JEPPESEN GMBH,GERMANY vs. ACIT, INTERNATION TAXATION, CIRCLE-3(1)(1), MUMBAI, MUMBAI, MAHARASHTRA

“2. On the facts and circumstances of the case & in law, the Ld. AO/DRP grossly erred in concluding that consideration earned by the Appellant of INR 47,60,85,618 from the Indian Customers is Royalty as per Article 12 of Double Tax Avoidance Agreement between India and Germany (India-Germany DTAA) by holding that such consideration is received for the use of or the right to use industrial, commercial, or scientific experience.

The brief facts, in so far as necessary for adjudication of the controversy, are that the assessee is a company incorporated under the laws of the Federal Republic of Germany and is a tax resident of Germany within the meaning of Article 4 of the Double Taxation Avoidance Agreement between India and Germany. The assessee was incorporated in 1934 and has since been engaged in the Jeppesen GmbH specialised business of providing flight and navigational informational solutions to air operators. It also develops certain software products used by airline operators for flight planning and operational execution. It provides such aeronautical information solutions and software products not only to customers in Germany but internationally, including to air operators and customers in India. During the year under consideration, the assessee earned consideration aggregating to ₹47,60,85,618 from Indian customers, primarily for providing navigational and aeronautical data and information, supplied either electronically through online portals or e-mail attachments or delivered in paper form as manuals, charts and similar publications, and also for granting licences relating to Electronic Flight Bag software and certain ground tools software, along with implementation, training and support services that are linked to such software.

The assessee’s consistent stand before the Assessing Officer was that the consideration received from Indian customers constituted its business income and, in the absence of any Permanent Establishment in India, the same was not chargeable to tax in India. The Assessing Officer, however, in the draft assessment order took the view that the assessee’s activity of developing and compiling data in an agreed format based on information obtained from government sources, other publicly available sources and/or customer-supplied information was carried out on the foundation of the assessee’s accumulated experience and Jeppesen GmbH therefore the receipts would fall within the ambit of “royalty” under Article 12 of the India–Germany DTAA as well as section 9(1)(vi) of the Act. The Assessing Officer further observed that in earlier years the assessee had offered income from said services as “royalty” and had paid taxes accordingly; that there was no material change in the facts and the nature of services, provision of data or software; and that despite this the assessee had altered its treatment by, according to the Assessing Officer, not offering the income as royalty at the treaty rate and instead paying equalisation levy at two per cent on a portion of receipts. It was also noticed by the Assessing Officer that the assessee had claimed exempt income under section 10(50) of ₹42,44,84,655, whereas in the return of income the exempt income reflected in the schedule was shown at ₹29,41,51,732, and that a portion of income of ₹13,03,32,920 had been subjected to tax deduction at source at ten per cent and had also been offered to tax in the return. Based on these aspects, and after referring to section 9(1)(vi) and Article 12, the Assessing Officer concluded that Article 12 includes imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill and observed that the assessee itself had stated that it compiles data in an agreed format based on information obtained from government or other publicly available sources and/or customer-supplied data, and that such data is developed/compiled using underlying experience, algorithm and logic which contribute to the final product, and therefore to use scientific and commercial experience the data is processed and made available to customers. The relevant “13. Thus, in view of the above discussion, consideration received by the assessee from Indian customers would fall within the ambit of Royalty as per Article 12 of India-Germany OTAA as well as S. 9(1)(vi) of the IT Act, 1961.

On reference before the learned DRP, the Panel upheld the approach of the Assessing Officer and held that the activities of the assessee involved compilation and delivery of specialised aviation data and reflected application of commercial and scientific experience, thereby qualifying as royalty. The learned DRP further held that while proprietary rights remained with the assessee, customers gain access to and use specialised data and software derived from such rights, and this access to software constitutes “use” under Article 12 of the India–Germany DTAA, thereby rendering the consideration taxable as royalty. The relevant findings and directions of the learned DRP are reproduced hereunder and are consciously left blank to be incorporated verbatim in italics at the appropriate place in the final order. Pursuant thereto, the Assessing Officer passed the final assessment

