DEPUTY COMMISSIONER OF INCOME-TAX, NEW DELHI vs. PGS GEOPHYSICAL AS, GURGAON

Draft Assessment Order dated 25.03.2014, the Assessing Officer (“AO”, for short) did not agree with assessee’s claim of applicability of Section 44BB of I.T. Act. The AO proposed to invoke Rule 10 of Income Tax Rules, 1962 (“I.T. Rules”, for short) and proposed to determine assessee’s income @ 15% of the gross receipt by applying Rule 10 of I.T.

Rules. The Assessee filed objections before Dispute Resolution Panel (“DRP”, for short).

Vide order dated 02.12.2014, DRP held that, the amount received by the assessee during the year under consideration on account of hire charges of the vessels should be brought to tax by applying the deemed profit ratio of 10%, U/s 44BB of the I.T. Act. Acting on the directions of the DRP, the AO passed Assessment Order dated 12.01.2015 U/s 144C(13) read with Section 143(3) of I.T. Act wherein the assessee’s income determined that 10% of the gross receipts U/s 44BB of I.T. Act. Aggrieved, the Revenue has filed this appeal in Income Tax Appellate Tribunal (“ITAT”, for short), with the following grounds of appeal are as under:

Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS. i. Whether on the facts and circumstances of the case, the Hon’ble Dispute Resolution Panel (“DRP”) has erred in directing the Assessing Officer to apply the deemed profit rate of 10% u/s 44BB of the Income Tax, 1961 (“the Act”) on the Revenues earned by assessee on account of providing vessels on hire to be used for undertaking seismic data acquisition and onboard processing, as against the proposed action of the AO to bring the revenue to tax as royalty u/s 9(1 )(vi) of the Act at an estimated net income @15% of gross receipts r.w.s 44DA of the Act.

1.1 Whether on the facts and circumstances of the case, the Hon'ble DRP has erred in not appreciating that the terms services or facilities used therein are not defined and the two terms used are general in nature and therefore, once the payments take the-character of Royalty as defined u/s 9(l)(vi), they go outside the purview of section 44BB and have to be taxed at rates applicable to Royalty u/s 115A/44DA of the Act.

2. Whether on the facts and circumstances of the case the Hon'ble DRP has erred in its interpretation of the legislative intent behind the scheme of taxation envisaged in 9(l)(vi)/9(l)(vii) read with sections 115A/44DA and 44BB , ignoring the decisions in the cases of M/s Rolls Royce Pvt Ltd [2007-TII-03-HC-UKHAND-INTL] and M/s ONGC As Agent of M/s Foramer France [(2008) 299 ITR 438 Uttarakhand. 2.1 Whether on the facts and circumstances of the case, Hon’ble DRP has erred in not appreciating the fact that proviso to section 44DA brought about by the Finance Act 2011 was only clarificatory in nature and its application has to be read into the main provisions with effect from the time the main provision came into effect in view of the decision of the Hon’ble Supreme Court in the case of Sedco Forex International Drilling v/s CIT. 2.2 Whether on the facts and circumstances of the case, the Hon'ble DRP has erred in not appreciating the fact that even in terms of ratio of the judgment in the said of OHM Ltd [[352, ITR 406 (Delhi)] cited by it, the provisions of section 44BB are not applicable where the scope of the services/facilities provided by an assessee is general in nature falling under section 115A/44DA of the Act. 2.3 The Hon'ble DRP has erred in mechanically following the decision in the case of M/s OHM Ltd without first adjudicating upon the issue as to whether and how the scope of the services/facilities rendered under the contracts is not general in nature and therefore, does not qualify as Royalty u/s 9(l)(vi) of the Act and taxable under section 44DA of the Act read with section 7 of the DTAA.

