The Indian Income Tax Appellate Tribunal (ITAT) delivered a ruling dated 10 June 2005 in the case of Essar Oil Ltd. v Joint Commissioner of Income Tax (unreported) on whether credit rating fees paid to an Australian entity were liable to income tax in India as "royalties" under the India-Australia tax treaty (tax treaty).

(a) Facts. Essar Oil Ltd. (Essar Oil) made an application to the tax authorities for authorization to remit an annual surveillance fee of USD 25,000 to Standard and Poors (Australia) Pty Ltd. (S&P) without the need to withhold any tax in India.

The fee was being paid towards an annual surveillance of credit rating certificate issued by S&P to the taxpayer. The tax authorities treated the annual surveillance fee payable to S&P as "fees for technical services" (FTS) under Sec. 9(i)(vii) of the Indian Income Tax Act 1967 (ITA) and that the services were covered by the term "royalties" under Art. 12 of the tax treaty. Essar Oil lodged an appeal with the Commissioner of Income Tax (Appeals) who confirmed the stand taken by the tax authorities. Essar Oil further appealed to the ITAT.

(b) Issue. The issue before the ITAT was whether the credit rating fees paid to S&P were FTS or if they were covered by the term "royalties" under Art. 12 of the tax treaty, and taxable in India.

(c) Decision. The ITAT rejected the Essar Oil's contention that the credit rating fees paid to S&P were neither in the nature of FTS as defined Sec. 9(i)(vii) of the ITA nor "royalties" as defined in Art. 12 of the tax treaty and held that the payment was taxable in India as "royalties".

The ITAT also rejected the argument that the payment made to S&P was towards services rendered by S&P in the normal course of its business activities and thus, such payment would be classified as "business profits" under Art. 7 of the tax treaty. As "business profits", the fees would not be taxable in India unless S&P had a permanent establishment in India under Art. 5 of the tax treaty.

In coming to the decision that the payment was a royalty, the ITAT analysed S&P's business model and the agreement pertaining to the certification issued to Essar Oil. The ITAT observed that under Art. 12(3)(c) of the tax treaty, if a payment is made for the supply of commercial knowledge or information, then such payment would fall within the meaning of term "royalties". Art. 12(3)(d) of the tax treaty provides that payments for the rendering of any technical or consultancy services which are ancillary and subsidiary to the application or enjoyment of information as mentioned in Art. 12 (3)(c) of the tax treaty would also fall within the term "royalties".

The key question was whether a "credit rating certificate" constituted "commercial information". If so, the payment would fall under Art. 12 of the tax treaty. The term "commercial information" had not been defined in the tax treaty and therefore, had to be interpreted as it is understood in a general sense. In general, the term "commercial information" means the act or process of informing, communication or reception of knowledge and any information, which has got a commercial value for the user. It is not necessary that such commercial information by itself should be an immediate source of earning for the user. What is important is that the user of such information should derive some commercial benefit therefrom.

The ITAT noted that Essar Oil contended that it had only obtained an "opinion" from S&P for the purposes of raising resources for its business from international markets. The ITAT held that such contention also supports the view that a "credit rating certificate" is commercial information because Essar Oil wanted to use the certification to inform prospective investors of its financial status, capability and other credentials in order to encourage them to invest in Essar Oil. In the present scenario, investors, who may be ignorant of the company, would rely on the credit rating certificate assigned by an internationally recognized independent specialized credit rating institution, such as S&P. An "opinion" by S&P is respected and carries great weight in arriving at investment decisions. Thus, on this count also, the "opinion" of S&P can be termed as a supply of commercial information both from the angle of the company and the potential investors.