The Income Tax Appellate Tribunal, Delhi, has clarified a critical boundary in international tax law by holding that credit rating services and associated surveillance fees do not attract taxation as royalty or fees for technical services under the India-Singapore Double Taxation Avoidance Agreement unless there is a transfer of technical know-how or commercial experience to the recipient. This decision provides much-needed doctrinal clarity for multinational service providers operating across borders.
Background & Facts
The Dispute
The assessee, S & P Global Ratings Singapore Pte. Ltd., is a Singapore-based company engaged in providing credit rating and annual surveillance services to Indian corporate clients, including Reliance Industries Ltd, Bharti Airtel Limited, Hero Fincorp Ltd., and Adani Ports & SEZ Ltd. The dispute arose over whether payments received by the assessee for these services constituted taxable income in India under the Income-tax Act, 1961, and the India-Singapore Double Taxation Avoidance Agreement (DTAA).
Key Facts
- The assessee is a tax resident of Singapore under Article 4 of the India-Singapore DTAA.
- The assessee has no Permanent Establishment (PE) in India as per Article 5 of the DTAA.
- For Assessment Year 2022-23, the assessee declared total income of Rs. 6,08,14,200/- in its return filed on 31.10.2022, including only those receipts on which tax was withheld by Indian clients.
- Total receipts from Indian clients amounted to USD 9,22,082/- (equivalent to Rs. 73,22,67,191/-).
- The assessee maintained that its services involved no transfer of technical expertise, know-how, or proprietary processes to clients.
- The Assessing Officer (AO) issued notices under Section 133(6) to Indian clients and reviewed agreements to determine the nature of the receipts.
- The AO concluded that credit ratings constituted "information concerning commercial experience" under Article 12(3)(a) of the DTAA and thus qualified as royalty.
- The annual surveillance services were classified as Fees for Technical Services (FTS) under Article 12(4)(a) of the DTAA.
- The Draft Assessment Order dated 28.03.2024 proposed tax at 10% and initiated penalty proceedings under Section 270A.
- The Dispute Resolution Panel (DRP) upheld the AO’s findings in its order dated 21.12.2024.
- The Final Assessment Order was passed on 09.01.2025, assessing income at Rs. 73,22,67,191/- as FTS.
Procedural History
- 31.10.2022: Assessee filed return for A.Y. 2022-23 declaring income of Rs. 6,08,14,200/-
- 2023: AO initiated scrutiny and issued notices under Section 133(6)
- 28.03.2024: Draft Assessment Order issued by AO
- 21.12.2024: DRP order rejecting assessee’s objections
- 09.01.2025: Final Assessment Order passed under Section 143(3) read with Section 144C(13)
- 15.06.2026: ITAT Delhi delivered judgment on appeal
The Parties' Positions
For the Assessee
- Argued that credit ratings are merely opinions based on publicly available data and international standards.
- Contended that no technical skill, process, or know-how is transferred to clients.
- Relied on Diamond Services International (P.) Ltd. v. UOI and ICICI Bank Ltd. v. DCIT to establish that mere receipt of commercial information does not constitute royalty or FTS.
- Emphasized that the OECD Commentary distinguishes between transfer of know-how and performance of services.
- Stated that annual surveillance is a monitoring activity, not a transfer of technology or expertise.
For the Revenue
- Argued that credit ratings are used by Indian companies to access capital markets and reduce borrowing costs, indicating commercial benefit derived from the assessee’s expertise.
- Relied on the agreement with NHPC Ltd. to show continuous interaction and analysis, suggesting a service involving technical input.
- Maintained that the ratings are based on proprietary methodologies and internal models, which constitute "commercial experience" under Article 12(3)(a).
- Asserted that surveillance services are ancillary to the use of the rating and thus qualify as FTS under Article 12(4)(a).
Relief Sought
The assessee sought deletion of the assessed income of Rs. 73,22,67,191/-, cancellation of the penalty under Section 270A, and a declaration that the receipts are not taxable in India under the DTAA.
