S & P Global Ratings Singapore Pte. Ltd. vs Assistant Commissioner Of Income-tax, Circle Int. Tax 3(1)(2)

“1 That, the Ld. AO has erred in assessing the income at Rs 73,22,67,191 by holding that the said receipts are taxable under Article 12(3)(a) and Article 12(4)(a) of the India-Singapore DTAA.

1.1

While doing so, the Ld. AO/ Ld. DRP has failed to consider and apply the judgments relied upon by the Appellant and to that extent, the impugned order and the directions issued by the DRP are laconic and hence vitiated in law.

2.

That, the Ld. AO has erred in characterizing the receipts from provision of credit rating services as royalty under Article 12(3)(a) of the India-Singapore DTAA by holding that the said services involve provision of information concerning "commercial experience".

2.1

Without prejudice to the above, the Ld. AO/ DRP has not established or even remotely discussed as to how the test of "use" or "right to use" embedded in Article 12(3)(a) of the India-Singapore DTAA stands satisfied in the instant case, and hence the impugned order is arbitrary and is thus vitiated in law.

3.

That, the Ld. AO has erred in characterizing the receipts from provision of annual surveillance services as fee for technical services under Article 12(4)(a) of the India-Singapore DTAA.

4 That, on the facts and circumstances of the case and in law, the Ld. AO has erred in incorrectly computing or levying tax payable and interest under the Act;

5.

That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act.

All the aforesaid grounds are mutually exclusive and without prejudice to each other.

The Appellant craves leave to add, amend, alter, delete, rescind, forgo, or withdraw any of the above grounds of appeal either before or during the hearing before the Hon'ble Tribunal.”

“10.

Thus, on the basis of above discussion it can be safely concluded that the credit rating certificate is commercial information because it is mandatorily required in raising resources from the international markets. It indicates the level of safety for the potential investors, thus facilitates the marketing/resource mobilisation exercise of the rated company. It also enables the rated company to reduce its cost of borrowing. For the period for which it is issued the company has got absolute rights to utilize it for the intended purposes unless such rating is changed by the rating institution depending upon developments subsequent to the issue of credit rating certificate. Thus, credit rating certificate can also be viewed as rights acquired by the company which can be used for mobilisation of higher resources at an appropriate cost, Accordingly, in the instant case, the annual surveillance fee falls within the category of ancillary services under sub-para (a) of para (4) provided in connection with the use of commercial information under sub-para (a) of para (3) of the Article 12 of India- Singapore DTAA and accordingly, the assessee's receipts are liable to be taxed as FTS.

11. Taxability of Income under Income-tax Act:

11.1

As per Income-tax Act, a non-resident is chargeable to tax on income that is sourced in India. The source rules are given in section 5(2) and section 9 of the Income-tax Act. Under section 5(2) of the Act, a foreign company or any other non-resident person is liable to tax on income which is received or is deemed to be received in India by or on behalf of such person, or income which accrues or arises or is deemed to accrue or arise to it in India. Section 9 of the Act, thereafter, specifies certain types of income that are deemed to accrue or arise in India in certain circumstances. These two sections embody the source rules of income taxation for non-residents in India.

11.2

Section 9(1)(vii) deals with chargeability in respect of certain technical services. The definition as to what constitute the FTS is provided in Explanation 2 to section 9(1)(vii) of the Act. As per Explanation 2 to Section 9(1)(vii), "fees for technical services" (FTS) means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries". Admittedly, the consideration received by the assessee company is in the nature of FTS and therefore, such income is chargeable to tax in India under the domestic tax provisions.

12.

In view of the above discussion, the assessee's contention that the income of USD 9,722,082 equivalent to Rs. 73.22,67,191 / from supply of credit ratings and analytical services is not chargeable to tax under the provisions of the Income-tax Act, 1961 is not accepted. Thus, it is ascertained that the income in the hands of the assessee is taxable as FTS under the provisions of Income-tax Act and as FTS under the relevant provisions of India-Singapore DTAA.

Penalty u/s 270A of the I.T. Act, 1961 is also proposed to be initiated as I am satisfied, in view of the above, that the assessee has under reported its income by way of misreporting.”

“ LEGAL SUBMISSIONS ON NON-TAXABILITY OF CREDIT RATINGS SERVICEWS

9.

Article 12(3) of India-Singapore DTAA provides as under:

"(3)

The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use:

(a)

any copyright of a literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial. commercial or scientific experience, including gains derived from the alienation of any such right, property or information:

(b)

any industrial, commercial, or scientific equipment, other than payments derived by enterprise from activities described in paragraph 4(b) or 4(c) of Article 8."

10.

The definition of royalty as per Article 12 includes any payment made for "information concerning industrial, commercial or scientific experience". Reference may be drawn from commentary of the OECD Model Convention 2010 in relation to the meaning of the term "information" in the nature of "experience" as alluding to the concept of "know-how." The extracts of the said commentary have been given below:

"11.

In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 is referring to the concept of "know-how" Various specialist bodies and authors have formulated definitions of know-how. The words "payments [...] for information concerning industrial, commercial or scientific experience" are used in the context of the transfer of certain information that has not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to undivulged information of an industrial, commercial, or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and from the disclosure of which an economic benefit can be derived. Since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as a result of performing services at the request of the payer.

11.1

In the know-how contract, one of the parties agrees to impart to the other, 30 that he can use them for his own account, his special knowledge and experience which remain unrevealed to the public. It is recognized that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof.

11.2

This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments made under the latter contracts generally fall under Article 7."

11.

