2025 (3) TMI 1378 - AT - Income Tax

Income from the provision of background scrutiny screening services as assessable under the head royalty - India-UK DTAA - HELD THAT - Both the learned lower authorities respective findings assessing the assessee s impugned income from the provision of background scrutiny screening services as assessable under the head royalty stands reversed in very terms therefore. Assessee appeal allowed.

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this case were:

Whether the revenue receipts derived by the assessee from providing background scrutiny services to clients in India should be classified as "royalties" under the Income-tax Act, 1961 and the India-UK Double Taxation Avoidance Agreement (DTAA).
Whether the services provided by the assessee fall under "fees for technical services" as per Article 13 of the India-UK DTAA.
Whether the reports generated by the assessee are protected by copyright laws and thus constitute the use of copyright.
Whether the information provided by the assessee involves imparting commercial experience, skill, or expertise.

ISSUE-WISE DETAILED ANALYSIS

1. Classification of Revenue Receipts as Royalties

Relevant Legal Framework and Precedents: The classification of income as "royalty" is governed by Article 13 of the India-UK DTAA, which defines royalties as payments for the use of or the right to use any copyright, patent, trademark, or information concerning industrial, commercial, or scientific experience.
Court's Interpretation and Reasoning: The Tribunal referred to previous decisions where it was held that the assessee's services did not qualify as royalties. The reports provided were factual data and did not meet the criteria for literary or artistic work under the Indian Copyright Act, 1957.
Key Evidence and Findings: The Tribunal examined the nature of services provided by the assessee, which involved verification of information without any advice or analysis. The reports were not protected by copyright laws and were for internal consumption by clients.
Application of Law to Facts: The Tribunal concluded that the services provided did not involve the use of any copyrightable work and thus could not be classified as royalties under Article 13 of the DTAA.
Treatment of Competing Arguments: The Department argued that the reports were protected by copyright, but the Tribunal found no evidence supporting this claim.
Conclusions: The Tribunal reversed the lower authorities' findings, ruling that the receipts were not royalties.

2. Classification as Fees for Technical Services

Relevant Legal Framework and Precedents: Article 13(4) of the India-UK DTAA defines "fees for technical services" as payments for rendering technical or consultancy services, which involve the transfer of technical knowledge, experience, skill, or processes.
Court's Interpretation and Reasoning: The Tribunal found that the services provided by the assessee did not involve technical skill or knowledge transfer. The role was limited to data validation without any consultancy or advisory services.
Key Evidence and Findings: The Tribunal noted the absence of any technical characteristic in the background checks and verification services provided by the assessee.
Application of Law to Facts: The Tribunal applied Article 13(4) and determined that the services did not qualify as fees for technical services.
Treatment of Competing Arguments: The Department's argument that the services involved technical expertise was not supported by evidence.
Conclusions: The Tribunal held that the receipts could not be classified as fees for technical services under the DTAA.

3. Copyright Protection and Use of Copyright

Relevant Legal Framework and Precedents: The Indian Copyright Act, 1957, outlines the requirements for a work to be protected by copyright.
Court's Interpretation and Reasoning: The Tribunal found that the reports generated by the assessee did not fulfill the requirements for copyright protection as they were factual data without literary or artistic value.
Key Evidence and Findings: The reports were used for internal purposes by clients and did not involve any rights to publicly display or distribute the content.
Application of Law to Facts: The Tribunal concluded that the reports did not involve the use of copyright as defined under the Indian Copyright Act.
Treatment of Competing Arguments: The Department's claim of copyright protection was not substantiated by evidence.
Conclusions: The Tribunal ruled that the reports were not protected by copyright laws.

4. Imparting of Commercial Experience, Skill, or Expertise

Relevant Legal Framework and Precedents: The definition of royalties in Article 13 of the DTAA includes payments for information concerning commercial experience.
Court's Interpretation and Reasoning: The Tribunal found that the services provided did not involve imparting any commercial experience, skill, or expertise. The reports contained factual data without any transfer of knowledge or skills.
Key Evidence and Findings: The Tribunal noted that the services were limited to verification and did not involve any advice or recommendations.
Application of Law to Facts: The Tribunal determined that the services did not meet the criteria for imparting commercial experience.
Treatment of Competing Arguments: The Department's argument of commercial experience was not supported by the nature of services provided.
Conclusions: The Tribunal ruled that the services did not involve imparting commercial experience.

SIGNIFICANT HOLDINGS

The Tribunal held that the assessee's revenue receipts from background scrutiny services did not qualify as royalties under Article 13 of the India-UK DTAA.
The Tribunal concluded that the services provided did not involve technical skill or knowledge transfer and thus could not be classified as fees for technical services.
The Tribunal found that the reports generated were not protected by copyright laws and did not involve the use of copyright.
The Tribunal ruled that the services did not involve imparting commercial experience, skill, or expertise.
Final determination: The assessee's appeal was allowed, reversing the lower authorities' findings.

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