Revenue from background screening services not taxable as royalty or FTS under India-UK DTAA

ITAT Delhi held that revenue received by assessee from background screening and investigation services to Indian clients was not taxable as royalty or fees for technical services (FTS) under India-UK DTAA. The tribunal determined that online access to screening results did not constitute database access or transfer of copyright/intellectual property rights. The validation reports provided factual information without transferring commercial experience, technical knowledge, or skills to clients. The assessee's role was limited to data verification and reporting findings, with clients making independent hiring decisions. No addition on account of royalty was warranted.

---

---

Issues Involved:
1. Determination of taxable income and validity of the assessment order.
2. Classification of revenue from background screening and investigation services as 'Royalty' under the India-USA DTAA.
3. Taxation of recovery of common internet and IT-related costs as Royalty.
4. Application of the correct tax rate.
5. Recovery of refund.
6. Levy of interest under Sections 234A and 234B.
7. Initiation of penalty proceedings under Section 270A.

Summary:

Issue 1: Determination of Taxable Income and Validity of the Assessment Order
- The assessee contended that the AO erred in determining the taxable income at INR 12,67,41,890/- against nil returned income, based on mere conjectures and surmises. The Tribunal noted that the issue is covered by a previous order where similar additions were made based on incorrect understanding of the nature of transactions undertaken by the assessee.

Issue 2: Classification of Revenue as 'Royalty'
- The AO classified the revenue from background screening services as 'Royalty' under Article 12 of the India-USA DTAA. The Tribunal held that the services provided do not involve any right to use or transfer of copyright and know-how. The Tribunal referred to the India-UK DTAA and concluded that the income cannot be characterized as 'Royalty' or 'Fees for Technical Services' (FTS) under Article 13. The Tribunal emphasized that the services involve verification of factual data, which does not qualify as literary or artistic work and does not involve any transfer of commercial experience or skill.

Issue 3: Taxation of Recovery of Common Internet and IT-related Costs
- The AO taxed the recovery of common internet and IT-related costs as Royalty. The assessee did not press these grounds due to the tax effect, and the Tribunal did not adjudicate on this issue but kept it open.

Issue 4: Application of the Correct Tax Rate
- The AO applied a tax rate of 40% on the total income assessed, ignoring the provision that Royalty should be taxed at a base rate of 10% under Section 115A of the Act. The Tribunal found this application incorrect.

Issue 5: Recovery of Refund
- The AO recovered a refund of INR 2,05,932 without appreciating that no refund was received by the assessee for the subject assessment year. The Tribunal noted this error.

Issue 6: Levy of Interest
- The AO levied interest under Sections 234A and 234B. The Tribunal found discrepancies in the computation of interest and noted that the total interest and fee payable were incorrectly calculated.

Issue 7: Initiation of Penalty Proceedings
- The AO initiated penalty proceedings under Section 270A. The Tribunal did not find a basis for this initiation given the nature of the case.

Conclusion:
- The Tribunal concluded that the receipts from background screening services do not qualify as 'Royalty' or 'FTS' under the India-UK DTAA and thus are not chargeable to tax in India. The appeal was partly allowed, and the Stay Application was dismissed as infructuous. The Tribunal pronounced the order in the Open Court on 19/01/2024.

---