Receipts from services of background screening & investigation of potential employees neither royalty nor FTS

Recently, the Delhi ITAT held that income received by a non-resident Assessee from background screening and investigation services involving verification of information concerning various candidates to be hired by its Indian clients does not constitute royalty or FTS under Article 13 of India-UK DTAA.

The Bench comprising Shri G.S. Pannu (President) and Ms. Astha Chandra (Judicial Member) observed that none of the requisites under Article 13(3) are satisfied so as to qualify the receipts as ‘royalty’ since the Assessee’s services are merely restricted to providing a report summarising its findings with respect to the background check which is primarily a factual data and cannot per se qualify as literary or artistic or any other copyrightable work.

Senior Advocate Ajay Vohra appeared for the Assessee while Revenue was represented by Mr. Vizay B. Vasanta, CIT-DR.

Briefly, the Assessee, a UK based company having no Permanent Establishment (PE) in India received Rs.12.54 Cr from its clients in India towards background screening and investigation services which was not offered to tax. During assessment, the AO held that the reports provided by the Assessee 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.

The AO further held that the Assessee maintains a database or has taken such database under licence from its owner and the consideration received by the Assessee is for allowing the use of database to its clients and is chargeable to tax as royalty. Thus, according to the AO, screening report provided by the Assessee contains confidential information use of which amounts to the use of commercial experience of the Assessee chargeable to tax as royalty and services provided by the Assessee are ancillary to the alleged royalties and therefore, also taxable as FTS.

After considering the submission, the Coram observed that the agreement clearly restricted Assessee’s role to verification of information concerning various candidates proposed to be hired by the clients available in public domain or obtained from previous employers based on which background reports are generated and shared with the clients in India either in physical or online mode.

Relying on Apex Court decision in case of Analysis Centre of Excellence (P) Ltd. vs. CIT [432 ITR 471 (SC)], the Bench observed that provision of background screening services does not include any consideration for use or right to use any copyright or a literary, artistic or scientific work, patent or process of information to constitute as ‘royalty’.

Accordingly, the receipts of Assessee from its clients in India cannot be regarded as ‘royalties’ under Article 13 of India-UK DTAA, added the Bench.

Finding that “none of the rights as mentioned in Section 14(1) of Indian Copyright Act, 1957 have been rested with the client by the Assessee while rendering its services”, the Coram opined that client does not have any rights to publicly display, sell/distribute, copy, edit or undertake any other commercial exploitation of the background report, and accordingly, consideration received under the terms of its agreement with clients in India is purely towards provision of background screening and does not include any consideration for use or right to use any copyright or a literary, artistic or scientific work to constitute ‘royalty’ under Article 13 of India-UK DTAA.

Regarding the issue of FTS, the Bench observes that since the services provided by Assessee does not involve any advice/guidance on the credentials of employees proposed to be hired by clients in India and client is independently entitled to take decision on hiring of proposed candidates, accordingly, the said services does not involve any technical skill/knowledge or consultancy to constitute FTS under Article 13(4) of India-UK DTAA.

Cause Title: HireRight Ltd vs. ACIT [ITA No. 373/Del/2023 / 2023-Enterslice-22-ITAT-Del]

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HireRight-Ltd-vs-ACIT