HIRERIGHT LIMITED,UNITED KINGDOM V. ASSISSTANT COMMISSIONER OF INCOME TAX . CIRCLE 2(1)(1), NEW DELHI

ITA 187/DEL/2025

AI Insights

The case involves two appeals by HireRight Limited and HireRight LLC against the orders of the Assistant Commissioner of Income Tax, which had treated the income from background screening services as 'royalty' and taxed it accordingly. The main legal contention was whether the income from these services qualifies as 'royalty' under the provisions of the Income Tax Act and the India-UK Double Taxation Avoidance Agreement (DTAA). The tribunal examined previous rulings and the specific nature of the services provided by the assessees, which included background checks and verification services, and found that these do not involve the transfer of any copyrightable material or technical knowledge, and thus, do not qualify as 'royalty'.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 126944 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2022-2023
• Result in Favour of: Others
• Court: TRIBUNAL
• Department Lawyers: VIZAY VASANTA
• Assessee Lawyers: KISHORE KUNAL; ANKITA PRAKASH; ANUJ KUMAR
• Keywords: Assessment Order; Background Screening; Dispute Resolution Panel; Royalty; Taxable income
• Section: 143(2); 234B; 234A; 234C; 270A

Judgement Text

" 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’, NEW DELHI BEFORE SH. RAMIT KOCHAR, ACCOUNTANT MEMBER AND SH. SUDHIR KUMAR, JUDICIAL MEMBER ITA No.187/Del/2025 Assessment Year: 2022-23 HIRERIGHT LIMITED 15, Westferry Circus Canary Wharf London, Foreign United Kingdom Pan No. AAECH0080Q Vs. Assistant Commissioner of Income Tax, Circle - 2(1) (1) International Taxation, Gurgaon (APPELLANT) (RESPONDENT) ITA No.185 /Del/2025 Assessment Year: 2022-23 HireRight LLC, 3349, Michelson Drive Irvine, Nashville, USA PAN NO.AADCH2254D Vs. Assistant Commissioner of Income Tax, International Taxation, Gurgaon (APPELLANT) (RESPONDENT) Appellant by Sh. Kishore Kunal, Advocate Ms. Ankita Prakash, Advocate Sh. Anuj Kumar, Advocate Respondent by Sh. Vizay B Vasanta, CIT DR Date of hearing: 07/04/2025 Date of Pronouncement: 23/04/2025 2 ORDER PER SUDHIR KUMAR, JUDICIAL MEMBER: These appeals are preferred by the assessees, Hier Right Limited and Hire Right LLC, against the order of the Assessing Officer dated 20.12.2024 and 18.12.2024 respectively for the A.Y. 2022-23 by the DRP/ TPO. 2. Since the facts and issues are common in both the appeals, the same are disposed of by this common order. Firstly, we taken the ITA No.187/Del/2025 in the case of Hire Right Limited for A.Y. 2022-23 wherein the assessee has raised the following grounds in appeal: ITA No.187/Del/2025 A.Y.2022-23 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 14,60,96,010 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 14,60,96,008 based on mere conjunctures and 3 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' under the provisions of Explanation 2 to Section 9(1)(vi) of the Act and 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 the reports provided by the Appellant are protected by Copyright laws and therefore, the use of such reports by the clients will result in use of a Copyright chargeable to tax as Royalty. 2.2. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the Appellant maintains a Database, and the consideration received by the Appellant is for allowing the use of database to its clients and is chargeable to tax as Royalty. 4 2.3. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the screening report provided by the Appellant contains confidential information which are not available in public domain and use of that information by the clients amounts to use of commercial experience of the Appellant and is chargeable to tax as Royalty. 2.4 That on the facts and circumstances of the case and in law, the Ld. AO erred in placing reliance on judicial precedents and clauses in agreements which are distinguishable on the facts of the case. 3. That on the facts and circumstances of the of the case and in law, the Ld. AO has erred in levying interest under section 234A, 234B and 234C of the Act. 4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act. 2. The brief facts of the case are that the assessee company filed the return of income declaring total income of Rs. Nil -on 28-10- 2022 for A.Y. 2022-2023 and claimed refund of Rs. 1,60,63,800/-. However, the assessee company has claimed exempt income of Rs. 14,60,41,199/-The case of the assessee 5 was selected for scrutiny through CASS and notice u/s 143(2) of the Act issued on 31-05-2023 which was duly served upon the assessee. Again, notices with questionnaire were issued to the assessee. The assessee company filed the reply and stated that the assessee is a company incorporated under the laws of the UK and for the taxation purpose is a tax resident of the UK within the meaning of Article 4 of the India UK Double Taxation avoidance agreement (“DTAA”). The assessee is a company, inter alia engaged in the business of providing human resource screening service including pre-employment background