Tech Mahindra Ltd v Commissioner of Taxation

• Jurisdiction: Australia Federal only
• Court: Full Federal Court (Australia)
• Judge: Robertson,Wigney JJ,Davies
• Judgment Date: 22 September 2016
• Date: 22 September 2016

([2016] FCAFC 130)

Australia, Federal Court

(Robertson, Davies And Wigney JJ)

Tech Mahindra Ltd

and

Commissioner of Taxation 1

Treaties — Interpretation — Application — Agreement between Government of Australia and Government of Republic of India for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income, 1991 — Operation of “business profits rule” — Article 7 — Operation of “royalties provision” — Article 12 — Principles of interpretation — Vienna Convention on the Law of Treaties, 1969, Article 31 — Whether source State having right to tax royalties under Article 7 or 12 — The law of Australia

Summary:2The Facts:— the Appellant Was An Indian Resident Which Conducted Business Through A Permanent Establishment, Performing Services For Its Australian Customers In Both Australia And India. The Agreement Between The Government Of Australia And The Government Of The Republic Of India For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income, 1991 (“the Agreement”), Was In Force At All Relevant Times. The Respondent Served A Notice Of Assessment On The Appellant That Included Income From Services Performed For Its Customers In India. The Appellant Maintained That, Pursuant To The Agreement, Australia Did Not Have Taxation Rights To That Income.

Article 7 of the Agreement addressed business profits.3 The profits of an enterprise of one State were taxable only in that State unless the enterprise carried on business in the other State through a permanent establishment (Article 7(1) of the Agreement). In that case, the enterprise's profits could be taxed in that other State but only so much of them as was attributable to that permanent establishment. Where profits included income which was dealt with by other articles of the Agreement, those articles were unaffected (Article 7(7)). Article 12 of the Agreement4 addressed royalties, which relevantly meant payments or credits as consideration for rendering any service (Article

12(3)(g)). Royalties arising in one State could be taxed in that State (Article 12(1)). Royalties taxed in the State in which they arose could not exceed a certain gross amount (Article 12(2)). However, these provisions did not apply if the person beneficially entitled to the royalties, being a resident of one State, carried on business in the other State, in which the royalties arose, through a permanent establishment, or performed in that other State independent of personal services from a fixed base, and the property, right or services in respect of which the royalties were paid or credited were “effectively connected with” the permanent establishment or fixed base (Article 12(4)). In such a case, Article 7 applied.

The judge held that certain categories of payments referable to Indian services were “royalties” as defined in Article 12(3)(g) of the Agreement.5 Furthermore, Article 12(4) was not engaged, so that Australia could tax those payments under Article 12(2). It was common ground that the payments in question constituted “royalties” as defined in Article 12(3) and referred to services which were not attributable to the appellant's permanent establishment in Australia. The appellant appealed.

Held:—The appeal was dismissed.

(1) The primary judge had correctly construed and applied Article 12(4) of the Agreement. The co-extensive operation of Articles 12 and 7 gave content and meaning to the phrase “effectively connected with the permanent establishment” in Article 12(4). The phrase was intended to encapsulate the test of connection under Article 7(1)(a), which justified the allocation of taxing rights to a Contracting State in respect of the business profits of a non-resident that were attributable to the permanent establishment in that Contracting State. Article 12(4) was engaged where the royalties in question were taxed by the source State under Article 7(1)(a) as part of business profits attributable to a permanent establishment in that State (paras. 21 and 39).

(2) “Effectively connected with” meant having a real or actual connection with the activities carried on through a permanent establishment. Whether such a connection existed was not answered merely on the basis that the property, rights or services provided “serve to effect the purposes of the permanent establishment” (para. 43).

(3) Royalties were taxed by the source State either as part of business profits under Article 7 (where such royalties were attributable to a permanent establishment in that State) or separately under Article 12. Article 12(4) was intended to relieve the source State from the limitation on taxing rights imposed under Article 12 by taxing such royalties under Article 7, not to disentitle the source State from any taxing rights where otherwise Article 7 would not give such taxing rights. This construction gave effect to the

language of Article 12(4) and was consistent with the extrinsic materials6 (paras. 29, 31 and 35).

(4) The principles which applied to the interpretation of the Agreement were well settled. A holistic approach was to be taken consistent with Article 31 of the Vienna Convention on the Law of Treaties, 1969. The written text had primacy but regard also had to be given to the context, object and purpose of the treaty provisions (para. 22).

The following is the text of the judgment delivered by the Full Court:

INTRODUCTION

1. This appeal concerns Article 7 (the business profits rule) and Article 12 (the royalties provision) of the Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, concluded 25 July 1991, [1991] ATS 49 (entered into force 30 December 1991) (“the Indian Treaty”).

2. The Appellant is a resident of India which carries on business in Australia through a permanent establishment. In the income year in issue, the Appellant performed services for its Australian customers both in Australia and in India. The Appellant did not dispute that Article 7(1)(a) of the Indian Treaty gave Australia the right to tax the income that the Appellant received in respect of the services performed in Australia, but in issue was whether Australia had any taxing rights in respect of the income from the services performed by the Appellant in India (“the Indian services”). The Respondent (“the Commissioner”) contended that the payments in respect of the Indian services were “royalties” as defined in Article 12(3) and taxable in Australia under Article 12(2) and, in the alternative, that the net profits from the Indian services were liable to Australian tax under Article 7(1)(b) of the Indian Treaty. The Appellant in turn contended that the payments were not “royalties” as defined in Article 12(3) but, if royalties, Article 12(4) was engaged and gave priority to Article 7, so that whether Australia had the right to tax those payments depended on whether the criteria in

Article 7(1) were met which, it was submitted, they were not. It was common ground that the profits referable to the Indian services were not attributable to the Appellant's permanent establishment in Australia and that Australia did not have taxing rights in respect of those profits under Article 7(1)(a).

3. The primary judge held that certain categories of payments referable to the Indian services were “royalties” within the meaning of that term as defined in Article 12(3)(g) and held also that Article 12(4) was not engaged, so that Australia had the right to tax those payments under Article 12(2) of the Indian Treaty. The Appellant has appealed the decision of the primary judge that Article 12(4) was not engaged but not the finding that certain categories of payments referable to the Indian services were “royalties” within the meaning of that term as defined in Article 12(3)(g). For the reasons that follow we agree with the primary judge that Article 12(4) of the Indian Treaty was not...