Income Tax Appellate Tribunal - Delhi
Hireright Llc , Usa vs Deputy Commissioner Of Income Tax, ... on 19 January, 2024
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'D', NEW DELHI
Before Shri Saktijit Dey, Vice President
&
Dr. B. R. R. Kumar, Accountant Member
ITA No. 3413/Del/2023: Asstt. Year: 2021-22
Hireright LLC, Vs The DCIT, INT-Tax, Gurgaon,
100, Centreview, Suit 300, Haryana 122001
Nashville, United States of
America
(APPELLANT) (RESPONDENT)
PAN No. AADCH 2254 D
SA No. 446/Del/2023
Arising out of ITA No. 3413/Del/2023
Asstt. Year: 2021-22
Hireright LLC, Vs The DCIT, INT-Tax, Gurgaon,
100, Centreview, Suit 300, Haryana 122001
Nashville, United States of
America
(APPELLANT) (RESPONDENT)
PAN No. AADCH 2254 D
Assessee by : Sh. Kishore Kunal, Adv.
Ms. Ankita Prakash, Adv.
Revenue by : Sh. P. Praveen Siddharth, CIT-DR
Date of Hearing: 18.01.2024 Date of Pronouncement: 19.01.2024
ORDER
Per Dr. B. R. R. Kumar:-
The present appeal and the Stay Application have been filed by the assessee against the or der dated 31.10 .2023 passed by the AO for the A.Y. 2021-22.2
ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
2. The asse ssee has raised the following grounds of appe al:-
1. That on the facts and circumstances o f the case and in law, Ld. AO, has grossly erred in determining the taxable income of the Appella nt fo r the subject assessment year at INR 12,67,41,890/- as a gainst nil returned income and, accordingly, the assessment or der passed by the L d. AO is bad in law and void ab-initio .
1.1. T hat o n the facts and circumstances o f the cas e and in law, the L d. AO has erred in making additio ns of I NR 12,67,41,890/- based on mere conjunctures and surmises , ignoring the factual matri x o f the case as wel l as the nature o f the transactio ns undertaken by the Appellant.
1.2. That the Ld. AO has fa ile d to appreciate the submissions made by the A ppellant and furthe r erred in mak ing several observ ations and inferences in the assessment o rder, whic h are fac tua lly incorrec t and le gally untenable .
2. That on the facts and circumstances o f the case and in law, the Ld. AO e rred in ho lding that the revenue rece ive d by the Appellant from provision of background sc reening and inves tigation ser vices is in the nature o f 'Ro yalty' under the provisio ns of Article 12 o f the Double Taxatio n Avoidance Agreement between India and USA (" treaty").
2.1. T hat o n the facts and circumstances o f the cas e and in law, the Ld. A O etred in ho lding that the cons ide ration received by the Appellant for pro viding so lutions to c lients is for use o f info rmation co nc erning industrial, commercial, o r scientific experience a nd sa me is liable to taxed as ro yalty.
2.2. T hat o n the facts and circumstances o f the cas e and in law, the Ld. AO e rred i n ho lding that the Appe llant maintains database and pro vides access to its database hosted on its servers to its clie nts on payment basis . Therefore , use of o r right to use o f ser ver also amounts to use of e quipment and the same is liable to taxed as royalty.3
ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
2.3. T hat o n the facts and circumstances o f the cas e and in law, the L d. AO has e rred in denyi ng e xemptio n unde r Sec tion 10(50) o f the Act without appreciating the factual matrix o f the case.
3 That on the facts and circumstanc es of the case and in low, the Id. NO has creed in taxing recove ry o f common internet and It related co sts" that have hee n re-charged at cost by the A ppe llant from HireRight B ackgro und S creening India LLP as Ro yalty under the Treaty 3.1 That on the facts and circumstanc es of the case and in law, the Lel AO has crred by hokling that cos t to cost charges recovered by the Appellant fro m HireRught Background Sereening Incha L.I.P is in the nature o f income as provide d in section 5 r.w section 9 of the Act and is cove red in the de finion of income a s per Section 2(24) o f the Act.
