Australian Tax Court Decision On Deemed Source Rule In Australia-India Treaty

; posted on
October 16th, 2018

The Federal Court of Australia handed down its decision in Satyam Computer Services Limited v Commissioner of Taxation, which was involved in the “deemed source” rule in the Australia-India double tax treaty.


The Satyam Computer Services limited as now an amalgamated entity named tech Mahindra limited (hereinafter “The Company”) provided IT-related services to Australian customers, with those services partly performed in India and partly performed through a permanent establishment (PE) in Australia.

Under Indian perspective, the payment received by the company for the services provided by the employees located in India was considered as “royalties” as defined in Article 12(3)(g) of the Indian Agreement and Australia was given the right to tax those payments under Article 12(2) of the Indian Agreement. As a result, the treaty allocated taxing rights to Australia. In contrast, for Australian domestic law purposes, Australia would not exercise those taxing right since the payment was not treated as royalty and prima facie would be expected to have a source outside of Australia, given that the services were performed in India.

However, under article 23 of the Australia-India treaty (deemed source rule), such payment was deemed as Australian source, even though it was excluded as royalty under Australian perspective. Due to the article, under ss 4 and 5 of the International Tax Agreements Act 1953 (Cth), the payment will be included in the company’s assessable income for Australian tax purposes.

The issue, in this case, was whether, where Article 23 applies to an item of income, the item of income is deemed to have an Australian source for the purposes of the law of Australia ‘relating to its tax’.

The judgement

The court held that article 23 was perfectly applicable to virtually deemed payment as Australian Source. Further, to the extent that any inconsistency arises as between Australian domestic law and a relevant tax treaty, the effect of the International Tax Agreements Act is that the treaty provision prevails over the domestic law. The result is that such income can be liable to tax in Australia as long as the double tax agreement say so, notwithstanding that the income in question would not have been liable to tax in Australia under Australian domestic law.

The court in the Satyam case accordingly gave the full force of effect to Article 23 and concluded that the relevant payment (to the extent to which it was a royalty under the Australia-India treaty) had a source in Australia. Thus, permitting Australia to tax the company (a non-resident of Australia) on that income.

Source: Federal Court of Australia

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