The expression 'experience' alludes to the concept of know-how which should be made available to the recipient. Where the recipient merely avails a service, without having any insight into the experience of the service provider, the same may not satisfy the test of royalty.

12.

The Hon'ble Bombay High Court in Diamond Services International (P.) Ltd. v. UOI [2008] 169 Taxman 201 (Bombay) has elucidated the meaning of the expressions/phrase "experience" and "right to use" or "impart" in the context of Article 12 of the India-Singapore DTAA. It has been held that, in order to qualify as royalty under Article 12(3)(a), the payment should be for transfer of "industrial or commercial experience" from assignor to the assignee for a consideration - it must envisage the person who is the owner of any intellectual property right, designs or model, plan, secret formula or process, etc. to retain the property in them and permit the use or allow the right to use such patents, designs or models, plans, secret formula, etc. to another person.

Where there is no transfer of the right to use, payment made cannot be treated as royalty. In the instant case, there is no transfer of any experience or secrets and hence the receipts of the assessee from provision of credit rating and annual surveillance services shall not partake the character of royalty.

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16.

The Hon'ble Mumbai Tribunal in Taxation Department, ICICI Bank Ltd. v. DCIT [2008] 20 SOT 453 (Mumbai) dealt with taxability of rating agency fees under the India-US DTAA. The Hon'ble ITAT, while ruling in favour of ICICI Bank, held that the payer has only got commercial information and not technical know-how/technical expertise or the technology on the basis of which the report was prepared. The Hon'ble ITAT observed that for bringing any payment within the definition of FIS, the agency should make available technical skill, expertise or technical know-how, on the basis of which the agency has prepared or developed the commercial information. As the technical skill, expertise or technical know-how used in preparing the commercial information was not made available, the same cannot be charged to tax as Fee for Included Services. Relevant extract of the judgement is reproduced below:

"14.

Having given a close look to the facts of the case in the light of definition of fees for included services given in DTAA and the Memorandum of Understanding alongwith example, we find that the has obtained the commercial information of rating from Moody's and the remuneration was paid outside India. Now it is to be seen whether the acquired any technical skill or technology on the basis of which commercial information was prepared. The answers is certainly in the negative because has only got the commercial information and not the technical know-how/technical expertise or the technologies on the basis of which it was prepared For bringing any payment within the definition of 'fee for included services' the non-resident must make available the technical skill, expertise or technical know-how to the, on the basis of which non-resident has prepared or developed the commercial information. Undisputedly in the instant case the technical skill, expertise or technical know-how used in preparing the commercial information was not made available to the and hence the remittance made by the for obtaining such commercial information cannot be called to be the 'fees for the included services' to make it chargeable to tax in India.”

17.

In summary, it is submitted that credit rating services does not tantamount to imparting of commercial experience as:

a)

the rating is required to be done as per international practices for the benefit of investors and no technical skill or process or expertise gets transferred to the clients;

b)

lenders/clients do not get right to use the experience and they are only given access to findings of the in the form of a report of the 's research and evaluation

c)

the assessee merely grants ratings to its clients and provides a report of its research/ evaluation without providing/ parting with its underlying know-how/technical expertise involved in arriving at such rating

d)

the merely issues credit certificates which do not impart any technical know-how/technical information or the technology on the basis of which they are prepared.

LEGAL SUBMISSIONS ON TAXABILITY OF ANNUAL SURVEILLANCE SERVICES

18.

Article 12(3) of India-Singapore DTAA provides as under.

"(4)

The term "fees for technical services" as used in this Article means payments of ary kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services:

(a)

are ancillary and subsidiary to the application or enjoyment of the right, property. or information for which a payment described in paragraph 3 is received, or

(b)

make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein, or

(c)

consist of the development and transfer of a technical plan or technical design but excludes any service that does not enable the person acquiring the service to apply the technology contained therein

19.

In terms of paragraph 4(b) of Article 12 read with Article 12(3) of the India-Singapore DTAA, fee for technical services inter-alia include technical or consultancy services that are ancillary and subsidiary to the application or enjoyment of any right, property, or information for which a payment described in paragraph 3(a) or (b) is received.

20.

In the absence of application or enjoyment of the right, property, or information (as described in para 3(a) of Article 12 of treaty which has been discussed in the preceeding paras of this application), the annual surveillance services rendered by the cannot be considered to be ancillary and subsidiary to use of commercial information under Article 12(3)(a) India-Singapore DTAA.”

H Scope of Work The credit rating agency shall issue the draft rating to the Company within 30 days of the award. Upon acceptance of draft rating by NHPC, the credit rating agency shall issue final rating within 2 days from the date of acceptance of draft rating by NHPC.

Annual surveillance to be carried out by the agency on the anniversary of the Rating.

Rate Debt Issue as and when sought for within stipulated time frame provided for by the company.

The broad scope of work of the Credit Rating Agency shall entail:

Communicating with NHPC Ltd. at regular intervals to understand developments and trends in performance to help analysts compare company performance against their own and the company's expectations, as well as against peers.

Checking the status of issues that may affect the credit quality of NHPC, exploring the probability of such issues arising in the near future, and assessing the management's perspective on such issues.

Discussing financial performance with the entity on the declaration of interim financial results.

Understanding strategic plans or new initiatives that could have rating implications.

The credit rating agency shall publish the rating, at least annually along g with the methodology used for the issue of rating and validity of the rating should also be stated up front.

The credit rating agency shall maintain internal records to support its credit opinions for a reasonable period of time or in accordance with applicable law.

The credit rating agency should also seek feedback from market participants whenever it contemplates major changes in its rating criteria or key rating policies and shall also provide some indication, such as a rating outlook, of the possible movement of the assigned rating.