Royalty under India-Germany DTAA denied where aviation data, software licences and support services involved no transfer of know-how

Receipts from flight information/data, restricted software licences, ancillary support services and sale of charts were not royalty under Article 12 of the India-Germany DTAA because no proprietary know-how, process or undivulged experience was transferred for independent use. The taxpayer only collated, verified and formatted publicly sourced aviation data, supplied final compilations, and rendered services through its own expertise; the software licences did not permit modification, decompilation or reverse engineering. In the absence of a permanent establishment, the receipts were business income not taxable in India, and the addition was deleted.

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Issues: Whether receipts from provision of flight information/data, software licences, ancillary support services and sale of charts were taxable as royalty under Article 12 of the India-Germany DTAA, or constituted business income not taxable in India in the absence of a permanent establishment.

Analysis: Article 12(3) covers payments for the use of, or the right to use, specified intellectual property and for information concerning industrial, commercial or scientific experience. The decisive inquiry is whether proprietary know-how or undivulged experience is transferred or imparted to the payer, enabling independent use, or whether the provider merely applies its own expertise to produce an end product or render a service. The OECD Commentary draws the same distinction between a know-how contract and a service contract. On the facts, the assessee collated, verified and formatted publicly sourced aviation data and supplied final compilations to customers; no proprietary methodology, process or internal know-how was imparted to enable independent reproduction. The software licences were restricted and did not permit modification, decompilation or reverse engineering, showing that no underlying experience was transferred. The training, implementation and support services were ancillary to the supply and represented application of expertise by the assessee itself. The sale of physical charts and similar items also could not be converted into royalty merely because skill was used in their preparation.

Conclusion: The receipts were not royalty under Article 12 of the India-Germany DTAA and, in the absence of a permanent establishment, were not chargeable to tax in India; the addition was deleted in favour of the assessee.

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