SC eases tax claim norms for foreign firms

Foreign-owned companies can now be treated as carrying on business in India even without active contracts, a physical office, and employees, the Supreme Court recently ruled, providing clarity for foreign firms with project-based or intermittent operations.

- Krishna Yadav [e-mail]

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

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.

This allows nonresident entities to claim tax deduction, 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 firm 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.