Seismic Survey Not FTS Or Royalty: Delhi High Court Quashes 7% Withholding Tax Certificate On Norwegian Firm

The Delhi High Court has quashed a 7% withholding tax certificate issued to Norwegian company PGS Geophysical under Section 197 of the Income Tax Act, holding that seismic survey and data acquisition services rendered for offshore oil exploration cannot be characterised as “fees for technical services” (FTS) or royalty.

A Division Bench of Justices V. Kameswar Rao and Vinod Kumar allowed the writ petition filed by the Norwegian company, which had been engaged by ONGC for conducting seismic data acquisition and related services in connection with oil and gas exploration activities.

The petitioner challenged the tax authority's decision to subject its receipts to a higher withholding rate by invoking Section 44DA read with the FTS/royalty provisions, instead of applying the presumptive taxation regime under Section 44BB, which had been consistently followed in earlier years.

PGS Geophysical argued that there was no change in facts or contractual terms from previous assessment years, during which the Revenue had accepted the applicability of Section 44BB and issued lower/NIL withholding certificates.

The Revenue sought to justify the enhanced withholding by contending that the services involved technical expertise and specialised equipment, and therefore constituted FTS/royalty taxable under Section 44DA.

Rejecting this contention, the High Court referred to its previous decision in PGS Exploration (Norway) AS v. Additional Director of Income Tax (2016) wherein it considered the activities of 2D/3D seismic survey carried out by the petitioner in connection with exploration of oil and held that the income received pursuant to the contract with ONGC would not amount to FTS.

It noted that nothing was brought on record to show that the said judgment had been taken in appeal or set aside.

Reliance was also placed on ONGC v. CIT (2015), wherein the Court, after examining a bundle of services, including seismic survey services held that that the profits should be computed in accordance with the provisions of Section 44BB of the Act which is a specific provision for computing income of non-resident from provision of services or facilities in connection with or supplying plant and machinery on hire used, to be used in prospecting or extraction or production of mineral oil in India.

In this background the Court observed,

“In the impugned order, the AO has merely stated that the services are in the nature of FTS/Royalty; hence the activities are covered under Section 44DA of the Act. There is no reason provided as to why there is a deviation from the earlier FY, wherein the receipts of the petitioner were held to be covered under Section 44BB of the Act. Further, the order does not specify as to whether the receipts (or parts thereof), are in the nature of FTS or in the nature of Royalty, to be covered under Section 44DA of the Act.”

As such, the impugned certificate was set aside and the matter was remanded back to the Assessing Officer for him to consider the law laid down in ONGC (supra) and PGS Exploration (Norway) AS (supra).

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

For Respondents : Advocates Gaurav Gupta, SSC, Shivendra Singh, YojitPareek, JSCs, Surya Jindal, Advocate.