screening, employment, education verification services and investigative due diligence services to its customers to India. After considering the submission made by the assessee the Assessing officer made the draft assessment order after making the following addition: (i) consideration received by the assessee was treated the royalty as per the article 12(3) of India- USA DTAA of Rs.14,60,96,008/- 6 3. The assessee filed its objection before the Dispute Resolution Panel-1, Delhi (“DRP”) against the draft Assessment Order dated 23-03-2024. The DRP in the direction dated 28-11- 2024 observed that the issue involved is a legacy issue and the review petition of the department is pending before the Hon’ble Delhi High Court, in this regard. Dispute Resolution Panel -1 has directed the Assessing officer to complete the assessment as per the direction dated 28-11-2024. 4. Pursuant to the DRP direction the Assessing Officer was passed the impugned Order on 20.12.2024 whereby, the total income of the assessee was determined at Rs.14,60,96,010/-. Aggrieved the order of the Assessing Officer the assessee filed the present appeal before the Tribunal. 5. At the outset, the Ld. AR submitted that the issue raised in the present appeal already stands decided by this Hon’ble Tribunal in assessee’s own case in ITA No.373/Del/2023 and ITA No.1884/Del/2022, whereby vide order dated 06.09.2023, the issue pertaining to the taxability of background screening 7 services as royalty was decided in favour of the assessee. He further submitted that revenue has filed the appeal against the order dated 06.09.2023 (supra) before the Hon’ble High Court vide order dated 26.02.2024 has decided the issue in favour of the assessee and dismissed the appeal of the revenue. The Ld. AR prayed that the appeal may be allowed in favour of the assessee. 6. On the other hands the Ld. DR for the revenue did not controvert the aforesaid proposition. 7. We have heard the rival submissions and perused the material available on record. We observed that the issue in the present appeal is covered by assessee’s own case in ITA No.373/Del/2013 and 1884/Del/2024 order dated 06.09.2023. The relevant findings of the order are reproduced as under: “12. As regards the impugned receipts being in the nature of royalty, in our considered view, none of the requisites under Article 13(3) of the India- UK DTAA are satisfied so as to qualify such receipts as 'royalty. What assessee is providing to the clients in India is merely a report summarising its findings 8 with respect to the background check undertaken by the assessee which is primarily a factual data and cannot per se qualify as literary or artistic or any other copyrightable work. Such a report 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. 9 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. Support may be drawn by the decision of the Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. vs. CIT (2021) 125 taxmann.com 42 (SC)/432 ITR 471 (SC). 13. 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. In the light of these facts, in our opinion online access to background screening results cannot be construed as providing access to database maintained by the assessee. 14. It is a fact on record that the information obtained by the assessee from various sources is in the nature of factual data about the prospective candidates proposed to be hired by the clients. In our view this information is not an information which 10 involves imparting of any kind of commercial experience, skill or expertise. The validation report merely contains some personal details of candidates such as educational and professional details which would not amount to imparting of commercial experience etc. 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. 11 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 Accordingly, ground No. 1 to 2.3 are decided in favour of the assessee: 8. We observed that the revenue has filed the appeal against the ITA No.373/Del/2023 vide order dated 06.09.2023 and Hon’ble High Court of Delhi vide order dated 26.02.2024 dismissed the appeal of the Revenue by observing as under: 12 “5. In our considered opinion, the mere undertaking of background checks of an employee or the verification of testimonials cannot possibly be recognized as entailing the use of any technical knowledge, experience or skill as provided under Article 13 (4) of the India-UK DTAA. The assessee is merely verifying disclosures and which activity cannot be recognized as being imbued with any technological characteristic. There is also a complete absence of a transfer of data or information which could be described as “technical” as the word is commonly understood. In view of the aforesaid, we find no reason to take a view contrary to what has been expressed by the ITAT.” 9. Thereafter, this Hon’ble Tribunal in assessee’s own case for AY 2021-22, in ITA 3880/Del/2023, vide order dated 27.06.2024, while relying on aforesaid orders held that the background screening services provided by the assessee does not quality as royalty. The relevant findings reproduced as under: 8. We find that the issue raised in the present appeal already stands decided by this Tribunal in ITA No.373/Del/2023 and ITA No.1884/Del/2022, whereby 13 vide order dated 06.09.2023, the issue pertaining to the taxability of background screening services as royalty was decided in favour of the Appellant. …… 11. Since the matter stands covered by the order of the Hon’ble High Court in assessee’s own case, in the absence of any change in the factual matrix and legal proposition, the appeal of the assessee is hereby allowed. 