4. That on the facts and circumstanc es of the case and in law, the Ld. AO has erred in computing the tax by applying the tax rate o f 40% (in the computation sheet annexed to the impugne d order passed by the Ld. A O) o f INR 5,06,96,756 (excluding applica ble surcharge and cess) on the total income assessed vide impugned order , the reby , igno ring the fac t tha t where the a dditions made in the impugned order have been held in the nature of ro yalty, the same ought to be laxed at base tax r ate o f 10% as per the pr ovisions o f Section 115A o f the Ac t.
5. That on facts a nd circumstances o f the case and in law, the Ld. AO ha s erred in recove ring refund o f INR 2,05.932 without appreciating the fac t that no re fund was received by the Appe llant fo r the subject Assessment year.
6. That on the faets and circumstances of the case and in law, the L d. A O has er red in levying interus t unde r Section 234A and Section 234B of the Act.
6.1 That on the facts and circumstanc es of the case and in law, the L d. A O has erro red while computing the 'Total inte rest and Fee Payablc' ( at Column 42) of INR 1,74,13,486 as against 4 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
amount to taling to INR 1,69,59.708 for the Interest unde r Section 234A and 234B o f the Act computed at INR 23.55.515 (at Column 37) and INR 1.46,04, 193 (at Column 38) respectively in the computation sheet annexed to the impugned order passed by the Ld. AO .
7. That on the facts and circumstanc es of the case and in law, the Ld. AO has e rred in initiating penalty pro ceedings under sec tion 270A of the Act
3. At the o utset, it has been brought to our notice that the issue of the involved in the appeal before us, has been squarely covered by the order of the Tribunal in the cas e of HireRight Ltd., in ITA No. 373/Del/2023 & ITA No. 1884/Del/2022, which read as under:-
The two appea ls filed by the assessee are directe d against the order da ted 20.07.2022 and 25.01.2023 o f the Ld. Assistant Commissioner o f Income Tax, Circle International Tax-2(1)(1) ("AO") passed under section 143(3) r.w.s. 144C(13) of the Income Tax Ac t, 1961 (the "Ac t") per taining to As sessment Year ("AY") 2019- 20 and 2020-21 re spectivel y. Since the issues invo lved in both the appeals are co mmon, the same were hea rd together and are being dispose d o f by this common order.
2. The assessee has raise d the fo llo wing grounds of appeal:-
AY 2019-20 - ITA No. 1884/De l/2022 "1. That on the facts and circumstances o f the case and in law, Ld. AO, has grossly er red in determining the taxable income of the Appellant fo r the subj ect assessment ye ar at INR 12,54,69,976/-- as against nil returne d income and, accordingly, the assessment orde r passed by the Ld. AO is bad in law and vo id ab-ini tio 1.1. That o n the facts and circumsta nces of the case and in law, the Ld. AO has erre d in pro posing addition of INR 12,54,69,976/- ba sed on mere conjunctures and surmises, 5 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
ignoring the factual ma trix of the case as well as the nature of the tra nsactions undertake n by the Appellant.
1.2. That the L d. AO has fa iled to appreciate the submissions made by the A ppe lla nt and further e rre d in making se veral observations and infere nces in the assessment order, which are factually inco rrect and legally untenable.
2. T ha t on the fa cts and circumstances of the case and in law, the Ld. AO e rred in holding that the revenue rec eived by the Appellant from provision o f backgro und scre ening and investiga tion services is in the nature of 'Ro yalty' or 'Fees for Technical Services' ( "FTS") unde r the provisions of Ar ticle 13 of the Double Taxa tio n Avoidance Agree ment between India and UK ( "India - UK DTAA").
2.1. That o n the facts and circumsta nces of the case and in law, the Ld. AO e rred in holding that the re ports pro vide d by the A ppe llant are pro tecte d by Co pyright laws and therefore, the use o f such repo rts by the clients will result in use o f a Copyr ight charge able to tax as Ro yalty.
2.2. That o n the facts and circumsta nces of the case and in law, the L d. AO erred in holding that the Appellant maintains a Database or Appellant has taken such database under license from its o wner and the consideration received by the Appellant is for allowing the use of database to its clients and is c ha rgeable to tax as Royalty.
