The High Court, sitting in Sydney, has refused the taxpayer’s application for special leave to appeal against the Full Federal Court decision in Tech Mahindra Limited v FCT [2016] FCAFC 130.
The Full Federal Court decision, which now stands, dismissed the taxpayer’s appeal, effectively upholding the judgment of Perry J in September 2016 that a company resident in India and registered in Australia, and which carried out IT services for Australian clients both from its permanent establishment (PE) in Australia and by employees located in India, was liable to tax in Australia in respect of part of the income derived from the services provided from India. It did so on the grounds that the payments made in Australia for certain services, undertaken in India, constituted “royalties” under the Australia-India Double Tax Agreement (DTA) and were deemed to be income derived from Australian sources under the DTA.
This description gives the right end result but does not take the reader through the twists and turns in applying the DTA. For a summary of that, see my note below and also the September 2016 Tax ‘Technical – Tax Month’ article on the Full Federal Court case (per link below).
[Full Federal Court decision; related Tax Month article; LTN 54, 22/3/17]
FJM Note:
It was common ground that the services provided by the Indian company were ‘knowhow’ based ‘royalties’. The fight was under the Double Tax Agreement between the Government of Australia and the Government of the Republic of India, concluded 25 July 1991 and took effect as Australian law on 30 December 1991), [1991] ATS 49 (“the Indian Treaty”).
In my report on the Full Federal Court case in September 2016, I noted that the twists and turns through the Indian Treaty, required some following. This is how I described it.
- The Business Profits Article, 7(1)(a), allowed Australia to tax the Indian company’s profits ‘attributable to’ its Australian ‘permanent establishment’ (and it was common ground that payments for their Australian based services would be taxed on this basis).
- Article 7(7) gave precedence to more specific subsequent provisions (such as the ‘royalty’ provisions in Article 12).
- The Taxpayer, therefore argued it could avoid Australian tax, altogether, if it could get itself into the more specific Article (viz: the Royalty Article) and then find a provision precluding that more specific article applying.
- It was common ground that the Australian payments for the work done in India were ‘know-how’ based ‘royalties’ (Art 12(3)(g)), which got the Taxpayer to ‘first base’ (prima-facie, into the more specific ‘royalties’ Article).
- The Taxpayer then sought to use Art 12(4) to escape the ‘royalties’ regime (and, it thought, escape Australian tax altogether).
- Article 12(4) is activated when the royalties were ‘effectively connected’ with an Australian ‘permanent establishment’. The Taxpayer argued that it needed to supply both the Indian and Australian services to perform its contracts with its Australian customers and that the ‘know-how’ payments for Indian services were, in that sense, relevantly ‘effectively connected’ to the Australian ‘permanent establishment’ and therefore escaped Australian tax altogether.
- The Court(s) disagreed.
- They held that Art 12(4) worked with Art 7(7) to allocate income that could be taxed by Australia as both a ‘business profit’ and a ‘royalty’. Its effect was to act a ‘gateway’ back to Art 7(1) business profits Australian taxation.
- The Court’s held that the relevant ‘connection’ with the ‘permanent establishment’ had to be enough to attract Art 7 ‘business profits’ tax in Australia (viz: it was a compendious reference to the factors that made profits ‘attributable to’ an Australian permanent establishment).
- As it was common ground that the payments for the Indian services were not taxable as ‘business profits’, the Courts held that Art 12(4) was not relevantly engaged and that the payments for Indian services were taxable, in Australia, under the relevant domestic, and Treaty, ‘royalty’ provisions (at a capped amount of the gross payment).
- [‘Simple’ – as they say in the ‘compare the market’ TV advertisement.]