Introduction
The landscape of Indian tax law often presents a unique challenge for foreign entities, particularly those in project-based sectors like oil and gas. For these organizations, business rarely follows a linear path of constant activity; instead, it moves in cycles of high engagement followed by periods of quiet preparation. A significant point of friction arises when the tax department equates a “gap in contracts” with a “cessation of business,” leading to the disallowance of legitimate deductions. However, the judicial stance established in the landmark case of Pride Foramer S.A. vs. Commissioner of Income Tax & Anr., (2025) INSC 1247 (“hereinafter referred to as the “Judgment”), offers a vital shield for taxpayers. It clarifies that a temporary pause in operations is not a permanent exit and that business continuity must be rooted in commercial intent rather than the mere presence of an active agreement.
Factual Background: Intent vs. Absence
The core of this dispute involved a non-resident specialist in offshore drilling that had operated in India under a long-term contract with ONGC for a decade. Once that contract expired in 1993, the company faced a multi-year interval without an active drilling project until a new contract was formalized in 1999. Despite the lack of immediate revenue during the assessment years 1996-97, 1997-98, and 1999-2000, the company remained strategically engaged in the Indian market. It maintained active correspondence regarding expert manpower, submitted a formal bid for a fresh assignment in 1996, and incurred essential administrative costs like audit and consultancy fees. These actions were taken specifically to remain “tender-ready” for future opportunities.
The Judicial Pivot: “Dormancy” is Not “Abandonment”
The Assessing Officer initially took a restrictive view, arguing that the absence of active drilling and a physical office in India meant the business had effectively ceased. This led to the refusal to carry forward unabsorbed depreciation or allow routine expenses under Section 37 of the Income Tax Act, 1961. While the High Court initially supported this narrow interpretation, the Supreme Court, in its judgment dated October 17, 2025, adopted a more realistic, “businessman-like” approach. Reinstating the view of the Income Tax Appellate Tribunal (ITAT), the Court affirmed that continuity is determined by the “overall activity” and the clear intent of the organization to remain in the market. It held that a “lean period” or a “lull” where an organization remains ready to revive operations must be legally distinguished from a total closure of the business.
Distinguishing Domestic Law from Treaty Concepts
Furthermore, the Court addressed a critical distinction between domestic tax law and international treaty concepts. The Revenue had argued that because the company lacked a “Permanent Establishment” (PE) during the inactive years, it could not be considered as carrying on a business in India. The Supreme Court rejected this reasoning, clarifying that the concept of a PE arises primarily in the context of Double Taxation Avoidance Agreements (DTAA). It does not dictate whether a “business connection” exists or whether a business is being “carried on” for the purpose of domestic deductions under the Income Tax Act. This distinction is vital for foreign contractors, as it ensures that domestic tax benefits are not tied to treaty-specific thresholds of physical presence.
Strategic Takeaways for Commercial Stability
Ultimately, this judicial perspective brings much-needed certainty to cyclical industries. For project-based businesses, the takeaway is clear that documentation is the most powerful tool for proving continuity. By maintaining a detailed trail of bids, emails, and administrative compliance through official channels, a company can demonstrate that its “business setup” remains intact even when revenue is absent. By prioritizing substance over form, the Indian judiciary has aligned the tax framework with global commercial realities, ensuring that businesses are not unfairly penalized for the natural ebbs and flows of their industry.
AMLEGALS Remarks
The judgment brings much-needed certainty on the issue of business continuity, specifically for operations reliant on ad hoc or project-based work. By accepting that business presence can be evidenced via activities related to preparation and administration, the Supreme Court’s stance represents a common-sense approach commensurate with current global business realities. From an educative perspective, it is a reminder that domestic taxation remains notionally separate from treaty-based arrangements like Permanent Establishment. For taxpayers and planning professionals, this highlights the relevance of recording efforts made on an ongoing basis to engage in business opportunities. From an administrative perspective, it represents an approach capable of assisting more nuanced determinations on business cessation, contributing toward a more stable and business-friendly tax framework in India for foreign entities.
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