2024 (5) TMI 635 - AT - Income Tax

Income Taxable in India or not - Royalty/FTS income - revenue received by the Appellant from provision of background screening and investigation services - scope of India - USA DTAA - HELD THAT - As decided in HIRERIGHT LTD. 2023 (9) TMI 478 - ITAT DELHI online access to background screening results cannot be construed as providing access to database maintained by the assessee. The consideration received by the assessee under the terms of its agreement with its client is purely towards provision of background screening services and does not include any consideration for use or right to use any copyright or a literary, artistic or scientific work, patent, trademark, design, model, plan, secret formula, or process or information. Thus, the impugned receipts of the assessee from its clients in India cannot be regarded as 'Royalties under the provisions of Article 13 of the India-UK DTAA What is delivered to the client is validation report assuring its clients about the authenticity of information contained in the report on the basis the information collated in the process of validation. Hence it cannot tantamount to imparting of commercial experience. 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. 15. As regards the 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 Hence, in the absence of any material change on the facts of the issue and the legal preposition, we hold that no addition on account Royalty is warranted in this case.

Summary

Issues Involved:
1. Determination of taxable income and validity of the assessment order.
2. Classification of revenue from background screening and investigation services as 'Royalty' under the India-USA DTAA.
3. Taxation of recovery of common internet and IT-related costs as Royalty.
4. Application of the correct tax rate.
5. Recovery of refund.
6. Levy of interest under Sections 234A and 234B.
7. Initiation of penalty proceedings under Section 270A.

Summary:

Issue 1: Determination of Taxable Income and Validity of the Assessment Order
- The assessee contended that the AO erred in determining the taxable income at INR 12,67,41,890/- against nil returned income, based on mere conjectures and surmises. The Tribunal noted that the issue is covered by a previous order where similar additions were made based on incorrect understanding of the nature of transactions undertaken by the assessee.

Issue 2: Classification of Revenue as 'Royalty'
- The AO classified the revenue from background screening services as 'Royalty' under Article 12 of the India-USA DTAA. The Tribunal held that the services provided do not involve any right to use or transfer of copyright and know-how. The Tribunal referred to the India-UK DTAA and concluded that the income cannot be characterized as 'Royalty' or 'Fees for Technical Services' (FTS) under Article 13. The Tribunal emphasized that the services involve verification of factual data, which does not qualify as literary or artistic work and does not involve any transfer of commercial experience or skill.

Issue 3: Taxation of Recovery of Common Internet and IT-related Costs
- The AO taxed the recovery of common internet and IT-related costs as Royalty. The assessee did not press these grounds due to the tax effect, and the Tribunal did not adjudicate on this issue but kept it open.

Issue 4: Application of the Correct Tax Rate
- The AO applied a tax rate of 40% on the total income assessed, ignoring the provision that Royalty should be taxed at a base rate of 10% under Section 115A of the Act. The Tribunal found this application incorrect.

Issue 5: Recovery of Refund
- The AO recovered a refund of INR 2,05,932 without appreciating that no refund was received by the assessee for the subject assessment year. The Tribunal noted this error.

Issue 6: Levy of Interest
- The AO levied interest under Sections 234A and 234B. The Tribunal found discrepancies in the computation of interest and noted that the total interest and fee payable were incorrectly calculated.

Issue 7: Initiation of Penalty Proceedings
- The AO initiated penalty proceedings under Section 270A. The Tribunal did not find a basis for this initiation given the nature of the case.

Conclusion:
- The Tribunal concluded that the receipts from background screening services do not qualify as 'Royalty' or 'FTS' under the India-UK DTAA and thus are not chargeable to tax in India. The appeal was partly allowed, and the Stay Application was dismissed as infructuous. The Tribunal pronounced the order in the Open Court on 19/01/2024.