9(l)(vi) read with sections 115A/44DA of the Act, not appreciating the fact that both set of provisions are special in nature which operate in their own clearly defined spheres and therefore, once a particular receipt or income takes on the character of Royalty/FTS as defined in section 9(l)(vi)/9(l)(vii), it cannot be considered for treatment u/s 44BB and has to be taxed u/s 115A/44DA of the Act 4. Whether on the facts and in the circumstances of the case, the Hon'ble DRP has erred,in holding that sections 115A and 44DA apply only to cases where the income by way of Royalty or FTS is earned by a non- resident by way of royalty or FTS from Government or an Indian Concern and where an income is received by a non-resident from another nonresidents, the provisions of section 115A/44DA do not apply. 4.1 Whether on the facts and in the circumstances of the case, the Hon'ble DRP has erred in not appreciating the fact that sections 44DA/115A enshrine the source rule of taxation and is intended to cover all the payments in the form of Royalties/FTS etc. where the source of such payments lies in India. 4.2 Whether on the facts and in the circumstances of the case, the Hon'ble DRP has erred in not appreciating the fact that the payments in the present case have been made by a non resident entity in respect of contracts being executed by it in India and therefore the source of the payments as well as the situs of the activity to which these payments pertain lies in India. 4.3 Whether the Hon'ble DRP has erred in not appreciating the fact that the phrase ’Indian Concern' in sections 115A/44DA having not been defined, it has to be given a purposive construction and, therefore, a Non- Resident entity executing contracts in India and making payments in respect of services availed for execution of such contracts in India should be treated as Indian Concern for the purpose of the section 115 A/44 DA of the Act.

(2) In the course of appellate proceedings in ITAT, Assessee filed Paper Books dated 15th May, 2018 and 16th October, 2018 containing the following particulars:

Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS.

• Copy of the contract entered into between the assessee and PGSEN for the hire of vessels. • Copy of relevant extract of the contract entered into PGSEN with RIL for rendering seismic data acquisition and processing services.

• Copy of the snapshot from the website of Directorate General of Foreign Trade Depicting the import-export code of PGSEN • Copy of mobilization and demobilization certificates duly certified by PGSEN and RIL • Copy of invoices raised by the assessee on PGSEN for the hire of vessels. • Copy of the invoices raise by the vendors on PGSEN for rendering custom clearance services, supply o food items and other consumables for consumption of vessels in India, supply of spares for the purpose of operation in India etc.

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(2.1) During appellate proceedings in ITAT, Ld. Commissioner of Income Tax (Departmental Representative), [“CIT(DR)”, for short], filed written submissions, relevant portion of which is reproduced as under:

“SUBMISSIONS

In the above case, it is humbly submitted that the following decisions may kindly be considered with regard to Applicability of Section 44BB 1. ONGC LTD vs. CIT (2015) f2015-TII-03-SC-INTLJ(SC| In that case, the facts as discussed by Hon’ble Supreme Court were that –

"6. The appellant-ONGC and a non resident/foreign company one M/s. Foramer France had entered into an agreement by which the non-resident company had agreed to make available supervisory staff and personnel having experience and expertise for operation and management of drilling rigs Sagar Jyoti and Sagar Pragati for the assessment year 1985-86 and the drilling rig Sagar Ratna for the assessment year 1986-87. Faced with the different views taken by the authorities under the Act, as mentioned above, the High Court proceeded to analyse the different clauses of the contract between the parties. A consideration of such analysis made by the High Court would go to show that it had come to light before the High Court that the contract between the parties visualized operation of the oil rigs including drilling operations by the personnel made available under the contracts/agreements, which fact was further stated on affidavit before the High Court by an authorized official of the ONGC in the following terms.

"That under the said agreement, Foramer was required, through its personnel listed in Exhibit-A to the said agreement, to carry out inter-alia the drilling operations specified in clause 4.3 to 4.10 of the said agreement." Page 7 of 34 Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS.

Despite the above, the High Court took the view that under the agreement payment to M/s. Foramer France was required to be made at the rate of 3450 USD per day and that the contract clearly contemplated rendering of technical services by personnel of the non-resident company. Specifically, taking the view that the contract did not mention that the personnel of the non-resident company was also carrying out the work of drilling of wells and as the company had received fees for rendering service the payments made were liable to be taxed under the provisions of Section 44D of the Act. /Is already noticed, in the rest of the appeals before the High Court the aforesaid decision dated 15.12.2005 passed in l.T.A. No. 239 of 2001 was followed on the basis that the facts in all the appeals were similar to those involved in of 2001" (emphasis provided)