2.3. That on the facts and circumstances o f the case and in law , the Ld. AO erred in holding that the scre ening repor t pro vided by the Appellant contains confidential info rmation which are not available in public domain and use o f that information by the clients amounts to use of commercial experience of the Appe llant and is chargeable to tax as Royalty.
6ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
2.4 That o n the facts a nd circumstances of the case and in law, the Ld. AO e rred in holding that the revenue rec eived by the Assessee is anc illary to the allege d 'Ro yalties' and therefore a lso ta xable as FTS.
3. T ha t on the fa cts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A and 234B of the Act.
4. T ha t on the fa cts and circumstances of the case and in law, the Ld. AO has e rred in recovering refund of INR 55,647 and levying interest of IN R 5,286 unde r S ection 234D of the Act wi thout appre ciating the fac t that no refund was rece ive d by the Appellant for the subject assessment year.
5. T ha t on the fa cts and circumstances of the case and in law, the Ld. AO has erred in initiating pe nalty proceedings under section 270A of the Act."
AY 2020-21 - ITA No. 373/Del/2023 "
1. T ha t on the fa cts and circumstances of the case and in law, Ld. AO, has grossly er red in determining the taxable income of the Appellant fo r the subj ect assessment ye ar at INR 8,51,94,915/ - as aga inst nil re tur ned income and, accordingly, the assessment orde r passed by the Ld. AO is bad in law and vo id ab-ini tio .
1.1. That o n the facts and circumsta nces of the case and in law, the Ld. AO has erre d in pro posing addition of INR 8,51,94,915/- based o n mere conjunctures and surm ises, ignoring the factual ma trix of the case as well as the nature of the tra nsactions undertake n by the Appellant.
1.2. That the L d. AO has fa iled to appreciate the submissions made by the A ppe lla nt and further e rre d in making se veral observations and infere nces in the 7 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
assessment order, which are factually inco rrect and legally untenable.
2. T ha t on the fa cts and circumstances of the case and in law, the Ld. AO e rred in holding that the revenue rec eived by the Appellant from provision o f backgro und scre ening and investiga tion services is in the nature of 'Ro yalty' or 'Fees for Technical Services' ( "FTS") unde r the provisions of Ar ticle 13 of the Double Taxa tio n Avoidance Agree ment between India and UK ( "India - UK DTAA").
2.1. That o n the facts and circumsta nces of the case and in law, the Ld. AO e rred in holding that the re ports pro vide d by the A ppe llant are pro tecte d by Co pyright laws and therefore, the use o f such repo rts by the clients will result in use o f a Copyr ight charge able to tax as Ro yalty.
2.2. That o n the facts and circumsta nces of the case and in law, the L d. AO erred in holding that the Appellant maintains a Database or Appellant has taken such database under license from its o wner and the consideration received by the Appellant is for allowing the use of database to its clients and is c ha rgeable to tax as Royalty.
2.3. That o n the facts and circumsta nces of the case and in law, the Ld. AO e rred in holding that the scree ning report provide d by the A ppellant contains confidential information whic h are no t available in public domain and use o f that info rmation by the clie nts amounts to use of commercial experience o f the Appellant and is chargeable to tax as Royalty . That on the facts and circ umstances of the case and in law , the Ld. AO e rre d in ho lding that the revenue receive d by the Assessee is a ncillar y to the alleged 'Royalties' and the refore also ta xable as FTS.
3. T ha t on the fa cts and circumstances of the case and in law, the Ld. AO has erred in gr anting T DS credit for INR 91,91,828 as against the TDS credit of INR Rs . 93,26,997 claimed by the Appellant, thereby resulting is a short-grant of TDS credit by INR Rs. 1,35,168.8
ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
4. T ha t on the fa cts and circumstances of the case and in law, the Ld. AO has e rred in recovering refund of INR 2,32,800/- witho ut appreciating the fact that no re fund was receive d by the Appellant for the subject assessment year.
5. T ha t on the fa cts and circumstances of the case and in law, the Ld. AO has erred in initiating pe nalty proceedings under section 270A of the Act."
