Court’s decision
The Delhi High Court allowed the writ petition filed by a Norway-based geophysical services company and quashed the Income Tax Department’s order dated 01.05.2025 issued under Section 197 of the Income Tax Act, 1961, which had directed withholding tax at 7% on gross receipts.
The Court held that receipts from 2D and 3D broadband seismic data acquisition for offshore oil exploration do not constitute “fees for technical services” or “royalty” and therefore cannot be taxed under Section 44DA. The appropriate provision remains Section 44BB. The impugned certificate was set aside as arbitrary and inconsistent with settled law.
Facts
The petitioner, a non-resident company incorporated in Norway, is engaged in offshore seismic surveys and geophysical data acquisition for oil and gas exploration. It received a Letter of Award from ONGC in November 2024 and entered into a contract dated 27.12.2024 for providing 2D and 3D broadband seismic data acquisition services in the eastern offshore region of India.
For Assessment Year 2025-26, the Revenue had issued a certificate under Section 197 permitting TDS at 3.5%, accepting that the income was taxable under Section 44BB.
For Assessment Year 2026-27, despite the contract and factual matrix remaining unchanged, the Assessing Officer issued a show cause notice proposing application of Section 44DA, treating receipts as royalty/FTS. Subsequently, a certificate directing 7% TDS was issued.
Issues
The principal issues before the Court were:
- Whether receipts from offshore seismic surveys amount to “fees for technical services” or “royalty” under Sections 9(1)(vii) or 9(1)(vi) of the Act.
- Whether, after the Finance Act, 2010 amendment, such receipts fall under Section 44DA instead of Section 44BB.
- Whether the Assessing Officer could deviate from the earlier year’s position without change in facts.
Petitioner’s arguments
The petitioner contended that seismic survey services are intrinsically linked to prospecting and exploration of mineral oil and therefore fall squarely within Section 44BB. Reliance was placed on the Supreme Court judgment in ONGC v. CIT and the Delhi High Court’s earlier ruling in the petitioner’s own case for AY 2008-09, which held that 2D/3D seismic survey activities do not constitute FTS.
It was argued that the rule of consistency barred the Revenue from taking a contrary stand in the absence of changed circumstances. The impugned order, according to the petitioner, mechanically labelled the income as “Royalty/FTS” without analysis.
Respondent’s arguments
The Revenue contended that post-2010 amendments, if income qualifies as royalty or FTS and is effectively connected with a Permanent Establishment in India, Section 44DA overrides Section 44BB.
It was argued that offshore seismic surveys involve use of identified vessels and equipment, potentially attracting the definition of royalty. The certificate under Section 197 was described as provisional and tentative, not binding for final assessment.
The Revenue maintained that at the stage of Section 197, only a tentative view is required to protect revenue interests.
Analysis of the law
The Court extensively examined the interplay between Sections 44BB and 44DA, particularly in light of the Finance Act, 2010 amendments. Referring to its earlier decision in Paradigm Geophysical Pty Ltd., the Court clarified that after 2010, royalty and FTS connected with a Permanent Establishment are taxable under Section 44DA.
However, the threshold requirement is that the income must first qualify as royalty or FTS.
The Court reiterated that Explanation 2 to Section 9(1)(vii) excludes consideration for “mining or like projects” from FTS. CBDT Instruction No. 1862 clarified that services connected with prospecting, including training and drilling operations, fall within this exclusion.
Precedent analysis
The Court relied heavily on its earlier decision in PGS Exploration (Norway) AS, where identical 2D/3D seismic survey services were held not to constitute FTS. That ruling had followed the Supreme Court’s decision in ONGC v. CIT, which applied the “pith and substance” test.
The Supreme Court had held that where the dominant purpose of the contract is prospecting, extraction, or production of mineral oil, receipts are governed by Section 44BB.
Nothing was placed before the Court to show that the earlier judgment had been set aside or overturned.
Court’s reasoning
The Court noted that the impugned order merely stated that services were in the nature of “Royalty/FTS” without specifying which category applied or providing supporting reasons.
There was no analysis distinguishing the present contract from the earlier year, where 3.5% TDS under Section 44BB had been granted.
The Court rejected the Revenue’s argument that offshore seismic surveys lack mining characteristics. Relying on binding precedent, it held that seismic surveys are the first step in prospecting and therefore fall within the exclusion under Explanation 2 to Section 9(1)(vii).
As regards royalty, the Court observed that no cogent material was produced to show that the consideration was for use of equipment rather than for provision of integrated services.
Accordingly, the characterisation as FTS/Royalty was unsustainable.
Conclusion
The Delhi High Court quashed the Section 197 certificate directing 7% withholding and held that receipts from 2D/3D seismic surveys for oil exploration are taxable under Section 44BB, not Section 44DA.
The Court reaffirmed that unless income qualifies as royalty or FTS, Section 44DA cannot override Section 44BB.
The impugned order was set aside as legally untenable and inconsistent with binding precedent.
Implications
This ruling has significant implications for international taxation in the oil and gas sector:
- Seismic survey services remain covered under Section 44BB where intrinsically linked to exploration.
- Revenue authorities must provide cogent reasons before deviating from earlier accepted positions.
- The Finance Act, 2010 amendments do not automatically convert exploration-related services into FTS.
- Section 197 certificates, though provisional, must adhere to settled legal principles.
The judgment reinforces stability and certainty in cross-border taxation for mineral exploration services.
Case law references
- ONGC v. CIT (2015) 376 ITR 306 (SC)
Held that services inextricably connected with prospecting or extraction fall under Section 44BB. - PGS Exploration (Norway) AS v. ADIT (2016:DHC:2949-DB)
Held that 2D/3D seismic surveys do not constitute FTS. - Paradigm Geophysical Pty Ltd. v. CIT (Delhi High Court)
Clarified post-2010 interplay between Sections 44BB and 44DA.
FAQs
1. Are seismic survey services taxable as fees for technical services in India?
No, if they are intrinsically linked to prospecting or exploration of mineral oil, they fall under Section 44BB and are excluded from FTS under Explanation 2 to Section 9(1)(vii).
2. Does the 2010 amendment make all oil exploration services taxable under Section 44DA?
No. Only income qualifying as royalty or FTS and effectively connected with a PE falls under Section 44DA.
3. Can the Income Tax Department change TDS rates without change in facts?
While Section 197 certificates are provisional, deviation must be reasoned and consistent with binding judicial precedent.
