The Assessing Officer says our contract with ONGC is really technical services, so 44BB is out and 44D applies. How is that decided?
By the pith and substance of the contract, not by picking out its ancillary parts. If the dominant purpose of the agreement is prospecting for, or extraction or production of, mineral oils, the payment is assessable under s.44BB and not as fees for technical services under s.44D read with Explanation 2 to s.9(1)(vii).
Decided by the Supreme Court (Ranjan Gogoi J and Pinaki Chandra Ghose J) on 2015-07-01, reported as Civil Appeal No. 731 of 2007 with Civil Appeal Nos. 729, 733, 736, 737, 738, 740, 741, 6008, 6016 and 6023 of 2007, 925, 1239, 1240, 1514 to 1524, 1527 to 1529, 1531 to 1533, 1535, 2008, 2012, 4321, 7226, 7227 and 7230 of 2008, 2794 to 2797 of 2009, 1722 of 2010 and 6174 of 2010 (Supreme Court of India). It bears on section 44BB, section 44D, section 9(1)(vii), section 115A of the Income Tax Act 1961, in Presumptive Taxation & Audit and How Tax Law Is Read matters.
This is the Supreme Court's test for the boundary between the ten per cent presumptive regime and the fees-for-technical-services regime, and it disposed of the whole group of appeals covering the range of ONGC's contracts at once. Two limits must be kept in view. First, the Court was construing s.44BB against s.44D, which applies to agreements made before 1 April 2003; for later agreements the competing provision is s.44DA. Second, and more importantly, the Finance Act 2010 inserted the second proviso to s.44DA(1) and a reference to s.44DA in the proviso to s.44BB(1) with effect from 1 April 2011, so for AY 2011-12 onwards the analysis has a further step: income within s.44DA(1) is excluded from s.44BB (Paradigm Geophysical, Delhi High Court, 2020). The pith-and-substance test survives that amendment; what changes is the provision it is being applied against.
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ONGC engaged a large number of non-resident assessees and foreign companies under contracts connected with its offshore and onshore oil operations. The works were set out contract by contract in a table in the judgment and included, for example, an agreement under which Foramer was required, through the personnel listed in an exhibit to the agreement, to carry out the drilling operations specified in its clauses 4.3 to 4.10. The Assessing Officer treated the payments as fees for technical services and assessed them under s.44D read with Explanation 2 to s.9(1)(vii) and s.115A. The Appellate Commissioner held s.44BB applied and the Tribunal affirmed that view. The High Court reversed. The question the Supreme Court framed for itself was whether the amounts paid by ONGC to the non-resident assessees and foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as fees for technical services under s.44D read with Explanation 2 to s.9(1)(vii), or is taxable on a presumptive basis under s.44BB.
All the appeals were allowed. The pith and substance of each of the contracts was inextricably connected with prospecting, extraction or production of mineral oil, and the dominant purpose of each agreement was prospecting, extraction or production of mineral oils even though certain ancillary works were contemplated. The payments made by ONGC and received by the non-resident assessees or foreign companies were therefore more appropriately assessable under s.44BB and not under s.44D. The orders of the High Court in each of the cases were set aside and the view taken by the Appellate Commissioner as affirmed by the Tribunal was restored (paragraphs 13 and 14).
The Income-tax Act does not define mines or minerals; those expressions are defined in the Mines Act 1952 and the Oil Fields (Development and Regulation) Act 1948. Reading s.2(j) and s.2(jj) of the Mines Act 1952 with the provisions of the Oil Fields Act 1948 relating to prospecting and exploration of mineral oils, and having regard to Entries 53 and 54 of List I and Entry 22 of List II of the Seventh Schedule, the Court held it abundantly clear that drilling operations for the purpose of production of petroleum amount to a mining activity or a mining operation. It followed that what is crucial is the proximity of the works contemplated under an agreement with a non-resident to mining activity or mining operations, and the Court accepted the test of pith and substance of the agreement as reasonable. It reinforced that conclusion by pointing to the CBDT's own circular of 22 October 1990, which had accepted the same test and stated that mining projects and like projects in Explanation 2 to s.9(1) would cover services such as imparting of training and carrying out drilling operations for exploration and extraction of oil and natural gas, with the result that payments under such agreements are chargeable under s.44BB and not s.44D. Applying that, the Court examined each contract in the group and found the appellants' description of the works to be correct (paragraph 13).
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.
