Business profits of a non-resident can be taxed in India owing to existence of a business connection of such non-resident in India as per the provisions of the Income-tax Act, 1961 (‘IT Act’) as well as a permanent establishment (‘PE’) of such non-resident, where such non-resident hails from a country having a Double Taxation Avoidance Agreement (‘DTAA’) with India. In computation of such business profits, expenses related to business as well as items such as brought-forward losses and unabsorbed depreciation are generally claimed as deductions in terms of the IT Act. In this context, the Supreme Court of India (‘SC’) recently dealt with the question related to claiming such deduction, where income was earned despite there being a temporary suspension of business.^[1] In this decision, while allowing the claims, the SC clarified that a temporary lull in business activity cannot be equated with cessation of business and that the absence of a PE or a subsisting contract in India does not preclude a non-resident from being regarded as carrying on business within the meaning of the IT Act.

The matter concerned a French drilling company that had completed a long-term contract in India and, after a few years of inactivity, secured a new one. During the intervening period, the entity stayed in touch with its Indian counterpart, submitted tenders, and incurred administrative and professional expenses. Although, it reported NIL income (except interest on tax refunds), it claimed deduction of business expenses and carry-forward of unabsorbed depreciation. The Assessing Officer and Commissioner (Appeals) disallowed the claims, asserting that no business was carried on during the relevant years.

The Income Tax Appellate Tribunal (‘Tribunal’) disagreed by observing that the gap was merely a ‘temporary lull’ and not a complete shutdown of business of the Assessee. The Tribunal also observed that there was active correspondence, bid participation, and the consultancy expenses clearly pointed to an intent to stay in business. The Uttarakhand High Court, however, took a more restrictive approach, holding that in the absence of a PE or ongoing contract, the Assessee could not be said to be carrying on business in India. This interpretation effectively ignored the commercial reality of cross-border operations.

Interestingly, the SC reversed the High Court’s view, calling it ‘wholly fallacious’ and inconsistent with the scheme of the Act. The SC held that the term ‘business’ has a wide import, covering preparatory and incidental activities that shows a continuing commercial purpose. In a noteworthy remark, the SC cautioned that in today’s globalised economy, treating a non-resident entity as ‘out of business’ merely because it operates from abroad, is anachronistic and contrary to India’s ‘ease of doing business’ commitment.

The decision provides welcome relief to non-resident taxpayers, reaffirming that genuine commercial efforts, even during periods of inactivity, are enough to preserve business continuity and safeguard related tax benefits under the IT Act such as claims of business expenses, brought-forward losses and unabsorbed depreciation.

[1] Pride Foramer SA v. CIT, 2025 INSC 1247 (SC).