2025 (1) TMI 861 - AT - Income Tax

Income taxable in India or not - Royalty receipts - amount received on account of screening services provided to Indian clients - addition u/section 9(1)(vi) and article 12 of India-US tax treaty - HELD THAT - As perused the Tribunal order and find that this issue is squarely covered in favour of the assessee and against the Revenue by an order of the co-ordinate bench in assessee s own case for Assessment Years 2019-20 and 2020-21 in 2023 (9) TMI 478 - ITAT DELHI held 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. 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 Engineering Analysis Centre of Excellence (P) Ltd. 2021 (3) TMI 138 - SUPREME COURT . Also see 2024 (2) TMI 1491 - DELHI HIGH COURT - Thus, no addition on account of Royalty is warranted in this case. Decided in favour of assessee.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment primarily revolves around the following core issues:

Whether the income received by the assessee from providing background screening services to Indian clients qualifies as "royalty" under Section 9(1)(vi) of the Income Tax Act, 1961, and Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA).
Whether the income can be characterized as Fees for Technical Services (FTS) under Article 13(4) of the India-UK DTAA.
The appropriateness of initiating penalty proceedings under Section 270A of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Characterization as "Royalty"

Relevant legal framework and precedents: The determination of whether the income qualifies as "royalty" is guided by Section 9(1)(vi) of the Income Tax Act and Article 12 of the India-USA DTAA. The Tribunal also referenced the decision in the case of Engineering Analysis Centre of Excellence (P) Ltd. vs. CIT.
Court's interpretation and reasoning: The Tribunal found that the services provided by the assessee, which involve generating reports based on background checks, do not constitute "royalty" as they do not involve the transfer of any copyrightable work or intellectual property.
Key evidence and findings: The Tribunal noted that the reports provided are factual data and do not meet the criteria for literary or artistic work under the Indian Copyright Act, 1957. The client's rights are limited to internal use without any rights to reproduce or commercially exploit the reports.
Application of law to facts: The Tribunal applied the provisions of the DTAA and the Copyright Act to determine that the income is not for the use or right to use any copyright, patent, or similar property.
Treatment of competing arguments: The Tribunal considered the Department's reliance on the lower authorities' orders but found no substantial refutation of the assessee's claims.
Conclusions: The Tribunal concluded that the income from background screening services does not constitute "royalty" under the relevant legal provisions.

Issue 2: Characterization as Fees for Technical Services (FTS)

Relevant legal framework and precedents: Article 13(4) of the India-UK DTAA provides the framework for determining whether income qualifies as FTS.
Court's interpretation and reasoning: The Tribunal interpreted that the services do not involve any technical skill, knowledge, or consultancy, nor do they make available any technical knowledge or skill to the clients.
Key evidence and findings: The Tribunal found that the services involve mere validation of information provided by candidates and do not impart any technical experience or skill to the clients.
Application of law to facts: The Tribunal applied the DTAA provisions to conclude that the nature of services is not technical and does not qualify as FTS.
Treatment of competing arguments: The Tribunal considered the Department's arguments but found the assessee's position consistent with the DTAA interpretation.
Conclusions: The Tribunal held that the income from these services should not be considered as FTS under the DTAA.

Issue 3: Initiation of Penalty Proceedings under Section 270A

Relevant legal framework: Section 270A of the Income Tax Act deals with penalties for underreporting or misreporting income.
Court's interpretation and reasoning: The Tribunal deemed the issue of penalty initiation as premature.
Conclusions: The Tribunal dismissed the ground related to penalty initiation.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "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."
Core principles established: The judgment clarifies that income from background screening services, which are factual and do not involve intellectual property transfer, does not qualify as "royalty" or FTS under the relevant DTAAs.
Final determinations on each issue: The Tribunal allowed the appeal in part, ruling in favor of the assessee on the issues of royalty and FTS characterization, and dismissed the penalty initiation as premature.

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