1. Definition

"Credit rating agency" is a commercial concern engaged in the business of credit rating of any debt obligation or of any project or program requiring finance, whether in the form of debt or otherwise, and includes credit rating of any financial obligation, instrument or security, which has the purpose of providing a potential investor or any other person any information pertaining to the relative safety of timely payment of interest or principal.

2. The value of taxable service in case of service provided by credit rating agencies.

Value of the taxable service in relation to the service provided by a credit rating agency to a client, is the gross amount charged by such agency from the client for services rendered in connection with credit rating of any financial obligation, instrument or security in any manner.

3. Applicability on advance for credit rating service.

The amount received in advance for the service of rating to be provided to the client, is only an advance and the services can only be deemed to have been provided only when the rating exercise has been completed and when rating of any instrument has been assigned. In case rating is not done, for any reason and the entire amount is returned back to the client, it cannot be said that services have been rendered and hence service tax is not attracted.

4. Relevant date for determining the liability of service tax.

The relevant date for determining the service tax liability would be the date when rating has been assigned to a particular instrument. In the case of ongoing projects, where rating has been assigned after the notified date i.e.16th October, 1998, the service tax would be payable.

5. Applicability on surveillance activity.

The client wanting to get rated a debt issue being floated by it requires the services of a credit rating agency. For this purpose they enter into a written agreement with a credit rating agency in a standardized format. The agreement specifies the charges for regular surveillance of the existing rating, to see whether it needs to be revised or otherwise. The fees of the rating agency is generally expressed as a percentage of the amount of debt sought to be revised. The fees on any assignments are usually paid at the time of entering into an agreement i.e. in advance. Such amounts are kept as advance against rating fee and is recognized as income only when the rating is assigned. After the rating is given, it is communicated to the client. The rating of any instrument remains under surveillance until the entire debt is repaid. The surveillance is a mandatory exercise for rating agencies. After surveillance, the client is billed as per the agreed fee structure. Service tax is payable both on the fees received for credit rating of the debt instrument and the surveillance fee.

6. Applicability on information and advisory services.

The information and advisory services, if any ,rendered by credit rating agencies would not attract service tax for the reason that taxable services in respect of credit rating agency means service provided to a client only in relation to credit rating of any financial obligation, instrument or security. Services of research and business aspects of a company, other customized services on say business houses and capital markets, indexing services and information services such as privatization policy for infrastructure projects, macro studies of infrastructure sector, implication of government policy in respect of any sector, financial modelling, bid evaluation, power purchase agreement, restructuring of state electricity boards, etc are not services ‘in relation to’ credit rating of any financial obligation, instrument or security and are hence outside the gamut of service tax on the services of credit ratings.