TMI Blog2023 (9) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961 (the Act ) pertaining to Assessment Year ( AY ) 2019-20 and 2020-21 respectively. Since the issues involved in both the appeals are common, the same were heard together and are being disposed of by this common order. 2. The assessee has raised the following grounds of appeal:- AY 2019-20 - ITA No. 1884/Del/2022 1. That on the facts and circumstances of the case and in law, Ld. AO, has grossly erred in determining the taxable income of the Appellant for the subject assessment year at INR 12,54,69,976/-- as against nil returned income and, accordingly, the assessment order passed by the Ld. AO is bad in law and void ab-initio 1.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing addition of INR 12,54,69,976/- based on mere conjunctures and surmises, ignoring the factual matrix of the case as well as the nature of the transactions undertaken by the Appellant. 1.2. That the Ld. AO has failed to appreciate the submissions made by the Appellant and further erred in making several observations and inferences in the assessment order, which are factually incorrect and legally untenable. 2. That on the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject assessment year at INR 8,51,94,915/- as against nil returned income and, accordingly, the assessment order passed by the Ld. AO is bad in law and void ab-initio. 1.1. That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing addition of INR 8,51,94,915/- based on mere conjunctures and surmises, ignoring the factual matrix of the case as well as the nature of the transactions undertaken by the Appellant. 1.2. That the Ld. AO has failed to appreciate the submissions made by the Appellant and further erred in making several observations and inferences in the assessment order, which are factually incorrect and legally untenable. 2. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the revenue received by the Appellant from provision of background screening and investigation services is in the nature of 'Royalty' or 'Fees for Technical Services' ( FTS ) under the provisions of Article 13 of the Double Taxation Avoidance Agreement between India and UK ( India - UK DTAA ). 2.1. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test, etc. The assessee does not have any permanent establishment ( PE ) in India. 3.1 The assessee filed its return of income for AY 2019-20 on 27.01.2020 declaring total income of Rs. nil and claimed refund of Rs. 12,54,69,976/-. For AY 2020-21 it e-filed its return on 05.02.2021 declaring total income of Rs. nil and claimed refund of Rs. 93,27,000/-. The assessee provided background screening and investigation services to its customers in India and received Rs. 12,54,69,976/- and Rs. 8,51,94,915/- in the respective AYs which have not been offered to tax in India by the assessee. 3.2 The assessee has claimed exempt income of Rs. 12,54,69,976/- in AY 2019-20 and Rs. 8,51,94,915/- in AY 2020-21. The case of the assessee for both the AYs was selected for complete scrutiny under CASS. Statutory notices along with detailed questionnaire were issued through electronic mode from time to time. In response thereto the assessee filed submissions as per electronic order sheet which has been placed on record. After perusing the details, The Ld. Assessing Officer ( AO ) show caused the assessee as to why the background screening and investigation services provided by the assessee to it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts to the use of commercial experience of the assessee chargeable to tax as royalty; and services provided by the assessee are ancillary to the alleged royalties and therefore also taxable as FTS. Accordingly, 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 proposing to assess the income of the assessee at Rs. 12,54,69,976/- and Rs. 8,51,94,915/- respectively. 4. The assessee filed objections before the Ld. Dispute Resolution Panel ( DRP ) stating that the aforesaid allegations made by the Ld. AO are grossly incorrect and made the following submissions before the Ld. DRP:- At the very outset and before adverting/ rebutting to the allegations made by the Assessing officer, it is most respectfully submitted that the Ld. AO has misunderstood the facts of the case and the exact nature of services rendered by the Assessee. Hence, in order to bring out clearly the facts of the case and the nature of the services rendered by the Assessee to its clients, it would be pertinent to explain the modus operandi/ nature of business of the Assessee. The Assessee is engaged in the business of providing human ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut specifying the exact nature of the copyright in use. hence the conditions laid down in Article 13(3)(a) is not satisfied. - The Consideration received by the Assessee is for rendering of 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 received/receivable by the Assessee cannot be termed as Royalties under the provisions of Article 13 of the India-UK Tax Treaty - That the income earned from provision of background screening services is in the nature of business income and in the absence of any presence in India in the form of a 'permanent establishment or business connection' the income earned by Assessee shall not be taxable in India either under the Income-tax Act, 1961 or under the India-UK treaty Le. Article 7 of the treaty. - In essence the Assessee collates the factual data from various sources and submits a report authenticating the information as submitted by the job Applicants of the clients. The act of mere collation of factual information cannot per se be copyrighted as it d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upport of the Assessee's claim, it is most humbly submitted that the receipts earned from background screening services involving verification of facts/information cannot in any manner be construed as payments towards Royalties or FTS as defined under Article 13 of the India- UK Tax Treaty. The receipts earned by the Assessee is purely in the nature of business income. However, in the absence of a permanent establishment in India, the receipts cannot be considered as taxable in India Most respectfully, the allegations of the Ld. AO are baseless and devoid of any legal merits of the case. 5. For AY 2019-20, the Ld. DRP vide its order dated 25.05.2022 directed the Ld. AO to complete the assessment by passing a speaking order after considering the assessee s submissions and for AY 2020-21, the Ld. DRP vide its order dated 12.09.2022 upheld the findings of the Ld. AO. 6. Consequently, pursuant to the directions of the Ld. DRP the Ld. AO passed the final assessment order under section 143(3) r.w. section 144C(13) on 20.07.2022 for 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/- respectively being in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... providing the clients the relevant facts captured by the assessee during the course of validation. The source of information used for verification of the details may be available on public domain or obtained telephonically from the previous employers of the candidates and in some cases, even the records of the courts/public authorities. 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. Further, 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. 11. Article 13(3) and 13(4) of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort cannot be copyrighted as it does not fulfil the requirements enlisted under section 13(1)(a) of the Indian Copyright Act, 1957. Also, none of the rights as mentioned in Section 14(a) of the Indian Copyright Act, 1957 have been rested with the client by the assessee while rendering its services. Income from provision of the services rendered by the assessee cannot be characterised as royalty for use of copyright in the report as the client merely has the right to use the findings in the report for its own internal consumption. The client does not have any rights to publicly display, sell/ distribute, copy, edit, modify or undertake any other commercial exploitation of the said report. It is thus evident that 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 prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 16. In common ground No. 2.4, the assessee has challenged the finding of the Ld. AO that the revenue received by the assessee is ancillary to the alleged royalties and therefore also taxable as FTS under Article 13(4)(a) of the India-UK DTAA. Having arrived at t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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