The Hon’ble Supreme Court held that - “13. The Income Tax Act does not define the expressions "mines" or "minerals". The said expressions are found defined and explained in the Mines Act, 1952 and the Oil Fields (Development and Regulation) Act 1948. While construing the somewhat pari materia expressions appearing in the Mines and Minerals (Development and Regulation) Act 1957 regard must be had to the provisions of Entries 53 and 54 of List I and Entry 22 of List II of the 7th Schedule to the Constitution to understand the exclusion of mineral oils from the definition of minerals in Section 3(a) of the 1957 Act. Regard must also be had to the fact that mineral oils is separately defined in Section 3(b) of the 1957 Act to include natural gas and petroleum in respect of which Parliament has exclusive jurisdiction under Entry 53 of List I of the 7th Schedule and had enacted an earlier legislation i.e. Oil Fields (Regulation and Development) Act, 1948. Reading Section 2(j) and 2(jj) of the Mines Act, 1952 which define mines and minerals and the provisions of the Oil Fields (Regulation and Development) Act, 1948 specifically relating to prospecting and exploration of mineral oils, exhaustively referred to earlier, it is abundantly clear that drilling operations for the purpose of production of petroleum would clearly amount to a mining activity or a mining operation. Viewed thus, it is the proximity of the works contemplated under an agreement, executed with a non-resident assessee or a foreign company, with mining activity or mining operations that would be crucial for the determination of the question whether the payments made under such an agreement to the nonresident assessee or the foreign company is to be assessed under Section 44BB or Section 44D of the Act. The test of pith and substance of the agreement commends to us as reasonable for acceptance. Equally important is the fact that the CBDT had accepted the said test and had in fact issued a circular as far back as 22.10.1990 to the effect that mining operations and the expressions "mining projects" or "like projects" Page 8 of 34 Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS. occurring in Explanation 2 to Section 9(1) of the Act would cover rendering of service like imparting of training and carrying out drilling operations for exploration of and extraction of oil and natural gas and hence payments made under such agreement to a non-resident/foreign company would be chargeable to tax under the provisions of Section 44BB and not Section 44D of the Act. We do not see how any other view can be taken if the works or services mentioned under a particular agreement is directly associated or inextricably connected with prospecting, extraction or production of mineral oil. Keeping in mind the above provision, we have looked into each of the contracts involved in the present group of cases and find that the brief description of the work covered under each of the said contracts as culled out by the appellant and placed before the Court is correct. The said details are set out below:

S.No. Civil Appeal No. Work covered under the contract 1. 4321 Drilling of exploration wells and carrying out seismic surveys for exploratory drilling 2. 740 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 3. 731 Drilling, furnishing personnel for manning, maintenance and operation of drilling rig and training of personnel. 4. 1722 Furnishing supervisory staff with expertise in operation and management of Drilling unit. 5. 729 Capping including subduing of well, fire fighting. 6. 738 Capping including subduing of well, fire fighting. 7. 1528 Analysis of data to prepare job design, procedure for execution and details regarding monitoring. 8. 1532 Study for selection of enhanced Oil Recovery processes and conceptual design of Pilot Tests. 9. 1520 Engineering and technical support to ONGC in implementation of Cyclic Steam Stimulation in Heavy Oil Wells. 10. 2794 Assessment and processing of seismic data along with engineering and technical support in implementation of Cyclic Steam Stimulation. 11. 1524 Conducting reservoir stimulation studies in association with personnel of ONGC 12. 1535 Laboratory testing under simulated reservoir conditions 13. 1514 Consultancy for optimal exploitation of hydrocarbon resources. Page 9 of 34 Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS.

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The above facts would indicate that the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated there under. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable under the provisions of Section 44BB and not Section 44D of the Act. On the basis of the said conclusion reached by us, we allow the appeals under consideration by setting aside the orders of the High Court passed in each of the cases before it and restoring the view taken by the learned Appellate Commissioner as affirmed by the learned Tribunal." (emphasis Supplied)

As evident from the above, the entire observation is with respect of "Drilling" i.e. whether "drilling" would amount to a 'mining operation' and the proximity of works contemplated under the contract to "Drilling". The Hon'ble SC has been repeatedly emphasizing a few expressions and terms like -

� “Proximity of the works” � “Directly and inextricably linked” � “Direct associated” � “Inextricably connected” � “Dominant Purpose” � “Pith & Substance”

Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS. to highlight the tests and degree of association that is needed to bring a transaction under the purview of section 44BB. In the words of Hon’ble SC, “there may be certain ‘ancillary works" but what matters is whether the "dominant purpose" is prospecting, extraction or production of mineral oil The above intention of the Hon’ble Apex Court is clearly discernable from the sample of work covered under agreements which are directly and inextricably associated with drilling, rig operation & management of drilling rigs & drilled wells and other such activities related to prospecting, extraction or production of mineral oils. This intention of Hon’ble Supreme Court to distinguish activities which are directly associated and inextricably connected with the prospecting, extraction or production of mineral oils from others has been clearly spelt out again by the very same Bench in their order of the same date in the case of the same appellant i.e. ONGC while deciding a related bunch of appeals relating to the provisions of Companies (Profits) Surtax Act, 1964. (Order dt. 1-7-15 in Civil Appeal Nos.730 of 2007) The issue in question was the true and correct purport and effect of exemption notification bearing No. GSR 307(E) dt. 31.03.1983 under section 24AA of the Surtax Act. Section 24AA of the Surtax Act, much like the provisions of Section 44BB of the Income Tax Act, is a beneficial provision that empowers the govt, to make exemptions etc. in relation to participation in the business of prospecting for extraction etc. of mineral oil. It distinguishes between two types of foreign participation in the business of prospecting or extraction or production of mineral oils i.e.

Sec. 24AA (2)

(a) Foreign companies with whom the Central Govt has entered into agreements for the association or participation of that Govt, or any person authorized by that Govt in any business consisting of the prospecting or extraction or production of mineral oils; and (b) Foreign companies with whom the central Govt has entered into agreement for the association or participation of that Govt. or any person authorized by that Govt. providing any services or facilities or supplying any ship, aircraft, machinery or plant (whether by way of sale on hire) in connection with any business consisting of in any business consisting of the prospecting or extraction or production of mineral oil carried on by that Govt. or any person specified by that Govt……………. The Hon’ble Supreme Court did not accede to the contentions of the appellant that- Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS.

“...applicability should be understood with reference to the existence of agreement with foreign companies rather than the immediate purpose of such agreement…… (beneficiaries should also) include foreign companies with whom the ONGC has no direct agreement though such foreign companies may nevertheless be providing similar services, may be, on the strength of separate agreements with the foreign companies with whom the ONGC has executed an agreement....” (emphasis and clarifications added) The Hon’ble SC held that “...the power to grant exemption is twofold and covers agreements directly associated with the prospecting or extraction or production of mineral oils or contracts facilitating or making available services in connection with such a business.’’ Thus, the above terms i.e. “Proximity of the works”, "Directly and inextricably linked", “Directly associated”, “Inextricably connected”, "Dominant Purpose", “Pith & Substance” as used by Hon’ble Supreme Court must be understood and given effect to in the context in which they have been used. This approach has also been followed by Hon’ble ITAT in the case of ONGC as representative assessee of University of Calgary vs. ADIT (2017) (ITANo.4877/Del/2013 & 1327/Del/2016) (copy enclosed) In view of the above, since the activities of the assesse are not directly associated or intrinsically linked with the prospecting, extraction or production of mineral oils it is not eligible for taxation u/s 44BB of the Act. Even assuming (without admitting) that the above decision of Hon’ble Supreme Court under the provisions of Companies (Profits) Surtax Act, 1964 should not be imported/used to interpret the provisions of Income Tax Act, it may be seen that the Hon'ble Supreme Court in their order in the case of ONGC under Income Tax Act (2015-TII-C3-SC-INTL) have clearly identified activities which are directly related to drilling and exploration. Thus, activities listed/described in the table in Para-13 of the order can be described under the following heads-

Sr. No. In Table Activity 1 Drilling & Seismic Surveys for Exploratory Drilling 2-4 Provision of Manpower of to Drilling Rig 5,6 Capping and Firefighting of Oil Wells 7,8,15 Study, Analysis and Designing 9-12 & 16 Stimulation studies & Seismic Surveys 13-21 & 33-35 Consultancy, Advice, Opinion, Analysis & Studies on resources potential 22 Repair of wells 23-26 Repair of Turbines & Generators 27 Replacement of consoles on drilling rigs 28-32 Inspection of Oil Rigs & Gas generators 36-41 Training 42-44 Software Page 13 of 34 Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS.

