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Expenses incurred on managing Indian operations of foreign entity eligible for set-off in future years, even if there was no permanent establishment
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Foreign entities can operate in another country for any specific projects without establishing a legal presence. In such a case, there is a possibility of constituting a permanent establishment (PE) in such other country for tax purposes. Net profit attributable to such PE of foreign entity is taxable in another country. The expenses incurred for the business activity of such PE are deductible from the revenue attributable to such PE for arriving at net taxable profit (subject to certain adjustments as per tax law).
Since PE is project and / or circumstances specific, the question arises in respect of deductibility of any expenses incurred post completion of project, since tax authorities may deny the deduction given the business has ceased to exist.
Hon’ble Supreme Court of India has recently pronounced a ruling[1] on this issue. In the said case, the taxpayer (a foreign company) had entered into a contract with an Indian customer for undertaking drilling operation at Indian waters. The contract spanned over a 10 year period and was completed in the year 1993. Income from oil drilling services was offered to tax in India as income of PE of the taxpayer. Subsequently, the taxpayer continued business correspondence with prospective customers and also submitted bids; but did not receive any contract until the year 1999.
The taxpayer continued to claim various expenses (such as audit fees, administrative charges, etc.) incurred during the interim period post completion of earlier contract (1993) till the conclusion of new contract (1999). However, the tax officer denied such claim on the ground that no business was carried out in such interim years and hence, the taxpayer was out of business.
While first level appellate authority upheld the action of tax officer; second level appellate authority ruled in favour of taxpayer; but the subsequent appellate authority reversed the said order and upheld the action of tax officer. Resultantly, the matter was challenged by the taxpayer before the Hon’ble Supreme Court of India (SC).
Conclusion
Hon’ble SC observed that there appeared an intention to carry on business and mere failure to obtain a business contract would not lead to cessation of business activities in India. Continuous correspondences with potential customer for supply of manpower for oil drilling purposes, unsuccessful bid in the year 1996 were considered crucial evidence in
[1]Pride Foramer S.A. [Civil Appeal Nos. 4395-4397/2010]