SC: Non-Resident Firms Can Be Taxed in India Without Office

Supreme Court: Non-Resident Companies Can Be Taxed in India Without a Permanent Office

Court Clarifies That Income Accruing in India Is Taxable Even Without a Physical Establishment

Judgment Interprets Income Tax Act Sections 4, 5(2), and 9(1)(i) to Strengthen India’s Tax Net

By Our Legal Correspondent

New Delhi: October 17, 2025: In a significant ruling, the Supreme Court of India has clarified that a non-resident company can be taxed in India on income that accrues or arises within the country, even if it does not maintain a permanent office or physical establishment here. The judgment, delivered by a bench of Justice Manoj Misra and Justice Joymalya Bagchi, examined the scope of Sections 4, 5(2), and 9(1)(i) of the Income Tax Act, 1961.

This decision is expected to have a wide impact on multinational corporations, foreign investors, and global businesses that earn income from India without setting up a branch office or registered entity in the country.

Background of the Case

The case revolved around the interpretation of the Income Tax Act and whether a “permanent establishment” (PE) is mandatory for taxing non-resident companies. Traditionally, under international tax treaties, a PE—such as a branch office, agency, or service canter—has been considered a key factor in determining tax liability.

However, the Supreme Court clarified that under Indian domestic law, the existence of a PE is not a precondition for taxation. What matters is whether the income has a “business connection” with India and whether it accrues or arises within the country.

This interpretation broadens the scope of India’s taxation powers and ensures that companies benefiting from Indian markets contribute to the tax system, even if they operate remotely.

Supreme Court’s Observations

The Court made several important observations:

Income Accruing in India Is Taxable: If a non-resident company earns income from activities linked to India, that income is taxable, regardless of whether the company has an office here.
Permanent Establishment Not Mandatory: The Income Tax Act does not require a PE for taxation. The concept of PE is relevant mainly under Double Taxation Avoidance Agreements (DTAAs), not under domestic law.
Business Connection Is Key: The presence of a business connection—such as contracts, services, or transactions linked to India—is sufficient to establish tax liability.

The Court emphasized that the law must be interpreted in a way that prevents tax avoidance and ensures fairness in the system.

What Is a Permanent Establishment?

A Permanent Establishment (PE) is a fixed place of business through which a foreign company carries out operations in another country. Common examples include:

A branch office
A factory or warehouse
An agency that regularly concludes contracts
A service canter where employees work for extended periods

Under international tax treaties, profits attributable to a PE are taxable in the source country. However, the Supreme Court clarified that Indian law goes beyond this—income can be taxed even without a PE if it arises from Indian sources.

Implications for Non-Resident Companies

This ruling has major implications for foreign businesses:

Digital and E-Commerce Companies: Many global tech firms earn revenue from Indian users without having offices here. This judgment strengthens India’s ability to tax such income.
Consultancy and Service Providers: Foreign consultants and service providers who work remotely but bill Indian clients may now face taxation in India.
Investment Structures: Companies routing investments through tax-friendly jurisdictions may need to reassess their strategies.

Tax experts believe this ruling will reduce tax leakages and align India’s tax system with the realities of a digital and globalized economy.

Interaction with Double Taxation Treaties

While the ruling strengthens India’s domestic tax powers, it does not override international treaties. If a non-resident company is based in a country with which India has a Double Taxation Avoidance Agreement (DTAA), the provisions of that treaty will apply.

For example:

If the DTAA requires a PE for taxation, then the treaty will prevail.
If no treaty exists, Indian domestic law will apply directly.

This means that while the ruling expands India’s domestic tax net, the actual impact will vary depending on the country of residence of the non-resident company.

Expert Reactions

Tax professionals and legal experts have welcomed the clarity provided by the Supreme Court.

For the Government: The ruling strengthens India’s ability to tax foreign companies and ensures that revenue generated from Indian markets contributes to the economy.
For Businesses: Companies will need to carefully review their India-linked income and assess potential tax liabilities, even if they do not have a physical presence here.
For Tax Policy: The judgment aligns with India’s broader efforts to tax the digital economy and prevent profit shifting.

Some experts, however, caution that the ruling may lead to increased litigation, as companies may challenge tax demands based on treaty protections.

Broader Context: Global Taxation Trends

The ruling comes at a time when countries worldwide are grappling with how to tax multinational corporations, especially digital giants. The OECD’s global tax framework and the push for a minimum corporate tax rate reflect similar concerns.

India has already introduced measures like the Equalisation Levy to tax digital transactions. The Supreme Court’s ruling further strengthens India’s position in ensuring that foreign companies pay their fair share.

Conclusion

The Supreme Court’s judgment marks a turning point in India’s taxation of non-resident companies. By ruling that a permanent office is not required for taxation, the Court has expanded the scope of India’s tax jurisdiction and reinforced the principle that income generated from Indian markets must contribute to the Indian economy.

For businesses, the message is clear: operating without a physical presence does not exempt you from Indian taxes. For policymakers, the ruling provides a strong legal foundation to pursue fair taxation in an increasingly digital world.

As global commerce becomes more borderless, this judgment ensures that India remains equipped to protect its tax base and promote fairness in the system.