3. Br iefly stated, the assessee is a foreign company and a tax resident o f UK. It is e ngaged in the business of providing human resource backgro und scree ning service s including pre- employment background screening, employment, educatio n, verification services and investigative due diligence services. The exac t nature o f services rendere d by the asse ssee prima rily includes verificat ion o f the de tails in respect of the concerne d candidate viz. i) educational verification ii) e mployment verification iii) pro fessio nal refe rence iv) othe r checks including but no t limite d to glo bal sanction check, criminal check, drugs test, e tc . T he assessee does not have any permanent establis hment (" PE") in India .
3.1 T he as sessee filed its re turn o f income fo r AY 2019- 20 on 27.01.2020 declaring to tal income of Rs. nil and c laimed refund of Rs.12,54,69,976/-. Fo r AY 2020- 21 it e- filed its retur n on 05.02.2021 declaring to tal income of Rs. nil and c laimed refund of Rs . 93,27,000/-. The assessee provided background screening and investigation services to its customers in India and rece ived Rs. 12,54,69,976/- a nd Rs . 8,51,94,915/- in the respective AYs which have not been offe red to tax in India by the assessee .
3.2 The assessee has claimed exempt incom e of Rs . 12,54,69,976/- in AY 2019-20 and Rs. 8,51,94,915/- in AY 2020-21. The ca se of the as sessee for both the AYs was selected for complete sc rutiny under CASS. Statutory notices along with detailed questionnair e were is sued through electro nic mode from time to time . I n respo nse the reto the 9 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
assessee filed submissions as per electronic o rde r sheet w hich has bee n placed o n record. Afte r pe rusing the de tails, The Ld. Assessing Officer ("AO") show caused the assessee as to why the ba ckgro und screening and inve stigation services provide d by the assessee to its customers in India wo uld not fall within the purview o f Article 13 o f the India-UK Double Taxation Avoidance Agreem ent ( "India-UK DTAA") and liable to tax in India and why the payment received by the asses see from Indian entity sho uld not be taxable as Fees for Technical Services ("FTS").
3.3 Fo r AY 2019-20, the assessee failed to file the reply in response to the said show cause notice within due date and hence the L d. AO proceede d to complete the assessment on the basis of mate rial ava ilable on record. For AY 2020-21 the assessee filed its reply vide letter dated 03.03.2022 and submitted tha t the ser vices pro vided by the assessee do not fall under the purvie w o f royalty/F TS. The assessee' s role is restricte d to verificatio n of the information concerning various candidates pro pos ed to be hired by i ts c lie nts and providing relev ant facts captured dur ing the course of validation. The background sc reening repo rts are delivere d to the clients in phys ical fo rm and/or through online access . Further, the assessee is not protected by any co pyright, but its circulation is regulate d under the UK and the local la ws . The asse ssee relied upon v ar ious case laws and the definitio n o f "ro yaltie s" under the Act, India- UK DTAA and the Co pyright Act. The reply/submissio n of the asses see w as not fo und tenable by the Ld. AO fo r the rea son that the asse ssee has itself admitte d that the informatio n is de livere d to the client by it thro ugh phys ical and online mode/access. The final rights on the information provide d to the clients lies with the assessee and the assessee has all the right to e xercise w ith the information. The info rmation lying with the assessee is tr ans ferre d to the c lients for use and thus the impugned income falls within the purview of royalty and FT S under the prov isions of Artic le 13 o f the India-UK DTAA and hence chargeable to tax in India. According to Ld. AO, the re ports pro vided by the assessee are protec ted by copy right laws and therefore the use of such repo rts by the 10 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
clients will result in use o f a copy right chargeable to tax as royalty; the assessee maintains a database or has taken suc h database under licence from its o wner and the consider ation receive d by the assessee is for allo wing the use of database to its clients and is chargeable to tax as ro yalty; the s creening repor t provide d by the assessee contains confidential info rmation use o f which amounts to the use of co mmercial experience of the assessee charge able to tax as ro yalty; and services provide d by the assessee are ancillary to the alleged 'roya lties' and the refore also taxable as FTS. Acco rdingly, the Ld. AO proceeded to pass the draft assessment order on 29.09.2021 for AY 2019-20 and on 08.03.2022 for AY 2020- 21 propos ing to assess the income o f the assessee at Rs . 12,54,69,976/- and Rs. 8,51,94,915/- respec tively.