The activities of the assessee are not covered under any of the above activities. “The assessee provided vessels on hire on time charter basis" to non-resident companies [DRP, Para-2] The business of such hirers or whether and to what extent such hirers deployed the hired vessels in their business has no effect on the taxability of the income received by the assessee. In the annexure to its objections before DRP, the assessee described its business as under –

“ The assessee….operates vessels which are provided on time charter basis…..As part of charter hire, the assessee provides operational and vessels management services which include maritime management services, health, security and environment and accounting services.

It is also engaged in conducting geophysical surveys offshore whith special emphasis on 3D collection of seismic data, processing and sale of such data and other activities of similar nature”. [p.3 Appeal Set]

In other words, the assessee is engaged in two types of activities i.e.

� Income from the operation of vessels on charter hire basis and � Income from processing and sale of seismic data & Geophysical Surveys. As has been claimed before lower authorities, the “The assessee provided vessels on hire on time charter basis” to non-resident companies. [DRP. Para-2] ] The business of such hirers or whether and to what extent such hirers deployed the hired vessels in their business has no effect on the taxability of the income received by the assessee. The Hon’ble Supreme Court has held the ‘Proximity’ and Intrinsic connection’ of the activities carried on by the assessee as the determining factor. It is not the claim of the assessee that it is providing services in the nature of Seismic Studies as described in S. Nos. 1,9-12 & 16 of the order of the Hon’ble Supreme Court. The AO and DRP confirmed that the income received by the assessee is from the hiring of the vessels only. Yet. the Hon’ble DRP erred in holding that the income is taxable u/s 44BB of the Act In view of the above, the order of the AO may be confirmed.”

(2.2) The Ld. Counsel for Assessee filed synopsis, the relevant portion of which is reproduced as under:

• “The Assessee, a company incorporated under the laws of Norway, is engaged in providing equipments, services and facilities in connection with prospecting for or extraction or production of mineral oils. • During the relevant previous year, the Assessee entered into a contract with Page 14 of 34 Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS.

PGS Exploration (Norway) AS ("PGSEN") and Petroleum Geo-Services Pacific Pte Ltd ("PGSAP") for providing vessels on hire to be used for undertaking seismic data acquisition and onboard processing in pursuance of their respective contracts with Oil and Natural Gas Corporation ("ONGC") and Reliance Industries Limited ("RIL"). Copy of the contracts is attached at pages 159-174 of the paperbook. • In the return of income, the Assessee had offered its revenues (amounting to INR 786,887,676) earned by it to tax as per the provisions of section 44BB of the Income-tax Act, 1961 ("the Act") and declared taxable income of INR 78,688,767. Copy of the return of income along with computation of income is attached at pages 55-81 of the paperbook. • The assessment proceedings were initiated by the Assessing Officer ("AO") under section 143(2) of the Act. The matter was also referred to the Transfer Pricing Officer ("TPO") and the TPO vide order dated December 3, 2013, completed the transfer pricing assessment by accepting the arm's length price determined by the Assessee and did not make any adverse inference in the case of the Assessee. Copy of the order passed by TPO is attached at pages 35-36 of the paperbook. • In the draft assessment order (dated March 25, 2014), the AO proposed to deny the applicability of section 44BB to the income received by the Assessee by holding that the plant and machinery supplied to PGSEN and PGSAP were in turn supplied to third party contractors like ONGC and RIL. Therefore, the first leg contractors, ie PGSEN and PGSAP may be justified in availing the benefit of section 44BB of the Act, but not the Assessee. Consequently, the AO held that such income would qualify as 'royalty' and proposed to tax the aforesaid income as per the provisions of section 28 of the Act read with rule 10 of the Income tax Rules ("Rules"), 1962. The AO arbitrarily proposed to attribute 15 per cent of the gross revenues as profits of the Assessee by applying rule 10 of the Rules and the total income was proposed to be assessed at INR 118,033,105 (effective rate of tax being 6.335 percent). Copy of the draft assessment order is attached at pages 37-54 of the paperbook. • Aggrieved with the draft assessment order, Assessee filed objections before the Dispute Resolution Panel - II, New Delhi ("DRP"). The DRP issued directions and held that the amount received by Assessee during the year under consideration on account of hire charges of vessels should be brought to tax by applying the deemed profit ratio of 10 per cent under section 44BB of the Act (copy of DRP directions enclosed at pages 218-231 of the paperbook). Our submissions