The Legal Issue
The central question was whether receipts from credit rating and annual surveillance services constitute "royalty" under Article 12(3)(a) or "fees for technical services" under Article 12(4)(a) of the India-Singapore DTAA, in the absence of any transfer of technical know-how, experience, or proprietary processes to the recipient.
Arguments Presented
For the Appellant/Petitioner
The assessee relied on the OECD Model Tax Convention Commentary 2010, which distinguishes between payments for know-how and payments for services. It argued that royalty under Article 12(3)(a) requires the transfer of information that can be used independently by the recipient without further involvement of the provider. The assessee cited Diamond Services International to establish that "experience" must be imparted, not merely disclosed. It further relied on ICICI Bank Ltd. v. DCIT, where the Mumbai Tribunal held that credit ratings are commercial information, not technical know-how, and that no technology or skill is transferred to the client. The assessee emphasized that its role was evaluative and advisory, not instructional.
For the Respondent/State
The Revenue contended that the rating process involves proprietary analytical models and internal expertise, the use of which by clients constitutes indirect transfer of commercial experience. It pointed to the NHPC agreement to argue that continuous dialogue and analysis amounted to a service involving technical input. The Revenue maintained that the rating’s utility in reducing borrowing costs demonstrated its commercial value and that surveillance services were ancillary to the use of the rating, thus falling under Article 12(4)(a).
The Court's Analysis
The Tribunal undertook a detailed examination of the nature of credit rating services and the language of the DTAA. It noted that Article 12(3)(a) defines royalty as payments for the use of, or right to use, information concerning commercial experience. The Tribunal emphasized that the OECD Commentary explicitly states that payments for services performed at the request of the payer do not qualify as royalties, even if they involve prior experience.
"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."
The Tribunal further observed that the ICICI Bank decision, rendered by a co-ordinate bench, was directly on point: the payment was for a report, not for the transfer of the methodology behind it. The Tribunal held that the assessee did not grant clients any right to use its internal models, algorithms, or analytical frameworks. Clients received only the final rating, not the means to replicate it.
Regarding annual surveillance, the Tribunal noted that Article 12(4)(a) requires services to be either ancillary to the use of royalty-type information or to make available technical knowledge. Since the Tribunal found no royalty component in the initial rating, the surveillance services could not be ancillary to it. Moreover, surveillance involved monitoring and reporting, not the transfer of technical skill or know-how.
The Tribunal rejected the Revenue’s reliance on the NHPC agreement, holding that regular communication and feedback mechanisms are inherent to professional services and do not equate to the transfer of technical expertise.
The Verdict
The appeal of the assessee was allowed. The Tribunal deleted the assessed income of Rs. 73,22,67,191/- and set aside the levy of tax under Article 12(3)(a) and Article 12(4)(a) of the India-Singapore DTAA. The penalty proceedings initiated under Section 270A were also cancelled. The Tribunal directed that the income be treated as non-taxable in India, subject to the absence of a Permanent Establishment.
What This Means For Similar Cases
Credit Ratings Are Not Royalty by Default
- Practitioners must now argue that mere issuance of a rating, even if based on proprietary models, does not constitute transfer of "commercial experience" under Article 12(3)(a).
- The burden is on the Revenue to prove actual transfer of know-how, not just the existence of internal expertise.
- Rating agencies can rely on ICICI Bank and Diamond Services to resist classification of fees as royalty.
Surveillance Services Require Direct Technical Transfer
- Annual monitoring or review services will not qualify as FTS unless they involve active transfer of technical knowledge enabling the client to apply a technology.
- Routine reporting, compliance checks, or feedback sessions do not meet the threshold under Article 12(4)(b).
- Tax advisors should review service agreements to ensure language does not inadvertently suggest transfer of technical skill.
DTAA Interpretation Favors Substance Over Form
- Courts and tribunals are increasingly prioritizing the substance of the transaction over the label assigned by parties.
- Revenue authorities cannot rely on broad interpretations of "commercial experience" to tax services that are essentially advisory.
- This judgment reinforces the principle that taxation under DTAA must align with international norms as reflected in the OECD Commentary.
