Decision impact statement

Tech Mahindra Ltd v Commissioner of Taxation

• Note: On 23 November 2022, the Treasury Laws Amendment (Australia-India Economic Cooperation and Trade Agreement Implementation) Bill 2022 received royal assent. The amendment applies to income years commencing on or after 29 December 2022.
  Whilst this Decision Impact Statement is not impacted by the amendment, a fact pattern similar to the facts of Tech Mahindra Limited v Commissioner of Taxation would be impacted by the amendment for income years commencing on or after 29 December 2022.

Impacted Advice

• N/A

This decision has no impact for ATO precedential documents or Law Administration Practice Statements

Précis

The sole issue in the appeal concerns the proper construction of Article 12(4) 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 [1991] ATS 49. The Commissioner did not seek to challenge the finding of Justice Perry in the first instance that Article 7 would not apply to those payments and that only certain payments in question constituted 'royalties' as defined in Article 12(3).

Brief summary of facts

The taxpayer was incorporated in India and was a non-resident of Australia for taxation purposes.

The taxpayer established offices in Australia, which comprised a 'permanent establishment' for the purposes 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 [1991] ATS 49 (Indian Agreement 1991).

In the relevant period, the taxpayer provided information technology services to large scale enterprises in Australia.

In the performance of its contracts, the taxpayer provided services through staff located in the Australian offices or staff located in the Indian offices.

In Tech Mahindra Limited v Commissioner of Taxation [2015] FCA 1982, Justice Perry concluded that a portion of the payments satisfied the definition of 'royalties' under Article 12(3)(g). Services that satisfied the definition in Article 12(3)(g) included the development and customisation of software, software maintenance activities whereby software fixes required a change to the source code, and enhancement activities being work undertaken in coding upgrades. Where an activity was interdependent on another activity which satisfied Article 12(3)(g), the former activity also satisfied Article 12(3)(g).

Her Honour concluded that Article 12(4) was not engaged to deny the operation of Articles 12(1) and 12(2) on the basis that the services performed in India were not 'effectively connected' to the permanent establishment.

The taxpayer appealed the Federal Court decision to the Full Federal Court.

In Tech Mahindra Limited and Commissioner of Taxation [2016] FCAFC 130, Robertson, Davies and Wigney JJ agreed with Perry J that Article 12(4) of the Indian Treaty was not engaged.

Tech Mahindra sought special leave to appeal the decision of the Full Federal Court to the High Court, (S244 of 2016). Gageler and Gordon JJ refused Tech Mahindra Limited's special leave.

Issues decided by the court

The co-extensive operation of Article 12 and Article 7 give content and meaning to the phrase 'effectively connected with' in Article 12(4). The primary judge was correct in holding that the phrase 'effectively connected with the permanent establishment' is intended to encapsulate the test of connection under Article 7(1)(a), which justifies the allocation of taxing rights to a Contracting State in respect of the business profits of a non-resident that are attributable to the permanent establishment in that Contracting State. Article 12(4) is engaged where the royalties in question are able to be taxed by the source State under Article 7(1)(a) as part of business profits attributable to a permanent establishment in that state.

In the relevant year the payments in question were not attributable to the taxpayer's permanent establishment in Australia.

ATO View of Decision

Article 12(4) is engaged where the royalties in question are able to be taxed by the source State under Article 7(1)(a) as part of business profits attributable to a permanent establishment in that state. In other circumstances, the source country's taxing right in Article 12 remains unaffected.

In the present case it was common ground that the payments referrable to the provision of those services were not attributable to the taxpayer's permanent establishment in Australia so the payments were brought to tax under Article 12 as income.

Implications for impacted advice or guidance

N/A

Legislative References:
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
[1991] ATS 49, Art 7 and Art 12

International Tax Agreements Act 1953
11Z

Vienna Convention on the Law of Treaties
[1974] ATS 2 Art 31

Case References:
McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation
[2005] FCAFC 67
(2005) 142 FCR 134
2005 ATC 4398

Task Technology Pty Ltd v Federal Commissioner of Taxation
[2014] FCAFC 113
(2014) 224 FCR 355
2014 ATC 20-467
(2014) 99 ATR 275