Royalty has been defined under Explanation to section 9(l)(vi) of the Act to inter-alia include consideration for the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to Page 15 of 34 Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS. in section 44BB of the Act. It is, thus, clear that the definition of royalty specifically excludes the consideration paid for the use of industrial, commercial or scientific equipment where such consideration is taxable as per the provisions of section 44BB of the Act. In the instant case, for the reasons elaborated hereinafter, the Assessee is governed by the provisions of section 44BB of the Act and accordingly, the provisions of section 9(l)(vi) of the Act for taxation of royalty would not be applicable. Section 44BB of the Act provides for the deemed profit regime in case of income earned by non-residents engaged in the business of: • providing services or facilities in connection with prospecting for, or extraction, or production of mineral oils (first limb); or • supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction, or production of mineral oil (second limb).

Applicability of second limb of section 44BB of the Act in the instant case • The Explanation to section 44BB of the Act provides that the term 'plant' would include ships, aircraft, vehicles, drilling units, scientific apparatus and equipment used for the purposes of the said business. As per the above provisions, it is clear that the supply of plant and machinery on hire to be used in the prospecting for, extraction and production of mineral oil would be liable to tax under the provisions of section 44BB of the Act. Also, the term 'plant and machinery' would include ships.

In the case of the assessee, the vessels were provided on hire for the purpose of prospecting for, extraction and production of mineral oil. • It is beyond doubt that the vessels used for prospecting for, extraction and production of mineral oil would be considered as ships. Reliance in this regard is placed on the following decisions:

- Sedco Forex International Drilling Inc vs ACIT (1996) (58 ITD 177) (Del) - ACIT vs Interocean Shipping India Private Limited (1994) (51 ITD 582) (Del) - Wavefield Inseis ASA vs DIT (2009) (320 ITR 290) (AAR) - Seabird Exploration FZ LLC UAE (2010) (326 ITR 558) (AAR) • Without prejudice to the above, the Delhi Bench of ITAT in the case of ACIT vs Interocean Shipping India Private Limited (1994) (51 ITD 582) (Del) has also held that the ships should be considered as machinery thereby, eligible to be categorized / covered under section 44BB of the Act • In the instant case, the ship / vessel provided by the Assessee is used for the purpose of prospecting for mineral oil pursuant to the Production Page 16 of 34 Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS.

Sharing Contract ("PSC") entered into by ONGC, RIL etc with the Government of India. It is also to be noted that for any oil and gas exploration activity, seismic survey is the first important step and in order to undertake seismic operations, the companies engaged in such activities would need support of seismic vessel which has specialized equipments for use in seismic data acquisition and process. Therefore, there is no dispute that the seismic activities are inseparable part of prospecting of mineral oil and the seismic survey vessel plays a crucial role in such operations. The seismic vessel provided by the Assessee is unique in nature and can be utilized only for the purpose of undertaking seismic activities, being integral to prospecting of mineral oil and accordingly, hire charges received would be chargeable to tax as per the provisions of section 44BB of the Act. Applicability of first limb of section 44BB of the Act in the instant case • Without prejudice to the above, in the instant case, the provision of vessels on hire by the Assessee to for conducting of seismic activities, shall be regarded as provision of a 'facility' 'in connection with' prospecting for or extraction or production of mineral oil, thereby liable to tax as per the provisions of section 44BB of the Act. • In absence of a definition under the Act, the same would need to be understood by placing reliance on its ordinary and normal meaning as per various dictionaries. Advanced Law Lexicon (Book 2; page no 1749)

"the quality of being easily performed; absence of difficulty; dexterity; ease in performance; that which promotes the ease of any action"

Concise Oxford English Dictionary (Indian Edition; Page 509)

"a building, service, or piece of equipment provided for a particular purpose; absence or difficulty or effort" • Since the term 'facility' has wide connotation and includes any activity that eases the performance of an action by another, the provision of a vessel by the Assessee (for the purposes of 'prospecting' through acquisition and processing of seismic data) would be construed as a facility in connection with the prospecting etc of mineral oils. • Thus, the provision of seismic vessels on hire by the Assessee clearly constitutes a 'facility' provided 'in connection with' prospecting for, or extraction or production of, mineral oil', and hence, would satisfy the conditions stipulated under the first limb of section 44BB of the Act. • The expression 'in connection with' has not been defined in the Act and thus, reliance is placed on the decision of the Apex Court in the case of Doypack Systems (P) Ltd vs UOI and Ors, National Textile Corpn and Anr, Swadeshi Mining and Mfg Co Ltd (1988) (36 ELT 201) (SC). The interpretation of the term 'in connection with' as emerging from above Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS. decision suggests that the expression includes matter occurring prior to as well as subsequent to so long as these are related to the principal thing. Judicial precedents, in the context of section 44BB of the Act have given a wide interpretation of the expression so as to include within its ambit services or facilities which are closely connected to the activities of prospecting for, or extraction or production of mineral oil such as helicopter services for transporting men to the area where exploration activities are undertaken and seismic data processing activities [Lloyd Helicopters International Pty Ltd (2001) (249 ITR 162) (AAR)]. • Attention is also invited to the decision of the Delhi Bench of the ITAT in the case of ACIT vs Paradigm Geophysical Private Limited (2008) (117 TTJ 812) (Del), wherein, the assessee had entered into a contract with RIL for undertaking seismic data processing activities. On the issue of determining whether the activities would be covered by the provisions of section 44BB of the Act, the ITAT held that any consideration of whatever nature received in connection with prospecting for, or extraction or production of mineral oil would be taxed on a presumptive basis as per section 44BB of the Act. The scope of section 44BB of the Act is very wide and would cover all kinds of services including services in the nature of managerial, technical or consultancy. This decision of the ITAT has been affirmed by the Uttarakhand High Court. • Therefore, from a plain reading of the above, it can be reasonably concluded that the Assessee is rendering services 'in connection with' (through provision of vessel on hire) prospecting etc of mineral oils. • Further, it is respectfully submitted that the decision of Uttarakhand High Court in case of CIT vs ONGC as an agent of M/s Foramer France (2005) (299 ITR 438) (Uttarakhand HC) relied on by the Revenue Authorities in ground of appeal no 2 has been overruled by the Hon'ble Supreme Court of India in case of ONGC vs CIT [2015] 376 ITR 306 (SC) (copy of the decision is enclosed on pages 1-23 of the paperbook). The Supreme Court held that where the pith and substance of each of the contracts/agreements is inextricably connected with prospecting, extraction or production of mineral oils, the income from such contracts would be taxable under the provisions of section 44BB of the Act. • In its decision, the Supreme Court did not distinguish between first and second leg contractors while allowing the benefit of section 44BB of the Act. Additionally, the Supreme Court allowed the benefit of section 44BB to 44 different contracts including contracts for training, inspection, repair and supply of software for processing seismic data. From a perusal of the Supreme Court decision, it is abundantly clear that the Supreme Court has interpreted the scope of section 44BB in a very wide manner and not limited it only to first leg contractors as alleged by the AO. • Following the Supreme Court decision, the Delhi High Court in case of Assessee's own case PGS Exploration (Norway) AS vs ADIT [2016] 383 ITR 178 (Delhi) (copy of the decision is enclosed on pages 24-37 of the paperbook) and Uttarakhand High Court in case of CIT vs M/s Expro Gulf Limited & Others (ITA No 34 of 2015) (Uttarakhand High Court) (copy of the decision is enclosed on pages 49-52 of the Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS. paperbook) have allowed the benefits of section 44BB of the Act to non- resident taxpayers. Further, this Bench has also followed the Supreme Court decision in the following cases:

- DDIT vs RPS Energy Pty Ltd (2018) (92 taxmann.com 77) (Delhi-Trib) - BJ Services Company Middle East Ltd vs ADIT (2017) (77 taxmann.com 218) (Delhi-Trib) - ACIT vs Landmarks Graphics Corp (2017) (87 taxmann.com 311) (Delhi Trib) - Viking Maritime Inc vs DCIT (2016) (69 taxmann.com 303) (Delhi - Trib) - Western Geco International Ltd vs ACIT (2016) (71 taxmann.com 166) (Delhi -Trib)

• The following recent case laws have followed the Supreme Court decision:

- Seabird Exploration FZ LLC (2018) (92 taxmann.com 328) (AAR) - National Oil Well Maintenance Company vs DCIT (2018) (89 taxmann.com24) (Jaipur - Trib) - Production Testing Services Inc vs DCIT (2018) (89 taxmann.com 416) (Mumbai -Trib)

First leg versus second leg contract • In the draft assessment order, the AO held that the provisions of section 44BB of the Act is applicable only to first leg contractors and it does not cover the second leg contractors. In this regard, it is submitted that the provisions of this section does not make any difference between first leg and second leg contractors as long as the non-resident is engaged in providing services or facilities in connection with prospecting, extraction or production of mineral oils or providing plant and machinery used or to be used in prospecting etc of mineral oils. • Attention is invited to the decision of Delhi Bench of ITAT in the case of Louis Dreyfus Armateures SAS vs ADIT (2015) (153 ITD 579) (Delhi-Trib) (copy of the decision is enclosed on pages 53-80 of the paperbook), wherein it was held that section 44BB does not distinguish between the main contractor or a sub-contractor. The provision clearly envisages the nonresident Assessee to be engaged in the business of supplying plant and machinery on hire. The only condition imposed is that, such plant and machinery has to be used or should be used, for the purposes of prospecting for, or extraction or production of mineral oils. The basic condition to be satisfied in the said provisions is that the plant and machinery supplied or let on hire by the Assessee, non-resident should be used in prospecting for or extraction or production of mineral oils, or where the equipment has been supplied, such equipment should have been used for the purposes of prospecting for or extraction or production of mineral Page 19 of 34 Fit for Publication ITA No.- 1401/Del/2015. Sd/- (AM) Sd/- (JM) M/s PGS Geophysical AS. oils. • In this regard, reliance is also placed on the following judicial precedents: Micoperi SPA Milano vs DCIT (2002) (82 ITD 369) (Mum); - McDermott International Inc vs DCIT (1994) (49 ITD 590) (Del) - Bourbon Offshore Asia Pte Ltd (2011) (337 ITR 122) (AAR); - Spectrum Geo Ltd (2012) (346 ITR 422) (AAR); - Wavefield Inseis ASA (2010) (230 CTR 106) (AAR); - Lloyd Helicopters Pty Ltd (2001) (249 ITR 162) (AAR) - - Pride Offshore International LLC vs ADIT (2015) (59 taxmann.com 23) (Delhi - Trib) Valentine Maritime Gulf LLC vs ADIT (2017) (163 ITD 32) (Mumbai- - Trib) - Technip UK Limited vs DIT (2017) (81 taxman 311) (Delhi-Trib) - Saipem Portugal Commercio Maritimo vs DCIT (ITA no 2071/2016) (Dellhi-Trib) • Further, the AO held that the vessels provided on hire by the Assessee to PGSEN and PGSAP were in turn let out to ONGC and RIL which is not a true fact. The vessels were used by PGSEN and PGSAP for conducting seismic data acquisition and processing in pursuance of the contract entered into with ONGC / RIL. • As mentioned above, the vessels, in the instant case, are being used by PGSEN and PGSAP for rendering seismic data acquisition and processing services which is the first step of prospecting of mineral oil. Thus, even for sake of argument, if the contention of the AO be accepted that the provisions of section 44BB of the Act is applicable only to first leg contractors, the provisions of the aforesaid section would be applicable to the Assessee as it is providing facilities / plant and machinery for prospecting of mineral oil only. • The words "....used or to be used for the business of prospecting for, or extraction or production of, mineral oils..." clearly signifies that the plant or machinery supplied on hire for the aforesaid activities would fall within the ambit of section 44BB. Section 44DA of the Act not applicable • Section 44DA read with section 9(l)(vi) of the Act provides that 'income from royalty receipts' would be taxable as 'business profits' in India if such receipts are received from Government or an Indian concern in pursuance of an agreement made by a non-resident with Government or the Indian concern after March 31, 2003, having a Permanent Establishment in India. However, the provisions of section 44DA have been included in the proviso to section 44BB with effect from April 1, 2011 i.e. applicable only from AY 2011-12 onwards. In this regard, reliance is placed upon the following: Page 20 of 34