4. T he assessee filed o bjectio ns befo re the Ld. Dispute Resolution Panel ( "DR P") sta ting that the afo resaid allegations made by the Ld. AO are grossly incor rect and made the following submissions be fore the Ld. DRP:-
"At the ve ry o utset and befo re adverting/ rebutting to the alle gations made by the Assessing officer, it is most respectfully submitted that the Ld. AO has mis unde rs tood the fac ts of the case and the exact na ture o f ser vices re ndere d by the Asses see. Hence, in order to bring o ut clearly the facts of the case and the nature o f the serv ices re ndered by the Assessee to its clients, it would be pertinent to explain the modus ope ra ndi/ nature o f business of the Assessee.
The Assessee is e ngage d in the business o f providing human resource screening services, including pre-em ployment background scre ening, employme nt, education verificatio n services and investigative due diligence se rvices The e xact nature of se rvices re ndere d by the Assessee primari ly includes verification o f the follo wing de tails in respect o f the concerne d candidate:
- Educational Verification
- Emplo yment Verification
- Profess iona l refe rence 11 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
- Other check s such as global sanction chec k etc. The Assessee's role is restricte d to ve rific ation of the info rmation ( including educational and professio nal details , criminal records etc.) concerning various candidates propose d to be hired by its clients a nd providing relevant facts capture d during the co urse o f validatio n. The Assessee has entered into agreements with var ious India parties to physic ally verify any info rmation data in re lation for scre ening se rvices.
The background screening repo rts ar e delivered to the clients in phys ical form a nd/or through online access The client is respons ible for compliance with the applicable local laws in connection w ith the background screening and Inve stigation services. T he consent from the candidates and the dis closures, as may he re quired, in connection w ith the rende ring of the said services shall also he obta ined by the client itself.
The Assesse e does not provide any adv ice/analysis/re commendatio n o n hiring o f the employees by its c lient. The final dec ision as re gar ds hiring/assignment of the candidate vests e ntirely with the clients o f the Asses see. Also , the Assessee does no t assume any responsibility with regard to hiring decisions taken by the client on the basis of the Assessee's findings.
The assumption a nd assertions ma de by the Ld. AO in the draft assessment order are based on inco rrect unde rstanding o f the fac ts in the present case . In to tality o f the above, it is respectfully submitted tha t the consideration receive d by the Assessee cannot be taxe d as 'Royalties under the India-UK DTAA fo r the belo w stated reasons:
- The definitio n of Ro ya lly under the India- UK DTAA unambiguously requires that the c onside ration re ceived must be for the use of or right to use, any copyright of a literary artistic, o r scientific work. However, the L d. AO has s ummarily alleged that the co nsideration received is taxable as ro ya lty under A rticle 13 of the India-UK Tax Treaty, w itho ut specifying the e xact nature of the 12 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
copyright in use. hence the conditio ns laid down in Ar tic le 13(3)(a) is no t s atisfied.
- The Consideration received by the Assessee is for rende ring o f background screening services and not for use or right to use any copyright of a literary, artistic or scientific work , patent, trademark. design, model, plan, secret formula, or process or information. Thus, the payment recei ved/receiv able by the Assessee c anno t be termed as Ro yalties unde r the pro visions o f Article 13 of the India-UK Tax Treaty
- T hat the income earned from provision of backgr ound screening services is in the nature o f business income and in the abse nce o f any presence in India in the form of a 'permanent establishment' or "business co nnection' the income earne d by Assessee shall not be taxable in I ndia eithe r under the I ncome-tax Act, 1961 o r under the India- UK trea ty Le . A rticle 7 of the treaty.
- In essence the Assessee collates the factual data from various source s and submits a report authenticating the info rmation as submitted by the j ob Applicants o f the clients. The act o f mere collation of factual informa tion canno t pe r se be copyrighted as it does not fulfil the requirements e nlisted under Section 13(1)(a) of the Indian Copyr ight Act 1957. The re ports prepare d by the Assessee ca nnot be termed as 'original literary work as it lacks origina lity and is devoid of m olecule of creativity o r skill.
