2024 (2) TMI 1491 - HC - Income Tax

Foreign entity's royalty from background verification services not technical services under India-UK tax treaty Article 13

Delhi HC upheld ITAT's ruling that royalty receipts from background verification services by a foreign entity do not qualify as 'fee for technical ... Royalty receipts - receipts of the assessee from its clients in India Income deemed to accrue or arise in India - Appellant sought to contend that the fees so generated from that exercise would fall within the ambit of “fee for technical services” in terms of Article 13 of the India-UK DTAA - HELD THAT:- The mere undertaking of background checks of an employee or the verification of testimonials cannot possibly be recognised as entailing the use of any technical knowledge, experience or skill as provided under Article 13(4) of the India-UK DTAA. Assessee is merely verifying disclosures and which activity cannot be recognised 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. No substantial question of law. Issues Involved:1. Whether the receipts from the assessee's clients in India qualify as 'Royalties' under the India-UK Double Taxation Avoidance Agreement (DTAA).2. Whether the services rendered by the assessee involve imparting of commercial experience, skill, or expertise.3. Whether the provision of reports by the assessee constitutes 'fee for technical services' under the DTAA.Issue 1: Qualification of Receipts as 'Royalties'The primary contention was whether the receipts from the assessee's clients in India should be classified as 'Royalties' under Article 13 of the India-UK DTAA. The appellant argued that the reports provided by the assessee are protected by copyright laws, and thus, their use constitutes the use of copyright. However, the ITAT found that the reports generated by the assessee, which summarize factual data from background checks, do not qualify as literary, artistic, or any other copyrightable work under Section 13(1)(a) of the Indian Copyright Act, 1957. The assessee's clients do not receive any rights to publicly display, sell, distribute, copy, edit, modify, or commercially exploit the reports, which are intended solely for internal use. Consequently, the receipts cannot be regarded as 'Royalties' under the DTAA, as they do not involve the use or right to use any copyright, literary, artistic, or scientific work, patent, trademark, design, model, plan, secret formula, or process.Issue 2: Imparting of Commercial Experience, Skill, or ExpertiseThe appellant further argued that the information provided by the assessee involves imparting commercial experience, skill, or expertise. The ITAT, however, concluded that the information in the reports is factual data about candidates, such as educational and professional details, which does not involve imparting of commercial experience, skill, or expertise. The validation reports assure clients of the authenticity of the information but do not transfer any commercial experience or skill to the clients. Therefore, the activity does not involve imparting of information concerning industrial, commercial, or scientific experience.Issue 3: Classification as 'Fee for Technical Services'The appellant contended that the services rendered by the assessee fall under 'fee for technical services' as defined in Article 13(4) of the DTAA. The ITAT found that the services do not involve any technical skill, knowledge, or consultancy, nor do they make available any technical knowledge, experience, skill, know-how, or processes to the clients. The assessee's role is limited to verifying information provided by candidates and does not include providing advice or guidance on the candidates' credentials. The clients independently decide on hiring based on the factual data provided. Thus, the services do not qualify as 'fee for technical services' under the DTAA.In conclusion, the High Court upheld the ITAT's findings, determining that the activities conducted by the assessee do not constitute 'Royalties' or 'fee for technical services' under the India-UK DTAA. The appeal was dismissed, as it did not raise any substantial question of law.