The Full Federal Court recently considered the double tax
agreement between India and Australia (DTA) in
Tech Mahindra Limited v Commissioner of Taxation 
FCAFC 130. Tech Mahindra Limited (the taxpayer)
argued that it was possible that royalties paid from Australia to
India could escape Australian taxation altogether under the terms
of the DTA. The Court held in favour of the Commissioner of
Taxation, with the result that the royalties were subject to
The taxpayer was an Indian tax resident company, which had a
permanent establishment (PE) in Australia. The
taxpayer provided services to Australian customers both from its
Australian PE and from its home jurisdiction, India. The issue was
whether any "royalties" paid by Australian customers to
the taxpayer in India were subject to royalty withholding tax.
The normal position is that royalties paid to a foreign resident
are subject to withholding tax, unless the royalties are
attributable to a PE. The taxpayer sought to disrupt this position
by saying that the payments were "effectively connected"
with its Australian PE (so that royalty withholding tax did not
apply), but were not a result of activities carried on through the
PE. If the taxpayer had been successful, that would mean that
Australia would have no taxing rights over the royalties paid by
Australian customers to the taxpayer's base in India.
The taxpayer based its argument on the language of Article
12(4). Article 12(4) applies to remove a payment from the royalty
withholding tax provisions if the property, right or services in
respect of which the royalties are paid are "effectively
connected" with a PE. If Article 12(4) of the DTA applies,
payments are not subject to royalty withholding tax but are instead
taxed as business profits under Article 7.
The Court considered the "loose" language in the DTA
having regard to the purpose of the DTA, including how the DTA
allocated taxing rights to income among Australia and India. The
Court concluded that Article 12(4) is intended to give priority to
Article 7 (business profits). Article 12(4) was not intended to
remove Australia's right to tax the royalty altogether, but
rather to determine whether the royalty should be taxed as a
royalty (subject to withholding tax) or as part of the profits of
the PE. Accordingly, Article 12 applied to the taxpayer, and
royalty withholding tax was imposed on the royalties paid by
Australian customers to the taxpayer.
The case confirms that the language used in the DTA will be
given a meaning that is consistent with the broader purpose of
double tax treaties, being to allocate taxing rights among
The Court's analysis is particularly relevant in the current
OECD BEPS environment, where countries are jostling for taxation
rights. Tech Mahindra shows that there can be significant ambiguity
in interpreting Australia's tax treaties, and the Court's
decision will help guide Australia's response to the BEPS
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