Background screening receipts not royalty where only factual verification is provided and no intellectual property rights are licensed.

Receipts from background screening services were held not to constitute royalty under section 9(1)(vi) because the reports only conveyed factual verification findings and did not grant any right to use copyright, database, technical know-how, or other protected intellectual property, nor did they make available technical knowledge, skill, or experience. The transfer pricing/addition on this count was deleted. The challenge to initiation of penalty under section 270A was rejected as premature because no final penalty determination was under challenge at that stage.

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Issues: (i) whether receipts from background screening services were taxable as royalty under section 9(1)(vi); (ii) whether initiation of penalty under section 270A was sustainable.

Issue (i): whether receipts from background screening services were taxable as royalty under section 9(1)(vi).

Analysis: The receipts arose from validation and screening reports containing factual information about candidates. The service provider did not grant any right to use copyright, database, technical know-how, or any other protected intellectual property, nor did it make available technical knowledge, skill, or experience to the client. The service was limited to verification of information and communication of findings, which did not amount to royalty or fees for technical services.

Conclusion: The receipts were not taxable as royalty, and the addition on this count was deleted in favour of the assessee.

Issue (ii): whether initiation of penalty under section 270A was sustainable.

Analysis: The penalty issue had not crystallised at the stage of the appeal and no final penalty determination was under challenge.

Conclusion: The penalty ground was dismissed as premature.

Final Conclusion: The substantive addition was deleted, while the penalty-related challenge did not succeed, resulting in a partial relief to the assessee.

Ratio Decidendi: Background screening reports based on factual verification do not constitute royalty or fees for technical services where no right to use intellectual property is granted and no technical knowledge, skill, or experience is made available to the client.

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