PGS Geophysical AS's tax determination remanded due to inconsistency and lack of reasoning by the Income Tax Department.
In a significant ruling, the Delhi High Court has directed the Income Tax Department to reassess the withholding tax certificate issued to PGS Geophysical AS, a Norwegian company engaged in providing geophysical services, including seismic surveys for oil and gas exploration. The court found the department's deviation from previous assessments and lack of reasoning in classifying the company's receipts as "Fees for Technical Services" (FTS) or "Royalty" under Section 44DA of the Income Tax Act, 1961, to be unsustainable.
The controversy arose when PGS Geophysical AS, contracted by the Oil and Natural Gas Commission (ONGC) for seismic data acquisition, applied for a lower tax deduction certificate under Section 197 of the Act. The company argued that their services should be taxed under Section 44BB, which applies to income from the provision of services in connection with the exploration or extraction of mineral oils, rather than as FTS or Royalty.
Previously, for the financial year 2024-25, the Revenue Department had issued a certificate for a withholding tax of 3.5% under the same contract. However, for the financial year 2025-26, the department revised the withholding tax rate to 7%, classifying the income as FTS/Royalty without sufficient explanation or consideration of binding judicial precedents.
The court, citing its earlier ruling in PGS Exploration (Norway) AS, emphasized that the services provided by PGS Geophysical AS do not qualify as FTS, as they fall under the exclusion for "mining or like projects" in Explanation 2 to Section 9(1)(vii) of the Act. The court noted that the Revenue's order lacked a clear rationale for classifying the income as Royalty and failed to explain the departure from the previous year's assessment.
Justice V. Kameswar Rao and Justice Vinod Kumar, presiding over the case, remanded the matter back to the Assessing Officer, instructing a fresh consideration of the applicable legal precedents, including the Supreme Court's ruling in the ONGC case. The court directed that the reassessment be completed within three weeks, emphasizing the need for consistency and adherence to established legal principles in tax determinations.
Bottom Line:
Income Tax Act - Section 197 certificate for lower tax deduction - Offshore seismic surveys conducted for oil and gas exploration - Consideration received for such services does not amount to "Fees for Technical Services" (FTS) under Explanation 2 to Section 9(1)(vii) of the Act as clarified by earlier judgments - Revenue's deviation from earlier findings regarding taxability under Section 44BB without proper reasoning is not sustainable - Matter remanded for fresh consideration.
Statutory provision(s): Income Tax Act, 1961 - Sections 44BB, 44DA, 197, Explanation 2 to Section 9(1)(vii)
PGS Geophysical AS v. Income Tax Department, (Delhi)(DB) : Law Finder Doc id # 2856700
