Payments made to global credit rating agencies by Indian companies are subject to withholding tax in India, Income-tax Appellate Tribunal, (ITAT), Mumbai, has ruled. In a recent order on an appeal filed by Essar Oil, the ITAT held that the payment for services rendered by Standard & Poor's constitute royalty payment, and hence is taxable. The ITAT observed that the services rendered by S&P has commercial value as it helps the company access funds at a viable cost.
The ITAT also dismissed the contention of Essar that the services of S&P were professional services and payment for them could not be construed royalty.
According to ITAT , S&P's services involves the public at large as companies use the S&P certificates for accessing funds, while professional services do not have any mark of public involvement.

The facts of the case are as follows. Essar Oil had sought clearance by an Income-tax officer to remit the annual surveillance fees to S&P, Australia. The tax officer held that the payment constituted fees for technical services under the Indian Income-tax laws and also covered by the definition of royalty under Article 12 of the Australia-India tax treaty. Accordingly, the tax officer ordered Essar to withhold tax at the rate specified in the treaty.

The appellate commissioner also supported the assessing officer's stand. Essar then appealed before the ITAT, the second appellate body for I-T disputes.
Essar points out that S&P certificate is issued on the basis of information and facts furnished and as such does not involve any technical services.

S&P's job is confined to giving an opinion on Essar's financial status based on the data supplied by Essar. Also, payment for annual review of its certification also does not come under the purview of royalty under the Double Taxation Avoidance Agreement (DTAA) between India and Australia.

The I-T department claimed that S&P supplied commercial information by virtue of issuing or reviewing the certificate. S&P analysed and processed the data furnished by Essar in a scientific manner by using its own research models and statistical techniques.

The certification by S&P enabled Essar to access international markets for funds and, therefore, the issue of certificate constituted supply of information having commercial value.

The ITAT pointed out that S&P is a major rating agency with its own models of assessment based on its own empirical research. S&P ratings have a significant effect on a company's ability to raise resources at a commercially viable cost. A rating certificate is also a statement of the body's financial status, its credentials and potentials etc. Hence an S&P certificate or review is a commercial information.

The ITAT also held that a commercial information necessarily does not mean that it should yield immediate earnings. As long as the information yields commercial benefit, such information can be classified commercial. In this sense, S&P ratings can be classified as commercial information.