Withholding tax on corporate credit rating services to a non-resident fails where the payment is not royalty and no permanent establishment exists.

Payment for corporate credit rating to a non-resident was treated as consideration for specialised professional services, not for the supply of scientific, technical, industrial or commercial knowledge or information. It therefore did not fall within the royalty article of the India-Australia DTAA. As the recipient had no permanent establishment in India, the income was not chargeable to tax in India under the business profits article either, and the payer had no withholding obligation under section 195. The assessee was accordingly held not liable to deduct tax at source, and the contrary orders were set aside.

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Issues: Whether tax was deductible at source under section 195 of the Income-tax Act, 1961 on payment made for corporate credit rating to a non-resident, and whether such payment was taxable in India as royalty under the India-Australia DTAA.

Analysis: The payment was held to be for specialised professional credit rating services, not for the supply of scientific, technical, industrial or commercial knowledge or information. Such receipts were therefore not covered by the royalty article of the treaty. In the absence of a permanent establishment of the non-resident in India, the income could be taxed only, if at all, under the business profits article of the DTAA. Since the recipient had no permanent establishment in India, the payment was not chargeable to tax in India, and the payer could not be fastened with a corresponding withholding obligation.

Conclusion: The assessee was not liable to deduct tax at source on the payment for corporate credit rating, and the contrary orders were set aside.

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