Royalty classification in India: decoding ‘information concerning knowledge, experience or skill’

The definition of a royalty under India’s Income-tax Act, 1961 (the Act) and the applicable tax treaties includes within its ambit “imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill”. The scope of this phrase is often a subject matter of interpretation in cross-border transactions involving laboratory testing, access to databases, etc. The thin line of difference between the imparting of knowledge, experience, or skill and the provision of technical services using the same can frequently be blurred.

Recent rulings of the Mumbai and Delhi benches of the Income Tax Appellate Tribunal (ITAT) bring this challenge to the fore, as discussed in this article.

One of the leading judgments on the topic is that of the High Court of Bombay in Diamond Services International v Union of India and Others (2007). The court held that the amount charged for providing grading and certification reports for diamonds was not a royalty under the India–Singapore double taxation avoidance agreement (DTAA). It was held that the service provider used its gemmological knowledge, experience, and skill in assessing and grading the diamonds and the report was a statement of fact as to the characteristics of the diamond, such as dimensions, clarity, colour, polish, and symmetry. The service provider did not impart or transfer any of its knowledge, experience, or skill to the service recipient through the reports and hence, in any case, the latter did not have any right to use or exploit the same.

The above position is also clearly articulated in paragraph 11 of the Commentary on Article 12 of the OECD Model Tax Convention (2017), which states that the said portion of the definition of royalty applies to “know-how contracts” wherein one party agrees to impart its pre-existing and undisclosed special knowledge and experience to the other, so that the latter can apply the same on its own. It further states that the royalty article does not cover contracts for the provision of services wherein the service provider uses its customary knowledge, experience, and skill to execute work for the service recipient. Significantly, the commentary highlights that royalty does not cover the imparting of “new information” obtained as a result of performing services at the request of the service receiver.

In Jeppesen GmbH v Assistant Commissioner of Income Tax (2025), the Mumbai ITAT held that the amounts received by a non‑resident taxpayer for supplying flight information and navigational data to Indian customers do not constitute royalties under Article 12(3) of the India–Germany DTAA as the same does not qualify as consideration for the use of “information concerning industrial, commercial or scientific experience”. While interpreting the aforesaid phrase, the tribunal articulated a two‑part test for characterisation as a royalty:

• Existence of specialised know‑how – the service provider must possess specialised knowledge, expertise, or experience; and

• Impartment or transfer of such know‑how – knowledge/experience must be transferred to the recipient in a way that permits independent application by the recipient, without further involvement of the provider.

Reaffirming the settled legal position of the High Court of Bombay in Diamond Services, the tribunal highlighted that the mere possession of technical skill or experience by a service provider does not, by itself, make a consideration a royalty.

On the facts, the assessee did not transfer any proprietary methodology, algorithm, technical process, or internal operational know‑how. The assessee only applied its expertise to compile flight‑related information and supplied a final, standardised output for internal use with restrictions on duplication, resale, alteration, or making available to third parties. Indian customers thus received the results of the assessee’s skill and not the confidential know‑how, enabling them to replicate the process independently. Consequently, the payments were held to be outside the ambit of a royalty.

In contrast, the Delhi ITAT held in Nunhems Netherlands BV v Assistant Commissioner of Income Tax (2025) that payments for specialised marker testing services and double haploid (DH) services provided by the Dutch parent to its Indian associated enterprise (AE) were taxable as royalties under Article 12(4) of the India–Netherlands DTAA as the same qualified as “information concerning industrial, commercial or scientific experience”. The marker testing service involved the examination of seeds and leaves provided by the Indian AE and the results shared were used to form an opinion/judgement about a future breeding programme in India. Under DH services, the Indian AE sends seeds to its Dutch parent for forward breeding by DH conversion and the enhanced hybrid seeds were sent back to India for further commercialisation.

The ITAT held that the test reports furnished by the Dutch parent to its Indian AE encapsulated all the scientific experience and knowledge of the former on the conversion of seeds into a DH plant and the extraction of seeds from the DH plant. The ITAT also observed that apart from the test report, the Dutch parents also provided converted seeds with enhanced properties for commercial exploitation. Thus, the Diamond Services ruling was said to be distinguishable on the facts, and the ITAT held that the consideration resulted in the imparting of scientific experience/know‑how and therefore qualified as a royalty.

Interestingly, the ITAT ruling does not seem to delve into details of whether the information shared by the Dutch parent comprised any of its existing proprietary knowledge or experience or merely constituted information or facts gathered during the examination, testing, or process undertaken by it on the leaves and seeds supplied by the Indian AE.

If it were merely the latter case, then the OECD commentary would suggest that the same cannot constitute a royalty under a know-how contract. Also, the fact that seeds extracted from DH plants with enhanced properties were supplied back to the Indian AE may not necessarily mean that certain proprietary technical knowledge or experience was also shared. It may very well be argued that the Dutch parent has merely used or applied its knowledge and experience to develop the enhanced seeds.

Based on the above judgments, it can be concluded that the characterisation of a royalty under “information concerning industrial, commercial or scientific experience” is a fact-driven exercise. Where the facts involved indicate that proprietary, undivulged know‑how is transferred such that the recipient can apply the know-how independently for its own account, royalty implications will arise. On the other hand, where the facts prove that the service provider supplies only compiled outputs or service results by using the know-how itself, the consideration should not be treated as a royalty.

It may also be pointed out that many of the tax treaties entered into by India also give limited taxing rights to the source country in respect of a fee for technical services (FTS). In some treaties, the FTS article is further subject to a ‘make available’ condition. Thus, any analysis as to whether a consideration paid would constitute a royalty may also require simultaneous examination of the applicability of the FTS clause.