In a landmark decision set to significantly impact foreign investment and the ease of doing business in India, the Supreme Court has clarified that non-resident companies can now claim tax deductions and carry forward losses even during periods of business inactivity. This ruling provides much-needed relief and clarity for multinational corporations (MNCs) operating on project-based or intermittent models, emphasizing that a temporary pause in operations does not signify a cessation of business, provided a "continuing business connection" and a "demonstrable intent to operate in India" are maintained.
This judgment brings welcome news for foreign firms across sectors such as oil drilling, construction, engineering, and consultancy, where projects are often time-bound, leading to intervals without active contracts. Previously, tax authorities sometimes denied deductions on administrative expenses or the carry-forward of unabsorbed depreciation during these 'idle' phases. The Supreme Court has now affirmed that preparatory activities – such as ongoing correspondence, bidding for new contracts, or maintaining readiness to execute future projects – are sufficient to be considered "carrying on business" under relevant sections of the Income Tax Act.
While this ruling streamlines tax compliance and offers benefits for foreign entities, experts also advise caution, noting it could potentially increase tax exposure. The recognition of a 'continuing business connection' means project-based operations might still face Indian tax liability even during intervals between contracts if a demonstrable link to Indian operations persists. Therefore, foreign companies are encouraged to meticulously maintain detailed records of decision-making, contract execution, and business control to navigate potential scrutiny and ensure compliance within India's evolving tax landscape for international businesses.