- Without prejudice to the abo ve, for the sak e of arguments, e ven if it is so assumed that the information collated by the Assessee which is used for preparation of background scree ning re ports is co pyrighted and obtained under a license, even then the conside ratio n rec eived from services provided by the Asses see cannot be held to be Ro yalties In the instant case, as the most w ha t la being transferre d is no t a copyright but actually a 13 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
copyrighted article. Payments made for acquiring the right to use the product itself, without allowing any right to use the co pyright in the product, are not cove red w ithin the scope of Ro yalties .
- The subject services can only be c lassified as payments towa rds use o f co pyright o nly w here the rights asso ciated with the sa id copyright enable the recipient to commercially e xploit the said copyright which is cle arly absent in the pr esent case . The permitted ine , it is pointed out, is o nly for client's internal use and does not amount to the use of Co pyright or the right allege d by the Ld. AO.
- That the cons ide ration cannot be c onstrued as rece ived for use of database as the Assessee does no t maintain any da tabase of the information do cumentation obtained for the purposes of rendering human resource sc reening services
- The Assessee a t no stage o f the process provides access to any database containing info rmation/documentation relev ant to the human reso urce background sc reening services. All that is pro vided is the online acce ss to the repor t pre pare d by the Assessee .
- The payments made by the clients to Asses see are fo r rendition of standard services and not for use of any info rmation conce rning industrial, co mmercial or scientific experience . The informatio n obta ined by the Asses see from different sources is in the nature o f fac tual data and in any case it is not an info rmation which would sho w any kind of commercial experience, skill or e xpe rtise. Accordingly, such pa yments do not fall under the definitio n of Royalty under the Indi a- UK Tax Treaty and therefore, is not liable to be taxed in India In the light o f the detailed arguments in suppo rt o f the Assessee's cla im, it is most humbly submitted that the rece ipts 14 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
earne d from backgro und s cree ning se rvices invo lv ing verification of facts/information canno t in any m anner be constr ued as pa yments towa rds Royalties o r FTS as de fined under Article 13 of the India- UK Tax Treaty. The rece ipts earne d by the Assessee is pure ly in the nature of business income. However, in the absence of a pe rmanent establishment in I ndia, the receipts canno t be considered as taxable in India Most res pectfully, the alle gat ions o f the Ld. AO are baseless and devoid o f any legal merits of the case ."
5. For AY 2019-20, the Ld. DRP vide its order dated 25.05.2022 direc ted the Ld. A O to complete the assessment by passing a speak ing o rde r after conside ring the assessee's s ubmissions and fo r AY 2020-21, the Ld. DRP vide its order date d 12.09.2022 upheld the findi ngs of the Ld. AO.
6. Co nsequently, purs uant to the directio ns of the Ld. DRP the Ld. AO passe d the final assessment order under sectio n 143(3) r.w. section 144C (13) on 20.07.2022 fo r AY 2019-20 and on 25.01.2023 for AY 2021 assessing the income of the assessee at Rs . 12,54,69,976/- and Rs. 8,51,94,915/- res pectively be ing in the na ture o f royalty/FTS charge able to tax in India.
7. Aggrieved, the assessee is in appeal before the T ribunal and all the grounds o f appe al relate the reto. T he main issue arising out o f all the grounds raised befo re us is whether the income of the assessee fro m prov isio n of background screening and inves tigation services to its clients i n I ndia are in the nature of 'roya lty' o r 'FTS ' chargeable to tax in India unde r the provisio ns o f Article 13 o f the India-UK DTAA .
8. The Ld. AR submitted that there is no dispute on the services rendered by the assessee . In orde r to e xplain the scope and nature of services pe rfo rmed by the asse ssee, the Ld. AR took us through the re levant parts of a sample agreement be twee n the assessee and B arclays ( page s 19 to 133 of Paper Book). He reitera ted the submiss ions made before the Ld. DR P. The Ld. DR vehemently argued that the impugned income of the assessee cannot be charac terised as royalty 15 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
income / FTS as the clients pro vide the lis t of candidates to the assessee and the role of the assessee is limite d to the background check of those candidates. A manual/o nline repo rt is handed over to the c lie nt. The ser vices perfo rmed by the assessee do not invo lve any right to use o f o r tr ansfer of copyright and know-how . He furthe r submitted that the observ ation o f the L d. DR P that the assessee did no t make any submiss ions befo re the Ld. AO is e rroneous as all the requisite deta ils/documents were duly pro duced by the assesse e be fore the Ld. A O.
