The Delhi High Court has clarified that an order passed by an Assessing Officer under Section 197 of the Income Tax Act, while being provisional, cannot be arbitrary or devoid of reason. The AO must provide a reasoned basis for their conclusions, especially when deviating from a position taken in a prior period on the same facts and under the same contract. Further, the AO is bound by judicial precedents, particularly a judgment rendered by a higher court in taxpayer’s own case on the same issue.
The High Court noted that the AO summarily concluded that the services are in the nature of FTS/Royalty without providing any reasoning, and without specifying whether the receipts in connection with the prospecting or extraction of mineral oil were FTS or Royalty, which are distinct categories. Most significantly, the Court found that the impugned order of the AO did not consider the previous judgment of the High Court in the petitioner’s own case, which had already determined that such services do not constitute FTS. This lack of reasoning for deviating from the previous year’s certificate and for concluding the income was Royalty was also a critical flaw.
The Court asserted that an order that ignores binding precedents and fails to provide any reasoning for characterizing income as FTS or Royalty is unsustainable in law. Accordingly, it quashed the impugned order and certificate under Section 197 of the Income Tax Act and remanded the matter back to the AO with a direction to pass a fresh order within three weeks after considering the law laid down by the Supreme Court in ONGC v. CIT [2015] 376 ITR 306.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that the amendment to the Finance Act, 2010 explicitly provides that if income earned by the taxpayer takes the character of Royalty or FTS, it must be computed under Section 44DA, and the provisions of Section 44BB shall not apply. Therefore, the applicability of Section 44DA hinges on whether the petitioner’s receipts are indeed FTS or Royalty.
The Bench found this issue was settled in the petitioner’s own case for AY 2008-09, PGS Exploration (Norway) AS v. Additional Director of Income Tax, where it was held that the activity of 2D/3D seismic survey carried out in connection with oil exploration falls within the exclusion of ‘mining or like projects’ provided in Explanation 2 to Section 9(1)(vii) of the Act and, therefore, the consideration received is not FTS. In light of this precedent, the Bench stated that the Revenue’s stand that the income amounts to FTS ‘prima facie cannot be accepted’.
Further, the Bench considered the argument by the Revenue Department that since the contract identified a specific vessel (MV Ramform Sovereign) and equipment for the services, the consideration could also be characterized as Royalty for the use of industrial, commercial, or scientific equipment under Explanation 2 to Section 9(1)(vi). It however, observed that while this argument was made in the written submissions, the impugned order itself provided no reasoning as to how the receipts would fall within the definition of Royalty to be covered by Section 44DA.
Briefly, the petitioner, a non-resident company incorporated in Norway, engaged in providing geophysical services to the oil and gas industry, including seismic surveys and data acquisition, had received a Letter of Award (LOA) from the Oil and Natural Gas Commission (ONGC) for 2D and 3D broadband seismic data acquisition services at the eastern offshore of India, leading to a contract. For the Financial Year (FY) 2024-25, the petitioner applied for a lower Tax Deductible at Source (TDS) certificate under Section 197 of the Income Tax Act, proposing a rate of 3.125%. The petitioner contended that its income was taxable under the presumptive taxation provision of Section 44BB, which applies to services in connection with the prospecting or extraction of mineral oil. The Revenue accepted this position and issued a certificate for AY 2025-26 directing TDS at a rate of 3.5%.
For the subsequent FY 2025-26, the petitioner filed a renewal application for the same contract, requesting a similar lower withholding tax rate. However, the Revenue issued a show-cause notice proposing the applicability of Section 44DA, which deals with income from Royalty or Fees for Technical Services (FTS). Despite the petitioner’s submissions arguing against it, the Revenue passed the impugned order and certificate, summarily holding that the petitioner’s receipts were in the nature of Royalty/FTS, taxable under Section 44DA. Consequently, it imposed a higher withholding tax rate of 7% by assuming a profit rate of 20% on the gross receipts.
Cases Relied On:
ONGC v. CIT [2015] 376 ITR 306
PGS Exploration (Norway) AS v. Additional Director of Income Tax 2016:DHC:2949-DB
Appearances:
Advocates Salil Kapoor, Soumya Singh, Ananya Kapoor, Sumit Lalchandani and Sakshi Rustagi, for the Petitioner/ Taxpayer
Advocates Gaurav Gupta, Shivendra Singh, Yojit Pareek, and Surya Jindal, for the Respondent/ Revenue