10. Further we observed that Hon’ble ITAT in group entities case in ITA No.2664/Del/2024 while relying upon the aforesaid orders and ITA No. 3413/Del/2023 2664/ vide order dated 26.03.2025 and 19.01.2024 respectively held the background screening services provided by an assessee does not qualify royalty and no additions can be made on account of royalty and decided the appeals in favour of the assessee. The relevant portion reproduced as below: 3. At the outset, 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 case of HireRight Ltd. in ITA No.373/Del/2023 and ITA No.1884/Del/2022 ….. 14 4. 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. 11. In view of the aforesaid we held that the issues in the present appeal are covered by the decisions of coordinate Bench and decision of Hon’ble Delhi High Court and accordingly the same are decided in favour of the assessee resulting which the appeal of the assessee is allowed. ITA No.185/Del/2025 A.Y. 2022-23 12. The assessee has raised following grounds of appeal :- 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 24,02,23,349 ns against returned income of INR 4,95,030 and, accordingly, the assessment order passed by the .d. 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 making additions of INR 23,97,28,319 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. 15 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 'Royalty' under the provisions of Explanation 2 to Section 9(i)(vi) of the Act and Article 12 of the Double Taxation Avoidance Agreement between India and USA (\"India - USA DTAA). 2.1. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the consideration received by the Appellant for providing solutions to clients is for use of information concerning industrial, commercial, or scientific experience and same is liable to taxed as royalty. 2.2. That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that Appellant maintains database and provides access to its database hosted on its servers to its clients on payment basis. Therefore, use of or right to use of server also amounts to 16 use of equipment and the same is liable to taxed as royalty. 2.3. That on the facts and circumstances of the case and in law, the Ld. AO has erred in denying exemption under Section 10(50) of the Act without appreciating the factual matrix of the case. 3. That on the facts and circunstances of the case and in law, the Ld. AO has erred in taxing an amount of INR 27,31,030 on account of 'recovery of common internet and IT' related costs that have been re-charged at cost by the Appellant from its Indian Associate Enterprises ie, HireRight India as Royalty under the Act and India-USA DTAA. 3.1. That on the facts and circumstances of the case and in law, the L.d. AO has erred holding that charges recovered by the Appellant from HireRight India are under the scope of Section 5 r.w.s 9 of the Act and are covered in the definition of income as per Section 2(24) of the Act without appreciating the fact that the sanse are cost-to- cost reimbursements. 3.2. That on the facts and circumstances of the case and in law, the Ld. AO has erred holding that 'recovery of com/non internet and IT related costs' recovered by the 17 Appellant from HireRight India on cost-to-cost basis are for use of or right to use of network/ fiber cables which amounts to use of industrial/scientific equipment and the same is liable to taxed as royalty under the provisions of the Act and the tax treaty. 4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under Section 234B of the Act. 5. That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act. 13. Ld. AR for the assessee has not pressed the ground no. 3 in ITA No. 185/Del/ 2025 for A.Y. 2022-23, hence this ground is decided against the assessee. 14. With regard to appeal being ITA No.185/Del/2025, since the facts are exactly similar except to ground No.3 which has been decided against the assessee to ITA No.187/Del/2025 our above findings in ITA No.187/Del/2025 are applicable mutatis mutandis to ITA No.185/Del/2025. Accordingly, the appeal 18 being ITA Nos.185/Del/2025 filed by the assessee is partly allowed. 15. To sum up: the appeals filed by the assesses appeal No. 187/Del/2025 is allowed and appeal No. 185/del/2025 is partly allowed. Sd/- Sd/- (RAMIT KOCHAR) (SUDHIR KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER *Neha, SR. PS * Date: 23.04.2025 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) ` 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI "