2D/3D Seismic Survey For Oil Exploration Not In The Nature Of FTS Or Royalty U/S 44DA Of Income Tax Act: Delhi High Court

The Court further held that Section 44DA applies only where receipts are first established to be like FTS or royalty, and that such classification is a jurisdictional precondition before invoking that provision.

The Court was hearing a writ petition challenging a withholding certificate issued under Section 197, directing the deduction of tax at a higher rate on payments receivable by the petitioner, a non-resident entity engaged in seismic data acquisition for offshore oil exploration.

A Division Bench of Justice V. Kameswar Rao and Justice Vinod Kumar observed: “…. after the amendment, introduced by the Finance Act, 2010, FTS/ Royalty arising out of activities in connection with the exploration etc. of mineral oils shall be taxable as per Section 44DA of the Act by virtue of the second proviso to Section 44DA(1), …however, for the said provision to apply, the income/receipts in the hands of the assessee necessarily need to be in the nature of FTS/Royalty”.

The Court, relying on the Supreme Court's ruling in Paradigm Geophysical v. CIT (2019), accordingly reiterated that “the activities of 2D/3D seismic survey carried out by the petitioner in connection with exploration of oil held that the income received pursuant to the contract with ONGC would not amount to FTS”.

Background

The petitioner was awarded a contract for the acquisition of 2D and 3D broadband seismic data in offshore areas for purposes of oil exploration. It applied for a certificate for lower withholding of tax, contending that its income was taxable under Section 44BB as consideration for services rendered in connection with prospecting or extraction of mineral oil, and not as royalty or FTS.

In the preceding assessment year, the Revenue had accepted this position and issued a certificate permitting deduction at a lower rate. However, for the subsequent year, the Revenue issued a fresh certificate estimating profits at a higher percentage and directing deduction of tax at 7% on the footing that the receipts constituted royalty or fees for technical services.

Aggrieved by the departure from the earlier position, the petitioner approached the High Court challenging the classification and rate determination.

Court’s Observation

The Court first analysed the statutory scheme governing taxation of non-resident income arising from oil exploration activities, particularly Sections 44BB, 44DA and 115A. It observed that Section 44BB is a special provision applicable to income derived from services or facilities provided in connection with prospecting for, or extraction or production of, mineral oil, whereas Section 44DA applies only where income qualifies as royalty or fees for technical services.

It noted that after the amendment introduced by the Finance Act, 2010, FTS or royalty arising from activities connected with the exploration of mineral oil may be taxed under Section 44DA by virtue of the second proviso to Section 44DA(1). However, the Court clarified that for the provision to apply, the receipts must first be shown to be like FTS or royalty.

The Court therefore held that the central issue requiring determination was whether the consideration received by the petitioner could at all be characterised as FTS or royalty.

In this context, the Court relied on an earlier decision rendered in review proceedings concerning the petitioner itself, in which it had been held that prospecting for or extraction or production of mineral oil constitutes mining operations and that the expression “mining projects or like projects” in Explanation 2 to Section 9(1)(vii) would also cover services such as training, drilling, or exploration-related activities.

The Court quoted the earlier ruling observing: “prospecting for or extraction or production of mineral oil could be termed as mining operations… and consequently… services like imparting or training and carrying out drilling operation for exploration… would also be covered… As such, consideration for the activity of 2D/3D seismic survey… cannot be construed as FTS. Nothing has been brought before us to show that the said judgment has been taken in appeal or set aside.”

The Bench held that since the earlier judgment squarely covered the petitioner’s activities and had not been overturned, the Revenue could not disregard it while determining tax liability for subsequent years.

The Bench concluded that the impugned certificate reflected failure to properly appreciate the statutory framework, binding precedent, and nature of the petitioner’s activities.

"Be that as it may, the finding of the AO with respect to FTS cannot be sustained in view of the decision in PGS Exploration (Norway) AS (supra) wherein this Court had held to the contrary in the case of the petitioner itself, albeit before the amendment was introduced. As such, the stand of the Revenue that the income of the petitioner would amount to FTS and would be taxable as per Section 44DA prima facie cannot be accepted", the Court concluded. 

Conclusion

The High Court held that the petitioner’s receipts from seismic survey services connected with oil exploration could not be treated as fees for technical services and that Section 44DA was therefore inapplicable. It granted relief to the petitioner by setting aside the impugned withholding determination.

The Court further directed that “the matter be remanded back to the AO for him to consider the law laid down by the Supreme Court in the case of ONGC (supra) as also this Court in PGS Exploration (Norway) AS (supra) as well as the issue with regard to the element of Royalty and then pass a fresh order under Section 197 of the Act”.

This exercise, the Court stated, shall be carried out by the AO within a period of three weeks from the date of receipt of a copy of the order.

The writ petition was, accordingly, allowed on the above terms.

Cause Title: PGS Geophysical AS v. Income Tax Department & Anr. (Neutral Citation: 2026:DHC:1499-DB)
Appearances

Petitioner: Salil Kapoor, Soumya Singh, Ananya Kapoor, Sumit Lalchandani, Sakshi Rustagi, Advocates

Respondents: Gaurav Gupta, SSC, Shivendra Singh & Yojit Pareek, JSCs, Surya Jindal, Advocate

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