9. The Ld. DR, o n the other hand, relied on the o rder o f the Ld. AO.
10. We have heard the Ld. Representative of the par ties a nd peruse d the recor ds. It is an undisputed fact that the assessee is a tax resident of UK and does not have a PE in I ndia and hence it has opte d to be governed by the provisio ns o f the India-UK DTAA be ing more beneficial to the assessee. Pro vis ion of services by the assessee and its na ture thereo f is also no t under dis pute. Perusal of the agree ment o f the assessee w ith Barc lays s hows the exact na ture o f ser vices pe rfo rmed by the assessee. We ha ve gone through the relevant extr acts of the said agreement and a re convinced with the conte ntion o f the Ld. AR that the a ssessee's ro le is restricted to verification o f the info rmation concerning vario us candidates pro po sed to be hire d by its clients ( viz. e ducational qualificatio ns, past employment details etc.) and prov iding the clients the relevant fac ts ca ptured by the assessee during the course of validation. The source of informatio n used for verificatio n of the details may be a va ilable on public domain or o btained telephonically from the pre vio us emplo yers of the candidates and in some cases, even the records of the co ur ts/public authorities . It is also evide nt that the assessee physically ver ifies the info rmation/data in re lation fo r scre ening services. The repo rts generated thereof a re delivered to the clients in physical mode and/o r thro ugh o nline access. The assessee does not provide any adv ice/analysis/ recommendati on on hiri ng of the employees by its client and does no t assume any responsibility 16 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
with regard to hiring decisions take n by its clients o n the bas is the assessee's report. The infor mation co llec ted by the assessee is not protected by any co pyright but its circulation is regulate d under the UK and other local laws. Furthe r, conside ring the nature o f the bus iness o f the asse ssee, it has to comply with the local laws w herein a duty is cast upon the assessee to ensur e the confidentiality of reports which contains deta ils of the applicants.
11. Artic le 13(3) and 13(4) o f India-UK DTAA reads as under:-
"3. For the purpo ses o f this Article , the term " royalties"
means:
(a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work, including cinematography films or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience; and
(b) payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial or scientific equipment, other than income derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic.
4. For the purposes of paragraph 2 o f this Artic le, and subject to para graph 5, of this Ar tic le, the te rm "fees fo r technica l ser vices" means payments of any kind of any person in conside ratio n fo r the re ndering o f any technical or consultancy services ( including the provisio n of services o f a technical or other perso nnel) which :
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3(a) of this article is received ; or
(b) are ancillary and subsidiary to the enjoyment of the property for which a payment described in paragraph 3(b) of this Article is received ; or
(c) make available technical knowledge, experience, skill know-17
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how or processes, or consist of the development and transfer of a technical plan or technical design."
12. As regar ds the impugned receipts being in the nature o f royalty, in our co nsidered view, no ne of the requis ites under Artic le 13(3) o f the IndiaUK DTAA a re satisfie d so as to qualify such receipts as ' roya lty'. What assessee is pro viding to the clients in India is merely a report summarising its findings w ith respect to the background chec k undertaken by the assessee whic h is primarily a factual data and cannot pe r se qualify as literary or artistic or any othe r copyrightable work. Such a repor t c annot be copyrighted as it does no t fulfil the requirements enlisted under sectio n 13( 1)(a) o f the Indian Copy right Act, 1957. Also, no ne o f the rights as mentio ned in Section 14(a) o f the Indian Co pyright Act, 1957 have been rested w ith the client by the assessee while rendering its services. I ncome from provisio n of the se rvices re ndered by the assessee canno t be characterised a s royalty fo r use o f copyright in the report as the client merely has the right to use the findings in the report for its o wn internal co nsumption. The client does not have any rights to publicly display, sell/ distribute, copy, edit, modify or under take any o ther commercial e xploitation o f the sa id repor t. It is thus evident that the conside ratio n received by the assessee under the terms o f its agreement with its client is purely towards provisio n of background screening se rvices and does not include any co nsideration fo r use or right to use any copyright or a literary, artistic or scientific wo rk , patent, trademark, design, model, plan, secret fo rmula, or process or informatio n. Thus, the impugne d receipts o f the assessee from its clients in India cannot be re garded as 'Royalties' unde r the provisions of Artic le 13 o f the India-UK DTAA. Support may be drawn by the decis ion of the Hon' ble Supre me Court in the case o f Engineering Analysis Centre of Excellence ( P) Ltd. vs. CIT (2021) 125 taxmann.com 42 (S C)/432 ITR 471 (SC) .