We have heard both the parties at length and have perused the facts and material placed on record as well as the relevant observations and findings of the Assessing Officer and the learned DRP. The factual backdrop, which is not in dispute, is that the assessee is engaged in providing flight and navigational data and information for air operators across several jurisdictions including India. Such flight information/data is collated from various civil aviation authorities and public sources, which is thereafter analysed, validated and verified by the assessee. Alongside, the assessee also provides certain software such as Electronic Flight Bag software and ground tools software, which are used in the systems installed in aircraft cockpits and for other on-ground operations. During the year under consideration, the assessee earned total receipts of ₹47,60,85,618, the break-up of which as set out in the original record is tabulated. The said table is reproduced hereunder:

The nature of transactions entered into by the assessee with Indian customers, as captured in the assessment record, shows that the provision of flight information/data primarily involves giving customers access to navigational data, airport data, en-route data, runway analysis data and similar aviation information, which enables customers to achieve efficiencies in operations such as determining optimal aircraft payload, fuel and time savings and improvements in overall operational processes. The assessee compiles such data into a database based on information obtained from government sources, other publicly available sources and/or customer- supplied information; the data passes through stages of collation, verification and validation by the assessee’s teams and, wherever required, validation with the relevant government agencies; thereafter, it is entered into a database and processed and converted into usable form and delivered to customers in an agreed format. Such delivery is made electronically through online portals or e-mails and, in some cases, in paper format as manuals. The terms of supply restrict the customer from duplicating, reselling or providing the data to third parties without written consent, the assessee retains ownership, grants only a limited/restricted right, and the customer is not permitted to alter the data transmitted. With respect to software licences, the assessee has granted licences for EFB software and ground tools used for accessing

The central question, therefore, is whether the receipts from Indian customers can be characterised as “royalty” within the meaning of Article 12 of the India–Germany DTAA, specifically on the footing adopted by the Revenue that they are consideration for “information concerning industrial, commercial or scientific experience.” It is an undisputed position that the treaty provisions, being more beneficial, would govern the characterisation. Article 12(3) defines “royalties” to mean payments of any kind received as consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including films or tapes used for broadcasting, any patent, trademark, design or Jeppesen GmbH model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. Thus, where the Revenue seeks to bring a payment within the last limb information concerning industrial, commercial or scientific experience it must be shown not merely that the provider possesses experience or expertise, but that such experience in the nature of know-how has been transferred or imparted to the payer, enabling independent use by the payer, and that the payment is in consideration for such transfer of know-how.

The OECD Commentary, which has consistently been treated as a valuable interpretative aid for treaty language, construes the expression “information concerning industrial, commercial or scientific experience” as referring to the concept of know-how, namely undivulged and proprietary information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and from disclosure of which an economic benefit can be derived, and clarifies further that since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as a result of performing services at the request of the payer, and that a know-how contract differs from a contract for provision of services, in which the provider undertakes to execute work himself by applying customary skills of his calling. The "11. In classifying as royalties payments received as consideration for information concerning industrial, commercial or scientific experience, paragraph 2 is referring to the concept of "know-how". Various specialist bodies and authors have formulated definitions of know-how. The words "payments... for information concerning industrial, commercial or scientific experience" are used in the context of the transfer of certain information that has not been patented and does not generally fall within other categories of intellectual property rights. It generally corresponds to undivulged information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise and from the disclosure of which an economic benefit can be derived. Since the definition relates to information concerning previous experience, the Article does not apply to payments for new information obtained as a result of performing services at the request of the payer. 11.1. In the know-how contract, one of the parties agrees to impart to the other, note he can use them for his own averant, his special knowledge and experience remain unrevealed to the public. It is recognised that the grantor is not required to play any part himself in the application of the formulas granted to the licensee and that he does not guarantee the result thereof. 11.2. This type of contract thus differs from contracts for the provision of services, in which one of the parties undertakes to use the customary skills of his calling to execute work himself for the other party. Payments mode under the latter contracts generally fall under Article 7.”

