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  • The Federal Court of Australia has considered the allocation of taxation rights between two States with respect to royalty payments.
  • The Court interpreted a 1991 tax treaty between India and Australia, particularly Articles 7 and 12 and their interaction.
  • A provision in a tax treaty is to be interpreted according to its language, context, and object and purpose.

How are the provisions of a bilateral tax treaty to be interpreted? Holistically, giving primacy to their terms, having regard to their context (including their interaction with other provisions) and in light of the object and purpose. That was the upshot of a recent judgment from the Federal Court of Australia in Tech Mahindra Limited v Commissioner of Taxation [2016] FCAFC 130, which this article will review.


In 1991, Australia and India concluded the Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income [1991] ATS 49 (entry into force 1991) (‘the treaty’). The treaty is incorporated under Australian law by virtue of s 11Z of the International Tax Agreements Act 1953 (Cth) and appears at schedule 35 of that Act.

Article 7 of the treaty specifies a business profits rule. The profits of an enterprise from one Contracting State are taxable only in that State unless the enterprise carried on business in another Contracting State through a permanent establishment. If so, the profits of that enterprise may be taxed in the other State but only as are attributable to that permanent establishment, or those business activities or sales of goods or merchandise of the same or a similar kind conducted through that permanent establishment (article 7(1)). Where profits include income which is addressed by other articles of the treaty, then those articles are unaffected by article 7 (article 7(7)).

Article 12 provides for royalties. These are defined as payments or credits given as consideration for rendering any services which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design (article 12(3)(g)).

Royalties arising in one Contracting State, being royalties to which a resident of the other Contracting State is beneficially entitled, can be taxed in that other State (article 12(1)). Royalties can also be taxed in the Contracting State in which they arise, but the tax so charged must not exceed a certain percentage of the gross amount of royalties (article 12(2)).

These provisions, however, do not apply if the person beneficially entitled to the royalties (being a resident of one of the Contracting States) carries on business in the other Contracting State (in which the royalties arose) through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the property, right or services in respect of which the royalties are paid or credited are ‘effectively connected’ with the permanent establishment or fixed base (article 12(4)). In those circumstances, article 7 applies.

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