By Ashutosh Dikshit
Once this agreement under ECTA is ratified by the Australian Parliament, it will help Indian technology companies to provide offshore services to their Australian customers in a transparent and cost-effective manner.
In India, the Income Tax Act 1961 provides directly [through section 90 (2)] that a taxpayer who is eligible to accede to a tax treaty will only have the provisions of the Act apply to him to the extent that the national tax provision is more advantageous – otherwise the provisions of the treaty will apply. However, in Australia, tax treaties are imported into national taxation differently – first by incorporating the treaty into the Australian International Tax Agreements Act 1953, then under the provisions of the act, all the provisions of the treaty are imported into Australian income tax law to apply to a taxpayer who is a resident of the treaty country. There is no mention, unlike the Indian Income Tax Act, that only the beneficial provisions of the treaty would apply.
Accordingly, the India-Australia Tax Convention (Agreement between the Government of Australia and the Government of the Republic of India for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on Income ) is listed in Schedule 35 of Australia’s International Tax Agreements Act and under the provisions of that Act the provisions of the treaty are incorporated into the Australian Income Tax Assessment Act.
In the case of
In Tech Mahindra Limited v Commissioner of Taxation  FCA 1982, the Australian court found that part of the payments made to Tech Mahindra for services rendered under its contracts met the definition of “royalties” within the meaning of Article 12(3)(g) of the tax treaty. The taxpayer’s claim was that offshore services classified as royalties (under section 12) could only be taxed in Australia if they were actually connected with the taxpayer’s PE in Australia under section 7 of the tax treaty. Section 7 gives Australia the right to tax business income attributable to the taxpayer’s PE in Australia; since these offshore services were not performed by its Australian PE, the taxpayer argued that, therefore, such royalty income would not be taxable in Australia. The Court did not accept the taxpayer’s claim. It held that section 12 provided an independent right to tax royalty income and therefore the taxpayer was liable to pay tax in Australia on such royalty income from offshore services.
Under Australian domestic tax law, only income of a non-resident taxpayer is taxable when it arises from sources within Australia. Tech Mahindra provided services to Australian customers performed partly by its employees located in Australia and partly by employees in India. The source of income from offshore services rendered from India would not be considered taxable in Australia, under its domestic tax laws, since the services are provided outside Australia. However, following the decision of the Full Federal Court of Australia, consideration received by the taxpayer for supplying IT services to customers in Australia through personnel located in India, although not taxable under Australian domestic tax law, would still be taxable in Australia under the provisions of the Treaty. Therefore, the treaty-based source rule effectively created a new taxing right for Australia beyond the normal provisions of its domestic law.
Indian companies, especially in IT services, have been grappling with the consequences of this decision for the past five years – litigation, tax increases in Australia, issues regarding the availability of foreign tax credit and negative impact on their business. for the provision of services. Approaches have been made to the Indian government to resolve this problem. Therefore, Australia’s commitment under ECTA to address this issue by amending its domestic laws is a welcome development for India-based IT service providers, which drive the bulk of global service exports. from India.
(Ashutosh Dikshit is a partner at Deloitte Touche Tohmatsu India LLP.)
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