2023 (9) TMI 478 - AT - Income Tax

Income taxable in India - screening and investigation services provided by the assessee to its customers in India - Royalty or Fees for Technical Services ( FTS ) - whether such income chargeable to tax in India under the provisions of Article 13 of the India-UK DTAA? - HELD THAT - It is an undisputed fact that the assessee is a tax resident of UK and does not have a PE in India and hence it has opted to be governed by the provisions of the India-UK DTAA being more beneficial to the assessee. As gone through the relevant extracts of the said agreement and are convinced with the contention of the Ld. AR that the assessee s role is restricted to verification of the information concerning various candidates proposed to be hired by its clients (viz. educational qualifications, past employment details etc.) and providing the clients the relevant facts captured by the assessee during the course of validation. It is also evident that the assessee physically verifies the information/data in relation for screening services. The reports generated thereof are delivered to the clients in physical mode and/or through online access. The assessee does not provide any advice/analysis/recommendation on hiring of the employees by its client and does not assume any responsibility with regard to hiring decisions taken by its clients on the basis the assessee s report. The information collected by the assessee is not protected by any copyright but its circulation is regulated under the UK and other local laws. Considering the nature of the business of the assessee, it has to comply with the local laws wherein a duty is cast upon the assessee to ensure the confidentiality of reports which contains details of the applicants. Further the assessee does not provide access to any database to its clients but only access to reports requisition by the client in electronic form. Provision of online access of the report to its client is limited to providing access to the specific report providing relevant facts for the concerned candidates captured during the course of validation. Nothing has been brought on record by the Revenue to refute the aforesaid claim of the assessee. Thus online access to background screening results cannot be construed as providing access to database maintained by the assessee. The screening report which is issued does not involve any transfer of commercial experience to the client or getting the right to use the experience. There is also no transfer of any skill or knowledge of assessee to the customers in the issuance of screening reports, as the client is only given access to findings of the assessee in the form of a report which contains factual information but nowhere the assessee imparts its experience, skill of carrying out background screening services to its client. It is thus clear that there is no imparting of information concerning industrial, commercial or scientific experience by assessee when it issues the reports to its clients. Characterisation of impugned receipts as FTS, in our view, the services rendered by the assessee do not involve any technical skill/knowledge or consultancy or make available any technical knowledge, experience, skill, know-how or processes to the clients. Assessee's role is restricted to the verification of information provided by various candidates proposed to be hired by its clients. It involves seeking information from various sources that is accessible on specific requests and no advice/guidance on the credentials of the candidate is provided by the Assessee to its client. The role of the assessee is limited to validation of data provided by the candidate and provide relevant facts captured during the course of validation. The clients make an independent decision to hire the candidate. Hence, in our view the services should not be considered as FTS under Article 13(4) of the India-UK DTAA. Accordingly, ground No. 1 to 2.3 are decided in favour of the assessee.

Summary

Issues Involved:
1. Determination of taxable income.
2. Classification of revenue as 'Royalty' or 'Fees for Technical Services' (FTS) under Article 13 of the India-UK DTAA.
3. Levy of interest under sections 234A, 234B, and 234D of the Income Tax Act.
4. Short grant of TDS credit.
5. Initiation of penalty proceedings under section 270A of the Income Tax Act.

Summary of Judgment:

Issue 1: Determination of Taxable Income
The assessee, a foreign company resident in the UK, filed returns for AY 2019-20 and 2020-21 declaring nil income and claiming refunds. The AO determined taxable income at INR 12,54,69,976/- for AY 2019-20 and INR 8,51,94,915/- for AY 2020-21, based on the revenue from background screening and investigation services provided to Indian clients. The AO's assessment was challenged by the assessee on grounds of being based on conjectures and surmises.

Issue 2: Classification of Revenue as 'Royalty' or 'FTS'
The AO classified the revenue as 'Royalty' or 'FTS' under Article 13 of the India-UK DTAA, arguing that the reports provided by the assessee were protected by copyright laws and involved the use of a database. The assessee contended that the services were purely factual verifications and did not involve any transfer of copyright or technical knowledge.

The Tribunal found that the services rendered by the assessee did not qualify as 'Royalty' or 'FTS' under Article 13 of the India-UK DTAA. The reports provided were factual data and did not involve any copyrightable work. The Tribunal also noted that the assessee did not provide access to any database but only to specific reports. Consequently, the receipts from these services were not taxable as 'Royalty' or 'FTS'.

Issue 3: Levy of Interest under Sections 234A, 234B, and 234D
The levy of interest under sections 234A and 234B was deemed consequential. For AY 2019-20, the Tribunal directed the AO to verify the claim regarding the recovery of refund and levy of interest under section 234D.

Issue 4: Short Grant of TDS Credit
For AY 2020-21, the assessee claimed a short grant of TDS credit by INR 1,35,168/-. The Tribunal directed the AO to verify and take remedial action.

Issue 5: Initiation of Penalty Proceedings
The initiation of penalty proceedings under section 270A was considered premature and did not require adjudication at this stage.

Conclusion:
The Tribunal allowed the appeals for both AY 2019-20 and 2020-21, subject to the directions for verification and remedial actions on TDS credit and refund claims. The main issue of classification of revenue as 'Royalty' or 'FTS' was decided in favor of the assessee, concluding that the receipts were not taxable under Article 13 of the India-UK DTAA.