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Handle my notice → Ask a CA on WhatsAppBy the pith and substance of the contract, not by picking out its ancillary parts. If the dominant purpose of the agreement is prospecting for, or extraction or production of, mineral oils, the payment is assessable under s.44BB and not as fees for technical services under s.44D read with Explanation 2 to s.9(1)(vii). This was decided by the Supreme Court (Ranjan Gogoi J and Pinaki Chandra Ghose J) and bears on section 44BB, section 44D, section 9(1)(vii), section 115A of the Income Tax Act 1961. It is reported as Civil Appeal No. 731 of 2007 with Civil Appeal Nos. 729, 733, 736, 737, 738, 740, 741, 6008, 6016 and 6023 of 2007, 925, 1239, 1240, 1514 to 1524, 1527 to 1529, 1531 to 1533, 1535, 2008, 2012, 4321, 7226, 7227 and 7230 of 2008, 2794 to 2797 of 2009, 1722 of 2010 and 6174 of 2010 (Supreme Court of India). This is the Supreme Court's test for the boundary between the ten per cent presumptive regime and the fees-for-technical-services regime, and it disposed of the whole group of appeals covering the range of ONGC's contracts at once. Two limits must be kept in view. First, the Court was construing s.44BB against s.44D, which applies to agreements made before 1 April 2003; for later agreements the competing provision is s.44DA. Second, and more importantly, the Finance Act 2010 inserted the second proviso to s.44DA(1) and a reference to s.44DA in the proviso to s.44BB(1) with effect from 1 April 2011, so for AY 2011-12 onwards the analysis has a further step: income within s.44DA(1) is excluded from s.44BB (Paradigm Geophysical, Delhi High Court, 2020). The pith-and-substance test survives that amendment; what changes is the provision it is being applied against. If it applies to you, the first step is this: Put the contract itself on record and identify its dominant purpose in one sentence; the Court looked at the description of works under each agreement, not at the label the Assessing Officer gave it.
ONGC engaged a large number of non-resident assessees and foreign companies under contracts connected with its offshore and onshore oil operations. The works were set out contract by contract in a table in the judgment and included, for example, an agreement under which Foramer was required, through the personnel listed in an exhibit to the agreement, to carry out the drilling operations specified in its clauses 4.3 to 4.10. The Assessing Officer treated the payments as fees for technical services and assessed them under s.44D read with Explanation 2 to s.9(1)(vii) and s.115A. The Appellate Commissioner held s.44BB applied and the Tribunal affirmed that view. The High Court reversed. The question the Supreme Court framed for itself was whether the amounts paid by ONGC to the non-resident assessees and foreign companies for providing various services in connection with prospecting, extraction or production of mineral oil is chargeable to tax as fees for technical services under s.44D read with Explanation 2 to s.9(1)(vii), or is taxable on a presumptive basis under s.44BB. The matter was decided on 2015-07-01 by the Supreme Court (Ranjan Gogoi J and Pinaki Chandra Ghose J). On those facts the Supreme Court held as follows. All the appeals were allowed. The pith and substance of each of the contracts was inextricably connected with prospecting, extraction or production of mineral oil, and the dominant purpose of each agreement was prospecting, extraction or production of mineral oils even though certain ancillary works were contemplated. The payments made by ONGC and received by the non-resident assessees or foreign companies were therefore more appropriately assessable under s.44BB and not under s.44D. The orders of the High Court in each of the cases were set aside and the view taken by the Appellate Commissioner as affirmed by the Tribunal was restored (paragraphs 13 and 14).
The Income-tax Act does not define mines or minerals; those expressions are defined in the Mines Act 1952 and the Oil Fields (Development and Regulation) Act 1948. Reading s.2(j) and s.2(jj) of the Mines Act 1952 with the provisions of the Oil Fields Act 1948 relating to prospecting and exploration of mineral oils, and having regard to Entries 53 and 54 of List I and Entry 22 of List II of the Seventh Schedule, the Court held it abundantly clear that drilling operations for the purpose of production of petroleum amount to a mining activity or a mining operation. It followed that what is crucial is the proximity of the works contemplated under an agreement with a non-resident to mining activity or mining operations, and the Court accepted the test of pith and substance of the agreement as reasonable. It reinforced that conclusion by pointing to the CBDT's own circular of 22 October 1990, which had accepted the same test and stated that mining projects and like projects in Explanation 2 to s.9(1) would cover services such as imparting of training and carrying out drilling operations for exploration and extraction of oil and natural gas, with the result that payments under such agreements are chargeable under s.44BB and not s.44D. Applying that, the Court examined each contract in the group and found the appellants' description of the works to be correct (paragraph 13). In the words reproduced by the source cited on this page: "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." The decision followed or applied CBDT Circular dated 22 October 1990 (F.No.500/6/89-FTD) — relied on as the Board's acceptance of the same test; Applied by the Delhi High Court in Paradigm Geophysical Pty Ltd. v. CIT (International Taxation)-3, W.P.(C) 1370/2019, decided 13 March 2020, at para 26.