13. F urther the assessee does not provide acces s to any database to its clients but o nly acce ss to reports requisition by 18 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
the client in electronic fo rm. Provision of online access of the repor t to its client is lim ited to providing access to the specific repor t pro viding relevant facts for the concerned candidates capture d dur ing the course of validation. No thing has bee n brought on recor d by the Revenue to refute the afo re said claim of the assessee . In the li ght of these facts , in our opinio n online access to backgro und scr eening results cannot be constr ued as prov iding access to database maintaine d by the assessee.
14. It is a fact o n record that the informatio n obtained by the assessee from var ious sources is in the nature of factual data about the prospective candidates proposed to be hire d by the clients . In our view this information is no t an information whic h invo lves imparting of any kind of commercial experie nce, sk ill or expertise . The validation report merely contains some personal deta ils of ca ndi da tes such as educ atio nal and profes sional details w hich would not amount to imparting of commercial experience etc. Wha t is delivered to the client is validation re port assur ing its clients a bout the authe nticity of info rmation contained in the repo rt on the basis the information collated in the process of validation. He nce it canno t tantamount to imparting of co mmercial e xpe rie nce. T he screening report which is issue d does not invo lve any transfe r of commercia l experience to the c li ent or ge tting the right to use the e xpe rience. The re is also no transfe r of any skill o r knowle dge of assessee to the customers in the iss uance of screening reports, as the client is o nly gi ven access to findings of the assessee in the form o f a re port w hic h co ntains factual info rmation but nowhere the asses see imparts its e xperience , skill o f carr ying o ut backgro und sc reening se rvices to its client. It is thus cle ar that the re is no imparting of informatio n concerning industrial, commercial or scientific e xpe rience by assessee when it issues the repo rts to its clients.
15. As regards the characterisa tio n of impugne d re ceipts as FTS, in o ur view, the services rende red by the assessee do not invo lve any technical skill/kno wle dge or cons ultanc y or make ava ilable a ny tec hnical k nowledge , experience , s kill, know-how 19 ITA No 3413/Del/2023 SA No. 446/Del/2023 Hireright LLC.
or processes to the clients. Assesse e's role is restricted to the verification o f information provide d by various candidates propose d to be hire d by its clients . It involve s seek ing info rmation from various sources that is accessible o n specific reques ts and no a dvice/guidance on the credentials of the candidate is provided by the Assess ee to its client. The role o f the a ssessee is limited to validation of data pro vide d by the candidate and pro vide rele vant facts captured during the co urse of validatio n. The clients make an independent decisio n to hire the candidate. He nce, in o ur view the services should not be conside red as FTS unde r Article 13(4) of the India-UK DTAA. Accordingly, gro und No. 1 to 2.3 are decided in favo ur of the assessee.
4. Hence, in the absence of any material change on the facts of the issue and the le gal prepo sition, we hold that no addition on account "Royalty" is warranted in this case.
5. With regard to gr ound no. 3 and 3.1 pertaining to recovery of common internet and IT related costs, the assessee submitted tha t keeping in view the tax effect the grounds are not being pre ssed. He nce, need not be adjudicated. However, issue is kept open.
6. Since the appeal of the assessee has been partly allowed, the Stay Application is liable to be dismissed as infructuous.
Order Pronounced in the Open Court on 19/01/2 024.
Sd/- Sd/-
(Saktijit Dey) (Dr. B. R. R. Kumar)
Vice President Accountant Member
Dated: 19/01/2024
*NV, Sr. PS*
20
ITA No 3413/Del/2023
SA No. 446/Del/2023
Hireright LLC.
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT, DELHI