Satyam Computer Services Limited v Commissioner of Taxation, [2018] FCAFC 172

In Tech Mahindra, computer services provided by employees of the taxpayer located in India to Australian companies were found to be royalties under the Australia-India Treaty, and Australia was found to have the right to tax those payments under Art. 12(2) of the Treaty.

At issue here was whether this meant that the payments had an Australian source by virtue of Article 23(1) of the Treaty, so that they were taxable as Australian source income under s. 6-5(3)(a) of the Income Tax Assessment Act 1997 (which provided that the assessable income of a foreign resident included “the ordinary income you derived directly or indirectly from all Australian sources during the income year”) and Art. 23(1), which provided:

Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State.

In finding that Art. 23(1) had such effect, the Court stated (at para. 15):

The effect of Article 23 … is that the payments in question are deemed to have an Australian source for the purposes of s 6-5(3)(a).

And at para. 26:

The applicant also placed store on the generalised principle that tax treaties are, and can only be, exclusively relieving: that is, they are only ever “shields not swords” and not the grant of a standalone taxing power and independent imposition of taxation. The Commissioner did not cavil with the proposition that tax treaties do not grant a standalone taxing power or the independent imposition of taxation (see Chevron Australia Holdings Pty Ltd v Commissioner of Taxation (No 4) (2015) 102 ATR 13; [2015] FCA 1092 and the cases cited at [50]–[52]) or that the allocation of the tax rights they effect is permissive. They do not oblige the contracting states to tax: Federal Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597 (“Lamesa”) at 600-601; GE Capital at [36]. However none of these generalisations establish the proposition that Article 23 does not operate according to its terms.

The Indian taxpayer (Satyam) argued unsuccessfully before the Full Federal Court of Australia “that tax treaties are, and can only be, exclusively relieving: that is, they are only ever ‘shields not swords’ and not the grant of a standalone taxing power and independent imposition of taxation.”

Art. 23(1) of the Australia-India Treaty provided:

Income, profits or gains derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, Articles 10 to 20 and Article 22 may be taxed in the other Contracting State, shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State.

The bolded language had the effect of indicating that a technical-services royalty, which Australia was permitted to tax under the Australian royalties article of the Treaty, was deemed to arise in Australia not only for the purposes of the Article of the Treaty dealing with the elimination of double taxation, but also for the purposes of the Australian domestic taxation provisions. Consequently, technical services fees (which were deemed royalties) earned by Satyam, which in the absence of the Treaty would have been considered to not arise in Australia so that they would not have been subject to Australian income tax under the approximate Australian equivalent of ITA s. 115, were now deemed for the purposes of that provision to arise in Australia and to therefore be subject to Australian income tax.