Apart from the international commentary, heavy reliance has also been placed on the judgment of the Hon’ble jurisdictional Bombay High Court in Diamond Services International (P) Ltd. v. Union of India, wherein their

On a combined reading of Article 12(3), the OECD Commentary and the juridical principles flowing from Diamond Services International, the governing legal position may be stated with clarity: the mere existence of skill, experience, technical capacity or specialised knowledge in the hands of the provider does not, by itself, render the consideration “royalty.” The decisive test is the nature of what is parted with. To qualify as royalty for information concerning industrial, commercial or scientific experience, the payment must be in consideration of a transfer or imparting of proprietary know-how typically undivulged, arising from prior experience such that the recipient, having received such know-how, can deploy it independently without further participation of the provider. Where, on the other hand, the provider retains the know-how, applies it himself to render a service or to deliver an output, and the recipient merely receives the product or result without being enabled to replicate the underlying process, the payment is not for know- how but for services or for supply, and would fall for consideration under Article 7.

When we examine the present facts through the above lens, it becomes apparent that the assessee gathers aviation- related information from government sources and other publicly available repositories, and in some cases customer- supplied information, and thereafter undertakes internal processes of verification, validation, collation and formatting

The same conclusion follows in relation to the software licences. The record shows that the assessee retains all rights, title and interest in the software; the customer is granted only a restricted licence to use the software for its operations; and the contractual terms prohibit modification, merging, translation, decoding, decompilation, disassembly or Jeppesen GmbH reverse engineering. These restrictions, far from indicating any transfer of know-how, underscore the opposite: that the customer is not permitted to access, extract or replicate the underlying technology. There is no factual or legal basis, therefore, to hold that any industrial, commercial or scientific experience in developing the software has been transferred or imparted to the customer. The payment is for a limited right of use in a controlled manner, without enabling the customer to exploit the underlying intellectual creation independently. In treaty interpretation, one must be vigilant against expanding the concept of “royalty” beyond its intended bounds; otherwise, every specialised product or service would become royalty merely because it is delivered by an enterprise possessing expertise an outcome neither contemplated by Article 12 nor supported by the jurisprudence.

As regards the ancillary services of training, implementation and support, the record itself shows that these services are ancillary and incidental and inextricably linked to the principal supply of data and software and are provided remotely from outside India. Such services involve the application of knowledge by the assessee to ensure effective use and functioning of the supplied product; they do not involve transfer of technical experience or making available any know-how enabling independent reproduction by the customer. The OECD Commentary itself draws a firm distinction between a know-how contract and a service contract, and clarifies that where the provider continues to perform the work himself using his expertise, the payment is Jeppesen GmbH not royalty. Therefore, these ancillary receipts also cannot be brought within the net of Article 12(3) as royalty for information concerning industrial, commercial or scientific experience.

With respect to the sale of goods, namely paper charts, leather binders and related items, the Assessing Officer’s approach that such physical goods are also in the nature of data and charts and that merely the medium of delivery changes, does not carry the matter any further. Even if the content is similar, a sale of tangible goods cannot be transmuted into royalty for “experience” merely because expertise was involved in producing such charts. If such logic were to be accepted, it would lead to an untenable proposition that every sale of goods manufactured or developed using skill or experience would become royalty, which would be a distortion of both treaty language and accepted principles of international taxation.

The assessee also placed reliance on the decision of the Mumbai Tribunal in BCD Travel Asia Pacific Pte. Limited, wherein the Tribunal reiterated that “information concerning industrial, commercial or scientific experience” refers to undivulged proprietary know-how enabling the recipient to reproduce or apply the experience independently, and emphasised that the presence of expertise on the provider’s part is not decisive; rather, what governs is whether knowledge remains embedded in the provider and is merely used to perform a task or whether it is transmitted to the

In view of the foregoing discussion, and having regard to the treaty language, the interpretative guidance of the OECD Commentary and the binding principles emanating from the judgment of the Hon’ble jurisdictional High Court, we are of the considered opinion that the receipts earned by the assessee from Indian customers cannot be treated as royalty

Since we have deleted the addition on the principal issue, the issue raised in Ground No. 5 relating to refund/credit of equalisation levy becomes purely academic.

Ground relating to interest under section 234B is consequential. Other grounds were not argued or pressed and are dismissed as infructuous.

In the result, the appeal of the assessee is partly allowed.