and professional expenses incurred to maintain business readiness and pursue contracts are therefore eligible under Section 37(1) when the business is found to continue.

3) PE Is a Treaty Concept—Not a Domestic-Law Prerequisite

The High Court’s negative inference from the absence of a PE or Indian office was rejected. Under domestic law:

• Sections 4, 5(2), and 9(1)(i) tax non-residents on income deemed to accrue/arise in India, including through a “business connection.”
• No provision in the Act makes a PE a condition precedent for being “in business” or having a business connection in India.

While a PE can be decisive under a DTAA for taxing “business profits,” that treaty threshold is conceptually distinct from whether, under the Act, the taxpayer is carrying on business and can claim deductions. The Court expressly confines the PE discussion to DTAA contexts and treats it as irrelevant for the present domestic-law question.

4) Consequence: Deduction, Set-off, and Depreciation

• Section 37(1): With the business found to continue, expenses wholly and exclusively for business are allowable, even if the year’s receipts under “business” head are nil.
• Section 71: The resultant business loss may be set off against “Income from Other Sources” (here, interest on income-tax refunds), as permitted during the relevant years.
• Section 32(2): Unabsorbed depreciation can be carried forward because the business for which depreciation was originally computed continued in the relevant years (satisfying the then-proviso, later omitted from AY 2002–03 onwards).

Impact and Significance

A. For Non-residents and Cross-border Enterprises

• Clarifies that absence of an Indian office/PE or an active contract does not, by itself, negate “carrying on business” under the Act.
• Supports tax positions during inter-contract periods common to EPC, O&G, shipping, and infrastructure sectors.
• Encourages maintaining robust evidence of continued pursuit of Indian business (bids, correspondence, consultant mandates, market development) to sustain deductions and depreciation continuity.

B. For Domestic Law–Treaty Interface

• Reaffirms the conceptual separation between domestic “business connection” and treaty “PE.”
• Avoids importing treaty thresholds into domestic deductibility and continuity inquiries.

C. For Administrative Practice and Litigation

• Constrains revenue authorities from disallowing expenditures merely because an assessee has no current contract or PE in a given year.
• Promotes evidence-based, commercial reality–oriented assessments, consistent with earlier Supreme Court jurisprudence.

D. Economic Policy Signal

The Court’s express invocation of globalisation and cross-border “ease of doing business” signals a purposive, business-friendly interpretive stance, aligning tax administration with contemporary commercial realities of remote and project-based operations.

Complex Concepts Simplified

• Lull vs. Cessation of Business:
  • Lull: A temporary pause in active operations during which the enterprise continues to pursue business (e.g., bidding, negotiations, compliance, retaining capability).
  • Cessation: A factual shutdown or exit—no intention to continue, typically evidenced by disposing of assets, winding up, or abandoning the market.
• “Carrying On Business”:
  • More than executing contracts; includes preparatory and incidental activities towards conducting business.
  • Focus is on intention and acts consistent with continuing operations.
• Section 37(1) Deduction:
  • Residual deduction for business expenses not specifically covered elsewhere and not capital/personal in nature.
  • Available even if no business revenue accrues in the year, provided the business continues.
• Section 71 Set-off:
  • Allows business losses to be set off against income from other heads (e.g., “Other Sources”), subject to statutory exceptions.
• Section 32(2) Unabsorbed Depreciation:
  • Carry forward is permitted; for the relevant years, the proviso required the original business to continue—a condition satisfied here.
  • Post-2002, the proviso was omitted, easing carry-forward conditions for later years.
• “Permanent Establishment” (PE) vs. “Business Connection”:
  • PE: A treaty concept (in DTAA) setting the threshold for taxing business profits of non-residents.
  • Business Connection: A domestic-law source rule (Section 9(1)(i)) deeming certain India-linked business income taxable—no PE needed under the Act.

Practice Pointers and Compliance Checklist

• Maintain contemporaneous documentation evidencing continuity:
  • Bids/tenders, correspondence with Indian counterparties;
  • Engagement letters with consultants/agents;
  • Board/management minutes discussing India pipeline;
  • Budgets allocating India-related pursuit costs;
  • Retention of India-focused teams and equipment readiness (as applicable).
• Segregate and substantiate business expenditure (Section 37) as wholly and exclusively for business.
• Track unabsorbed depreciation and tie it to the continuing business for pre-2002 years; note liberalized regime post-2002.
• Classify interest on income-tax refunds under “Income from Other Sources”; plan set-off under Section 71 where available.
• If relying on a DTAA for rate relief, analyze PE separately; this judgment concerns domestic deductibility and continuity, not treaty taxation of business profits.

What the Court Did Not Decide

• The judgment does not adjudicate treaty-based PE questions for taxing business profits; it confines PE discussion to clarifying irrelevance for domestic-law determination of carrying on business and deductions.
• It does not recharacterize interest on income-tax refunds; ITAT’s classification as “Other Sources” stands and is not disturbed.
• It does not lay down a bright-line list of documents establishing continuity; the test remains fact-intensive and evidence-driven.

Key Takeaways

• Non-resident assessees can be “carrying on business” in India during inter-contract periods, even without an Indian office/PE, if facts show sustained pursuit of Indian business.
• Mere lack of current contracts is not cessation; look to intention and conduct (bids, correspondence, consultancy, readiness).
• Business expenditure under Section 37(1) remains claimable during a lull; resultant losses may be set off under Section 71 against “Other Sources.”
• Unabsorbed depreciation under Section 32(2) remains carry-forwardable where business continuity is established (and, for pre-2002 years, subject to the then-proviso).
• PE is a treaty threshold and not a domestic-law prerequisite for being in business or having business connection under Sections 4/5/9.

Conclusion

Pride Foramer S.A. v. CIT is a crucial reaffirmation of commercial realism in tax adjudication. By rejecting a formalistic insistence on a permanent establishment or a subsisting contract to evidence business activity, the Supreme Court aligns the law with modern business dynamics, particularly of cross-border and project-based enterprises. The judgment harmonizes established precedents on “lull vs. cessation,” confirms the expansive scope of “business” and “for the purpose of business,” and draws a clear boundary between domestic “business connection” rules and treaty “PE” thresholds.

Practically, the decision provides a defensible framework for taxpayers to preserve deductions and depreciation continuity during lean periods, provided they can demonstrate genuine, contemporaneous efforts to pursue Indian business. For the administration, it is a reminder to ground such determinations in evidence and commercial context rather than rigid formalities. In both letter and spirit, the ruling advances predictability and fairness in the tax treatment of cross-border business operations.

Case Details (Quick Reference)

• Case: Pride Foramer S.A. v. Commissioner of Income Tax & Anr.
• Citation: 2025 INSC 1247
• Court: Supreme Court of India (Civil Appellate Jurisdiction)
• Date: 17 October 2025
• Bench: Manoj Misra, J.; Joymalya Bagchi, J. (author)
• Result: Appeals allowed; High Court judgment set aside; ITAT orders revived; AO to pass fresh assessments accordingly.