2023 (9) TMI 478 - AT - Income Tax

Tax Tribunal: Revenue not 'Royalty' or 'FTS' under India-UK DTAA. Directions on TDS, penalty.

The Tribunal allowed the appeals for AY 2019-20 and 2020-21, ruling in favor of the assessee on the classification of revenue as 'Royalty' or 'FTS' under ... Characterisation as Royalty - characterisation as Fees for Technical Services (FTS) - use of copyright / right to use - access to database - information concerning industrial, commercial or scientific experience - business income - permanent establishment - Article 13(3) of India-UK DTAA - Article 13(4) of India-UK DTAA - penalty proceedings - prematurityCharacterisation as Royalty - use of copyright / right to use - Article 13(3) of India-UK DTAA - business income - Receipts from provision of background screening and investigation services are not 'royalty' under Article 13(3) of the India UK DTAA - HELD THAT: - The Tribunal found that the assessee merely supplied factual validation reports summarising background checks and did not transfer or permit the use of any copyrightable work or confer rights akin to those under Section 14(a) of the Indian Copyright Act. The reports consist of factual data collated from public and other sources, lack the requisite originality to qualify as copyrightable literary works, and the contractual terms restrict clients to internal use without rights to commercially exploit, copy, modify or publicly display the reports. Therefore, the receipts are for provision of services (business income) and do not satisfy the requisites of Article 13(3) to constitute 'royalty'. [Paras 10, 12]Impugned receipts cannot be regarded as 'Royalties'; ground Nos. 2, 2.1-2.3 decided for the assessee.Characterisation as Fees for Technical Services (FTS) - make available technical knowledge, experience, skill, know how - Article 13(4) of India-UK DTAA - commercial experience - Receipts are not 'Fees for Technical Services' under Article 13(4) of the India UK DTAA - HELD THAT: - The Tribunal accepted that the assessee's role is limited to verification and validation of candidate information and delivering factual reports; it does not provide technical advice, consultancy, or make available technical knowledge, experience, skill, know how or processes to the clients. The clients alone make hiring decisions and no transfer of skill or know how occurs by issuance of the reports. Consequently, the receipts do not fall within Article 13(4) as FTS. [Paras 10, 15]Impugned receipts are not taxable as FTS; ground Nos. 1 and 2.4 (ancillary FTS contention rendered otiose) decided for the assessee.Access to database - use of copyright / right to use - Online provision of or access to the specific background screening report is not providing access to a database and does not amount to licence of database use - HELD THAT: - There is no evidence that the assessee maintained or granted access to a database; online access was limited to the specific report prepared for the client. The Revenue has not rebutted the assessee's claim that only report specific access was provided. Accordingly, such access cannot be construed as access to a database that would attract taxation as royalty. [Paras 13]Online access to screening results does not constitute access to a database; finding for the assessee.Interest consequential - Levy of interest under sections 234A and 234B for AY 2019 20 is consequential - HELD THAT: - The Tribunal treated the issue of interest in AY 2019 20 as consequential to the primary characterisation of receipts; having held the receipts not taxable as royalty/FTS, the interest contention follows accordingly. [Paras 17]Interest levy in AY 2019 20 is consequential.TDS credit short grant - Short grant of TDS credit for AY 2020 21 requires verification by the Assessing Officer - HELD THAT: - The Tribunal identified a discrepancy in TDS credit claimed by the assessee and that allowed by the AO. Rather than adjudicating on merits, the Tribunal directed the AO to examine and take remedial action after due verification of TDS records. [Paras 18]AO directed to verify and rectify TDS credit shortfall for AY 2020 21.Recovery of refund / levy of interest - Claims regarding recovery of alleged refunds and levy of interest require verification by the Assessing Officer - HELD THAT: - The assessee disputed recovery of specified refunds and related interest for both assessment years, asserting that no refund was received. The Tribunal did not decide the merits but directed the AO to verify the assessee's claim and act in accordance with law. [Paras 19]AO directed to verify refund recovery and interest claims and take action as per law.Penalty proceedings - prematurity - Initiation of penalty proceedings under section 270A is premature and does not require adjudication at this stage - HELD THAT: - The Tribunal observed that penalty proceedings were premature in the present stage of adjudication and therefore did not adjudicate on the penalty question. [Paras 20]Penalty issue left undecided as premature.Final Conclusion: The appeals for AY 2019 20 and AY 2020 21 are allowed: the Tribunal holds that receipts from background screening and investigation services are neither 'royalty' under Article 13(3) nor 'FTS' under Article 13(4) of the India UK DTAA and are therefore not taxable on that basis in India; further directions were given to the Assessing Officer to verify TDS credit and refund/interest recovery issues, and the penalty initiation was held premature. 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 IncomeThe 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 234DThe 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 CreditFor 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 ProceedingsThe 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.