It was decided by the Supreme Court on 2015-07-01 and is reported as Civil Appeal No. 731 of 2007 with Civil Appeal Nos. 729, 733, 736, 737, 738, 740, 741, 6008, 6016 and 6023 of 2007, 925, 1239, 1240, 1514 to 1524, 1527 to 1529, 1531 to 1533, 1535, 2008, 2012, 4321, 7226, 7227 and 7230 of 2008, 2794 to 2797 of 2009, 1722 of 2010 and 6174 of 2010 (Supreme Court of India). Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 44BB, section 44D, section 9(1)(vii), section 115A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. All the appeals were allowed. The pith and substance of each of the contracts was inextricably connected with prospecting, extraction or production of mineral oil, and the dominant purpose of each agreement was prospecting, extraction or production of mineral oils even though certain ancillary works were contemplated. The payments made by ONGC and received by the non-resident assessees or foreign companies were therefore more appropriately assessable under s.44BB and not under s.44D. The orders of the High Court in each of the cases were set aside and the view taken by the Appellate Commissioner as affirmed by the Tribunal was restored (paragraphs 13 and 14). It arises in Presumptive Taxation & Audit and How Tax Law Is Read matters, on section 44BB, section 44D, section 9(1)(vii), section 115A of the Income Tax Act 1961, and was decided by Ranjan Gogoi J and Pinaki Chandra Ghose J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show the proximity of the works to mining or mining operations — the Court held drilling operations for the production of petroleum are a mining activity. Cite CBDT Circular of 22 October 1990, which the Court recorded as the Board's own acceptance that mining projects and like projects in Explanation 2 to s.9(1)(vii) cover training and drilling operations for exploration and extraction of oil and natural gas, so the payment falls under s.44BB and not s.44D. State expressly in your submission which assessment year you are in: if it is AY 2011-12 or later, deal separately with the s.44DA route, because ONGC does not answer that question. Where the contract has ancillary elements, argue them as ancillary — the Court accepted that certain ancillary works may be contemplated without displacing the dominant purpose.
Still good law. The pith-and-substance test was expressly applied and followed by the Delhi High Court in Paradigm Geophysical Pty Ltd. (13 March 2020), which was read in full for this entry. But note the boundary: this judgment construes s.44BB against s.44D, and Paradigm holds that from 1 April 2011 income within s.44DA(1) stands excluded from s.44BB. No decision doubting or overruling the pith-and-substance test was located; a systematic check of later treatment was not carried out. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment is short: the last numbered paragraph is 14, and paragraphs 13 and 14 carry the holding and the disposal. What the judgment decides is a method, not a category. The Court did not hold that every contract with ONGC falls under s.44BB. It held that each contract is to be read for its pith and substance, that the question is what the dominant purpose of the agreement is, and that a contract whose dominant purpose is prospecting for, or extraction or production of, mineral oils does not lose that character because ancillary works are also contemplated. The corollary is the one an assessing officer will press: a contract whose dominant purpose is something else does not come within s.44BB merely because it is performed at an oilfield. The exercise is therefore contract by contract, and a decision on one operator's agreement is not authority on another's. The competing head matters to how the argument is framed. The alternative the Revenue urged was s.44D read with Explanation 2 to s.9(1)(vii), that is, fees for technical services, with s.115A supplying the rate. Where s.44BB applies, that route is closed; where it does not, the characterisation under Explanation 2 has to be worked out on its own terms. So the first thing to settle in any such dispute is the dominant purpose of the agreement, because everything else follows from it. On the disposal: all the appeals were allowed, the orders of the High Court in each case were set aside, and the view taken by the Appellate Commissioner as affirmed by the Tribunal was restored. The Court did not remit anything, so what was restored is the finding below, and a reader citing the case should cite the restored finding as well as the test. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
All the appeals were allowed. The pith and substance of each of the contracts was inextricably connected with prospecting, extraction or production of mineral oil, and the dominant purpose of each agreement was prospecting, extraction or production of mineral oils even though certain ancillary works were contemplated. The payments made by ONGC and received by the non-resident assessees or foreign companies were therefore more appropriately assessable under s.44BB and not under s.44D. The orders of the High Court in each of the cases were set aside and the view taken by the Appellate Commissioner as affirmed by the Tribunal was restored (paragraphs 13 and 14).
TaxSphere, “Oil & Natural Gas Corporation Ltd v CIT”, https://taxnotice.vittsphere.com/caselaw/case/ongc-v-cit-44bb-pith-and-substance-of-the-contract/ (validity last checked 2026-09-08)
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