Background check receipts are neither royalty or FTS, hence they are not taxable

Fact and issue of the case

The two appeals filed by the assessee are directed against the order dated 20.07.2022 and 25.01.2023 of the Ld. Assistant Commissioner of Income Tax, Circle International Tax-2(1)(1) (“AO”) passed under section 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (the “Act”) pertaining to Assessment Year (“AY”) 2019-20 and 2020-21 respectively. Since the issues involved in both the appeals are common, the same were heard together and are being disposed of by this common order.

The assessee has raised the following grounds of appeal:- AY 2019-20 –

ITA No. 1884/Del/2022

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 sub-ject assessment year at INR 12,54,69,976/– as against nil returned income and, accordingly, the as-sessment order passed by the Ld. AO is bad in law and void ab-initio

That on the facts and circumstances of the case and in law, the Ld. AO has erred in proposing addition of INR 12,54,69,976/- based on mere con-junctures and surmises, ignoring the factual matrix of the case as well as the nature of the transactions undertaken by the Appellant.

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.

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’ or ‘Fees for Technical Ser-vices’ (“FTS”) under the provisions of Article 13 of the Double Taxation Avoidance Agreement between India and UK (“India – UK DTAA”).

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.

That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the Appellant maintains a Database or Appellant has taken such database under license from its owner and the consideration received by the Appellant is for allowing the use of database to its clients and is chargeable to tax as Royalty.

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 cli-ents amounts to use of commercial experience of the Appellant and is chargeable to tax as Royal-ty.

That on the facts and circumstances of the case and in law, the Ld. AO erred in holding that the revenue received by the Assessee is ancillary to the alleged ‘Royalties’ and therefore also taxable as FTS.

That on the facts and circumstances of the case and in law, the Ld. AO has erred in levying interest under section 234A and 234B of the Act.

That on the facts and circumstances of the case and in law, the Ld. AO has erred in recovering refund of INR 55,647 and levying interest of INR 5,286 under Section 234D of the Act without appreciating the fact that no refund was re-ceived by the Appellant for the subject assessment year.

That on the facts and circum-stances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 270A of the Act.”

Observation of the court

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 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 pro-cess 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 custom-ers 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 experi-ence, skill of carrying out background screening services to its client. It is thus clear that there is no im-parting of information concerning industrial, commercial or scientific experience by assessee when it is-sues the reports to its clients.

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. As-sessee’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 rel-evant 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.

In common ground No. 2.4, the assessee has challenged the finding of the Ld. AO that the revenue received by the assessee is ancillary to the alleged royalties and therefore also taxable as FTS under Article 13(4)(a) of the India-UK DTAA. Having arrived at the conclusion that the impugned receipts of the assessee from provision of background screening and investigation services to its clients in India is not in the nature of royalty/FTS, this ground becomes otiose.

Ground No. 3 in AY 2019-20 relates to levy of interest under section 234A and 234B of the Act which is consequential in nature.

Ground No. 3 in AY 2020-21 relates to short grant of TDS credit by Rs. 1,35,168/-. The Ld. AO is directed to look into it and take remedial action after due verification.

In ground No. 4 the assessee has challenged the recovery of refund of Rs. 55,647/- and levy of interest of Rs. 5,286/-under section 234D in AY 2019-20 and refund of Rs. 2,32,800/- in AY 2020-21 claiming that no refund was received by the assessee for the subject AYs. We direct the Ld. AO to verify the claim of the assessee and take suitable action as per law.

Ground No. 5 relating to initiation of penalty proceedings under sec-tion 270A of the Act does not require adjudication at this stage being premature.

In the result, the appeals of the assessee for both the AYs 2019-20 (ITA No. 1884/Del/2022) and 2020-21 (ITA No. 373/Del/2023 are allowed subject to the direction con-tained in para 18 and 19 above.

Order pronounced in the open court on 6th Sep-tember, 2023.