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Australia has taxing rights under DTAA even if there is no provision in its domestic law: Australian Court

October 24, 2018[2018] 98 358 (FC-Australia)

ILT: Payment received by Tech Mahindra for providing services to Australian entities through Indian employees held as Royalty and in-turn held as taxable in Australia as per Article 12 read with Article 23 of Australia-India DTAA even though there wasn’t a specific provision to tax such income as per domestic laws of Australia


• Tech Mahindra (‘Applicant’) had offices in Sydney and Melbourne through which it provided software products and information technology services to entities in Australia.

• Payments received by applicant for the services provided in Australia by the employees located in India were treated as ‘Royalties’ as per Article 12(3)(g) of the Australia-India DTAA .

• Applicant argued that though Australia was allocated the right to tax the ‘Royalties’ by the Indian Agreement but it could only exercise that right if it had the right to impose tax on those amounts under Australia’s domestic law. As of now, the domestic law does not give any right to Australia to tax such income.

The Federal Court of Australia held that:

• The language of Article 23 should be given effect according to its terms and the context. Article 23 provides that that income derived by a resident of one contracting states may be deemed to be income from sources in other contracting state for purpose of law of that other state.

• Therefore, royalty income was to be included in the applicant’s assessable income because it was income from an Australian source by reason of Article 23 of the Australia-India DTAA.

• The Court rejected the argument that the tax treaties can only be used as shields not swords. It held that the tax treaties also provide standalone taxing power and independent imposing of tax to a particular income.

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