Facts of the Case

The assessee, PGS Exploration (Norway) AS, a company incorporated in Norway, was engaged globally in providing geophysical services, including acquisition and processing of 2D and 3D seismic data for hydrocarbon exploration. It entered into contracts with BG Exploration and Production India Limited and Reliance Industries Limited for acquiring and processing marine seismic data relating to offshore oil blocks in India. The assessee declared income under the presumptive taxation provisions of Section 44BB at 10% of gross receipts and obtained lower withholding tax certificates accordingly. However, during assessment, the Assessing Officer treated the receipts as “Fees for Technical Services” and assessed the income under Section 115A instead of Section 44BB. The Dispute Resolution Panel upheld the assessment, and the Tribunal also concurred, leading to the present appeal before the Delhi High Court.

 

Issues Involved

  1. Whether the activity of conducting 2D/3D seismic surveys in connection with oil exploration constitutes “Fees for Technical Services” under Explanation 2 to Section 9(1)(vii) of the Income Tax Act?
  2. Whether the receipts from such activities are taxable under Section 44BB or Section 115A of the Income Tax Act?
  3. Whether the existence of a Permanent Establishment (PE) in India is relevant for determining the applicable tax provision?

 

Petitioner’s Arguments (Assessee’s Contentions)

The assessee contended that its services were directly connected with prospecting and exploration of mineral oil and therefore squarely fell within Section 44BB, which is a special provision governing taxation of income from services connected with mineral oil exploration.

It was argued that such services were excluded from the definition of “Fees for Technical Services” by virtue of the exclusion for “mining or like projects” under Explanation 2 to Section 9(1)(vii).

The assessee relied upon the decision in Oil and Natural Gas Corporation Ltd. v. CIT and the Delhi High Court decision in Director of Income Tax-II v. OHM Ltd. to submit that services intrinsically linked to oil exploration must be taxed under Section 44BB.

 

Respondent’s Arguments (Revenue’s Contentions)

The Revenue argued that seismic survey services were technical in nature and therefore constituted Fees for Technical Services under Section 9(1)(vii).

It was contended that where a foreign company carries on business through a Permanent Establishment in India, Section 44DA or Section 115A would apply, and not Section 44BB.

The Revenue further argued that the amendment made by Finance Act, 2010 excluding Section 44DA income from Section 44BB was clarificatory and should guide interpretation even for earlier years.

 

Court Findings / Court Order

The Delhi High Court held that seismic survey activities undertaken by the assessee were inextricably connected with prospecting and exploration of mineral oil and therefore fell within the exclusionary clause of “mining or like projects” under Explanation 2 to Section 9(1)(vii).

The Court held that the receipts could not be characterized as Fees for Technical Services. Consequently, the income was taxable under Section 44BB and not under Section 115A.

The Court relied heavily on the Supreme Court ruling in ONGC and reaffirmed that Section 44BB, being a special provision for mineral oil exploration services, overrides the general provisions applicable to technical service fees.

Accordingly, the impugned Tribunal order and assessment order were set aside and the matter was remanded to the Assessing Officer for computation of income under Section 44BB.

 

Important ClarificationThe Court clarified that:

  • Services directly and dominantly connected with prospecting, extraction, or production of mineral oil are outside the scope of “Fees for Technical Services.”
  • Section 44BB is a special industry-specific provision and prevails over Section 44DA for the relevant assessment years before the Finance Act, 2010 amendment became effective.
  • For Assessment Years prior to 01.04.2011, if the receipts relate to oil exploration services, Section 44BB governs taxation.

 

Sections Involved

  • Section 44BB – Special provision for computing profits and gains in connection with exploration of mineral oils
  • Section 115A – Tax on royalty and fees for technical services of foreign companies
  • Section 44DA – Income by way of royalties or fees for technical services in case of non-residents
  • Section 9(1)(vii) – Income deemed to accrue or arise in India (Fees for Technical Services)
  • Section 260A – Appeal to High Court
  • Section 143(3) – Scrutiny Assessment
  • Section 144C – DRP Proceedings
  • Section 195 – TDS on payments to non-residents
  • Section 197 – Certificate for lower deduction of tax

 

 

Link to Download the Orderhttps://delhihighcourt.nic.in/app/case_number_pdf/2016:DHC:2949-DB/VIB08042016ITA6122012.pdf

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