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

On the facts and circumstances of the case & in law, the Ld. AO/DRP failed to appreciate that the receipts of INR 47,60,85,618 earned by the Appellant from the Indian Customers qualify as business income and the same is not chargeable to tax in the hands of the Appellant in India in the absence of Permanent Establishment (PE) of the Appellant in India.

Without prejudice to the above, the Ld. AO/DRP grossly failed to appreciate that the consideration of INR 5,16,00,963 received towards printed charts constitute sale of goods and cannot be taxed as royalty in hands of Appellant.

On the facts and circumstances of the case & in law, the Ld. AO/DRP failed to appreciate that the equalization levy amounting to INR 85,88,397 paid in respect of the receipts amounting to INR 42,44,84,655 be refunded or the Appellant be entitled/eligible to the claim of corresponding credit.”

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

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

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 Jeppesen GmbH

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 juri ictions 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 Jeppesen GmbH

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

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 Jeppesen GmbH

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.

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 juri ictional Bombay High Court in Diamond Services International (P) Ltd. v. Union of India, wherein their Jeppesen GmbH

The grading report by GIA is a statement of fact as to the characteristics of the diamond. Does this report amount to transfer of any industrial or commercial experience of GIA to the petitioner or to an agent of the petitioner. The report gives the attributes of the diamond and includes an analysis of the diamond's dimensions, clarity, colour, polish, symmetry and other characteristics. There is nothing on record before us to show that GIA through its grade report assigns or transfers any industrial or commercial experience to its customers. Therefore, the question would be whether the grading report would amount to any transfer of any experience by GIA to the clients. The term "experience" is not defined either under the Act or under the Double Taxation Avoidance Agreement and consequently we shall have to consider the normal dictionary meaning. The expression "experience" in The Oxford English Reference Dictionary has been explained as "Knowledge or skill resulting from actual observation of or practical acquaintance with facts or events. In The Chambers Dictionary the expression "experience" has been explained as "Knowledge or Jeppesen GmbH

For that purpose we may consider the expression "use" as defined in various dictionaries. In the Oxford English Reference Dictionary it is defined as "Exploit for one's own ends, employ, apply". In Chambers Dictionary it is defined to mean "Use to employ for some purpose. Apply to one's own purpose. The act so employing, using or putting into service". The nature of the transaction between GIA and its client does not invest the party making payment with any right as regards the use of the cumulated experience of GIA. The payment in question does not involve a payment for the use or the right to use the industrial, commercial or scientific experience of GIA. The activity of grading or certification is merely the application of this knowledge/experience in a professional stream as applicable to a particular diamond or set of diamonds which are offered for certification or grading. The definition of royalty under the Double Taxation Avoidance Agreement under article 12(3) as defined therein, that uses the expression "or for information concerning industrial, commercial or scientific experience". There is no parting of information concerning industrial, commercial or scientific experience by GIA when it issues the grading certificate. Under sub-clause (4) the payments received must be in consideration for services of managerial. technical or consultancy nature. That could include to the application or enjoyment of the right, property or information. This is not the case here. Neither is it making available technical knowledge, experience, skill, etc., to enable the person acquiring the service to apply the technology contained therein.

The question that remains to be answered is whether there is imparting of specific experience by GIA to the person. "Impart in Webster's Encyclopaedic Unabridged Dictionary has been defined to give, to bestow communicate; to grant a part or share of In Oxford English Reference Dictionary it is prescribed as "give a share of (a thing) A plain reading, therefore, of the meaning of the word "impart" implies that it means to give, to Jeppesen GmbH

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. 12. 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 Jeppesen GmbH

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

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

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 Jeppesen GmbH

……..The expression "information concerning industrial, commercial or scientific experience" has been authoritatively construed in the OECD Commentary as referring to the concept of know-how undivulged and proprietary information that enables the recipient to reproduce or apply the experience independently, without further assistance from the provider

The Commentary distinguishes this category from payments for services, which involve the application of knowledge rather than its transfer Paragraphs 11 to 13 of the OECD Model Commentary on Article 12, repeatedly cited by Indian courts, emphasise that in a know-how contract, the information must already exist, be capable of independent use by the recipient, and be transferred under confidentiality. In contrast, a service contract is one where the provider continues to participate in the execution of the work, utilising his expertise himself to produce results for the recipient.

The practical import of this distinction is that the presence of expertise on the provider's part is not decisive, rather, it is the mode of exploitation that governs tax characterisation. If the knowledge remains embedded in the provider and is merely used by him to perform a task, the income is from services. If however, the knowledge or experience is transmitted such that the recipient can thereafter deploy it independently, the income assumes the character of royalty."

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 juri ictional High Court, we are of the considered opinion that the receipts earned by the assessee from Indian customers cannot be treated as royalty Jeppesen GmbH

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.