For the assessment years 1996-97, 1997-98, and 1999-2000, Pride Foramer sought deductions and carry-forward of unabsorbed depreciation. However, the Income Tax Department rejected the claims, contending that the company had ceased its business operations in India.
The case centred on Sections 37(1) and 32(2) of the Income Tax Act, which permit companies to claim deductions for expenses like salaries, rent, and administrative costs, and to carry forward unabsorbed depreciation to subsequent financial years.
The Income Tax Appellate Tribunal ruled in Pride’s favour, but the Uttarakhand High Court overturned the decision, prompting the company to appeal to the Supreme Court.
Supreme Court’s Ruling: A Much-Needed Clarity
The Supreme Court has ruled that foreign-owned companies can be considered as carrying on business in India even without active contracts, a physical office, or employees, offering clarity for firms with project-based or intermittent operations.
The judgment stated that a temporary pause in business activity does not mean operations have ceased. What matters is the ongoing business connection and intent to continue operating in India. This enables non-resident companies to claim tax deductions, carry forward unabsorbed depreciation, and set off losses even during inactive periods.
The ruling also benefits companies under GST laws, allowing them to retain unused tax credits during brief periods of inactivity if they intend to resume operations. It reinforces that tax benefits depend on business continuity, not constant activity. Input tax credits help businesses lower tax liability by offsetting taxes already paid on purchases, preventing double taxation.
Is Everything Resolved?
Experts cautioned that while the SC ruling grants tax benefits, it may also increase tax exposure for project-based or intermittent foreign firms (like those in oil drilling, construction, or consulting), as they could now be liable for Indian taxes even between contracts if a business connection continues.
Although domestic law offers relief under the Income Tax Act, potential conflicts may arise with international treaties like Double Taxation Avoidance Agreements, which require a permanent establishment in India.
Companies are therefore advised to maintain detailed records of decision-making, contract execution, and business control to support their compliance.
DhruvStar Industry Insights: What it Means for the Industry
- Clarity: The ruling offers long-awaited clarity for foreign firms with project-based or intermittent operations, making India a more predictable and business-friendly tax jurisdiction.
- Ease of Doing Business: It also strengthens investor confidence, as companies can now maintain tax continuity and claim legitimate deductions even during periods of inactivity, aligning with India’s goals for ease of doing business.
DhruvStar Summary
- Supreme Court Ruling: Foreign companies can still be treated as carrying on business in India, even without active contracts, offices, or employees, as long as they demonstrate an intent to continue operations.
- Tax Benefits: This allows such firms to claim legitimate tax deductions, carry forward unutilised depreciation, and set off losses even during periods of inactivity under Section 37(1) of the Income Tax Act, 1961.
- GST Implications: Under GST, companies can retain unused input tax credits during short breaks in business, provided they plan to restart operations.
Sources
[1] Mint
Comments
Post a Comment