Delhi ITAT: Screening and Investigation Services in India Are Not Considered Royalty or FTS

The receipts from the provision of background screening and investigation services to clients in India are not royalties or fees for technical services (FTS), ruled by the Delhi Bench of the Income Tax Appellate Tribunal (ITAT).

There have been no technical skills or knowledge or consultancy or make available any technical knowledge, experience, skill, know-how, or processes to the clients, the bench of G.S. Pannu (President) and Astha Chandra (Judicial Member) witnessed. The role of the taxpayer is limited to the verification of the data furnished via different candidates suggested to be employed via its customer.

The taxpayer/appellant comprised a foreign company and a tax resident of the UK. It has the business of furnishing human resources background screening services, along with pre-employment background screening, employment, education, verification services, investigative due diligence services, and investigative due diligence services.

Important: Earning via FTS or Royalty May Force Foreign Companies/Non-residents to File ITR

The identical name of services provided via taxpayer comprises of the verification of the information in regard to the candidate like educational verification, employment verification, professional references, and other checks, as well as but not restricted to global sanction checks, criminal checks, drug tests, and others. In India, the taxpayer does not have any permanent establishment (PE).

The AO ruled revenue obtained via the taxpayer from the provision of the background screening and investigation services has the sort of royalty or FTS under the provisions of Article 13 of the Double Taxation Avoidance Agreement between India and the UK.

The taxpayer argued that their income should not be categorized as royalty or Fee for Technical Services (FTS). They explained that they receive a list of candidates from clients and their role is solely to conduct background checks on these candidates, presenting the findings to the client in the form of a manual or online report. The taxpayer emphasized that their services do not involve any right to use or transfer of copyright or know-how.

The Income Tax Appellate Tribunal (ITAT) recognized that the taxpayer is a UK tax resident and does not have a Permanent Establishment (PE) in India. Consequently, they have chosen to be governed by the India-UK Double Taxation Avoidance Agreement (DTAA), which provides more favourable terms for the taxpayer. The type of services provided by the taxpayer was not disputed, and the agreement between the taxpayer and Barclays clearly outlined the nature of their services.

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The tribunal concluded that the taxpayer’s role is limited to validating the information provided by the candidate and providing relevant facts uncovered during the validation process. The clients independently decide whether to hire the candidate. Therefore, in the tribunal’s opinion, these services should not be classified as Fee for Technical Services under Article 13(4) of the India-UK DTAA.