The Delhi High Court held that income from 2D and 3D seismic surveys for mineral oil exploration is not “fees for technical services” and falls outside Section 44DA. It clarified FTS classification is mandatory before applying the provision in taxation disputes.
NEW DELHI: The Delhi High Court has ruled that income generated from 2D and 3D seismic survey services related to mineral oil exploration cannot be classified as “fees for technical services” (FTS) and therefore does not fall under Section 44DA of the Income Tax Act.
The Court further clarified that Section 44DA applies only when the receipts are first identified as FTS or royalty, and this classification is a jurisdictional prerequisite before invoking the provision.
This ruling emerged during a writ petition contesting a withholding certificate issued under Section 197, which mandated a higher tax deduction rate on payments owed to the petitioner, a non-resident entity involved in seismic data acquisition for offshore oil exploration.
A Division Bench consisting of Justice V. Kameswar Rao and Justice Vinod Kumar noted,
“… 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.”
Citing the Supreme Court’s decision in Paradigm Geophysical v. CIT (2019), the court reiterated that
“the activities of 2D/3D seismic survey carried out by the petitioner in connection with exploration of oil”.
It meant that the income received under contract with ONGC would not qualify as FTS.
Factual Background:
The petitioner was contracted to acquire 2D and 3D broadband seismic data in offshore regions for oil exploration. It sought a certificate for reduced withholding tax, arguing that its income should be taxable under Section 44BB as income for services rendered in connection with mineral oil prospecting or extraction, not as royalty or FTS.
In the previous assessment year, the Revenue had accepted this position and issued a certificate allowing for a lower deduction rate. However, in the subsequent year, the Revenue issued a new certificate estimating profits at a higher percentage and directing a 7% tax deduction, claiming the receipts constituted royalty or fees for technical services.
Dissatisfied with this change, the petitioner approached the High Court to challenge the classification and tax rate determination.
Court’s Observation:
The Court began by analyzing the legal framework that governs the taxation of non-resident income from oil exploration activities, focusing particularly on Sections 44BB, 44DA, and 115A.
It highlighted that Section 44BB is a specialized provision for income generated from services provided in connection with mineral oil prospecting, extraction, or production, while Section 44DA applies only when income qualifies as royalty or FTS. The Court noted that after the 2010 amendment, FTS or royalty from oil exploration activities may be taxed under Section 44DA, but stated that the income must first be verified as being FTS or royalty.
Thus, the Court concluded that the key issue was whether the payments received by the petitioner could be classified as FTS or royalty. The Court referenced an earlier decision concerning the petitioner, which ruled that activities related to mineral oil prospecting, extraction, or production constitute mining operations.
The Court stated,
“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 operations 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 concluded that since the prior judgment directly addressed the petitioner’s activities and had not been set aside, the Revenue could not ignore it when determining tax liability for subsequent years.
The Bench pointed out that the assessment officer’s finding regarding FTS could not be upheld in light of the decision in PGS Exploration (Norway) AS (supra), where the Court had held otherwise concerning the petitioner, albeit prior to the amendment. Thus, the Revenue’s position that the petitioner’s income constituted FTS and should be taxed under Section 44DA was deemed untenable.
Conclusion:
The High Court established that the petitioner’s income from seismic survey services linked to oil exploration could not be categorized as fees for technical services, making Section 44DA inapplicable.
The Court subsequently annulled the disputed withholding determination and remanded the matter to the assessment officer for reconsideration based on the Supreme Court’s ruling in ONGC (supra) and the earlier judgment in PGS Exploration (Norway) AS (supra), addressing the issue of royalty as well.
This review should be completed by the assessment officer within three weeks of receiving the order. The writ petition was accordingly allowed on these terms.
Case Title: PGS Geophysical AS v. Income Tax Department & Anr. (Neutral Citation: 2026:DHC:1499-DB)
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