Tech Mahindra Limited v Commissioner of Taxation

Federal Court of Australia|2015-10-07|Before: India Minerals P, Perry J

INTRODUCTION 1 The applicant taxpayer, Tech Mahindra Limited (Tech Mahindra), formerly Satyam Computer Services Limited (Satyam), is a company resident in the Republic of India and registered in Australia. In the financial year ended 30 June 2008 (the relevant year), Satyam had offices in Sydney and Melbourne (the Australian offices) through which it provided software products and information technology services (IT services) to 69 entities in Australia (the Australian Customers). These services were performed in the relevant year partly by employees located in Australia (the Australian Services) and partly by employees located in India (the Indian Services). 2 It is not in dispute that the Australian offices of Satyam comprised a "permanent establishment" for the purposes of the Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the Indian Agreement): [1991] ATS 49. That agreement was concluded in Canberra on 25 July 1991 and came into force on 30 December 1991. Nor is it in issue that income from the Australian Services is income attributable to the permanent establishment in Australia and is therefore liable to tax in Australia in accordance with the Indian Agreement as enacted under Australian law. 3 The issue is whether, as the applicant contends, it is not liable to tax in Australia in respect of income earned from the Indian Services for the relevant year. For the reasons below, I find that part of the income generated by the Indian Services is liable to taxation under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) on the ground that payments made in Australia for certain categories of services undertaken in India constitute royalties under the Indian Agreement and are deemed to be income derived from Australian sources.

2.2 Satyam and the manner in which it provided services for its Australian Customers in the relevant year 9 Satyam was incorporated in India in 1987 and listed on the Bombay Stock Exchange in 1992. Its headquarters were in Hyderbad in India. The company conducted a business providing computer technology services including the development of software, and maintenance of, and enhancements to, existing software, as well as one-off consulting or advisory assignments relating to customer's information technology infrastructure. As at 30 June 2012, Satyam employed over 29,000 people and provided information technology services in 41 countries, including Australia, to large-scale enterprise customers in various industries. 10 Satyam established its Australian offices in the period 1998 to 2008 and, as at 30 June 2008, employed 821 staff in its Australian offices. 11 As mentioned, while for Australian tax purposes, Satyam was a resident of India, it is not in dispute that its Australian offices comprised a "permanent establishment" for the purposes of the Indian Agreement in the relevant year. Nor is the amount of profits earned by Satyam through the Australian and Indian Services, or their allocation between work undertaken by employees in India and by employees in Australia respectively in the relevant year in dispute. 12 During the relevant year, some of Satyam's Australian Customers were companies incorporated and resident in Australia, while others were Australian offices of foreign entities. Satyam's services were typically provided by Satyam employees at the customer's offices in Australia. Where it was not necessary to provide services at the premises of the Australian Customers, it was open to Satyam to provide the work through staff located in the Australian offices or staff located in the Indian offices, subject to the approval by the Australian Customers. Satyam's Australian Customers carried on business in diverse industries, including telecommunications, banking, health insurance, air travel, railways and retail. In all cases, the Australian Customers issued statements of work or purchase orders to Satyam for services to be provided to those entities pursuant to head or master supply agreements made directly with them or with different entities within the same corporate group. In some circumstances, services were provided to Australian Customers referable to head agreements with foreign entities although the local entity or office issued the relevant purchase order or statement of work. Usually the purchase order or statement of work with the local entity would incorporate particular terms of the head agreement. 13 As Mr Chakravarthy explained, in the relevant year the agreements for the provision of services to the Australian Customers comprised the following structure: (a) Master or head agreement. This agreement dealt with "high-level" contractual matters in Satyam's relationship with its customers. (b) Schedules, annexures and exhibits to the master agreement. These would usually fill in the detail that was referred to at a high level in the master agreement, such as the applications which Satyam was to monitor, mechanisms by which service provision would be assessed, standard charges for work done and so on. (c) Statements of work or purchase orders. When a customer wished for Satyam to provide specific services to it, it would inform Satyam of this by means of a purchase order or request for a statement of work. Whether the customer would issue a purchase order or statement of work to Satyam would depend on the particular customer's practice. The statement of work would generally be agreed after a period of discussion and negotiation between a customer and Satyam and would specify the exact services to be provided, the timeframe for the provision of services, the expected or capped cost of the services and so on. All services provided by Satyam to the Australian Customers were provided pursuant to, and were referable to, specific statements of work or purchase orders. While work may have been provided to more than one Australian Customers pursuant to only one master agreement, each Australian Customer (whether a separate entity or an office of an onshore entity) would separately issue a purchase order or statement of work to Satyam. 14 For example, the master supply agreement (MSA) might include clauses relating to the distinction between the MSA and supply contracts for specific goods or services to be provided to the client, the circumstances in which a supply contract will come into existence, variation and assignment of the MSA, confidentiality, notices, and general contractual terms such as severability, waiver, governing law and interpretation. The standard terms for supply contracts in the schedules or annexures to the MSA might cover such matters as rates which Satyam could charge for services (including for services by Satyam employees related to levels of expertise and seniority), invoicing and reporting requirements, dispute resolution, timeframes, testing of goods and ongoing support. The statement of work, on the other hand, would govern the detail of the individual tasks undertaken by Satyam employees for the client, such as the scope of work to be undertaken, the organisation of the team who undertake the work, plans for execution and testing of the work undertaken, the locations where the services would be provided, and the price or estimated price for the work to be undertaken. 15 While the terminology might differ as between clients, the structure of the arrangements for the provision of services to different clients was similar. 16 Once a purchase order or statement of work was agreed, it was allocated a project number (known as a project ID) internally within Satyam together with a project name which was descriptive of the kind of work being undertaken. Alternatively, it was allocated an existing project ID or project name. Employees were required to complete the Ontime system of timesheet data on a weekly or other basis, which recorded time spent by them working on particular projects. It was necessary for time entries to relate to particular projects for the purposes of invoicing the customer and determining the payment rates for the work done. Thus work undertaken by Satyam employees was referrable to projects which were, in turn, referrable to purchase orders or statements of work. 17 Most Australian Customers were invoiced on a monthly or other similar periodic basis referable to particular projects or on occasion to more specific work. An invoice substantiation report might also be required to accompany the invoice, setting out a detailed breakdown of individual tasks provided to the client referable to the invoice. All invoices were generated centrally by Satyam employees located in India, both for customers in Australia and the rest of the world. All Australian Customers in the relevant year were directed to, and did, make payments into the Satyam bank account, being a Citibank bank account located in Sydney and controlled by Satyam in India. 18 Satyam provided services to Australian Customers pursuant to fixed price agreements and agreements where charges were incurred on the basis of work actually undertaken by Satyam's employees ("time and materials" or "T&M" agreements). Mr Penmatsa explained that the division of work between Satyam's employees in India and in Australia differed in relation to each purchase order/statement of work. Where charges were incurred on a T&M basis, the division of work undertaken in Australia and India was determined by the client and would be reflected in the agreement with the client for that project. On the other hand, where work was done pursuant to a fixed price agreement, Satyam may determine the proportion of work done in Australia and offshore in India having regard to such factors as profitability for Satyam in circumstances where work could be provided more cheaply in India and the needs of the particular project including the risks involved in being able to complete the work. As Mr Nair explained with respect to the issue of risks: For example, if it was clear that the project would require a high degree of collaboration between Satyam employees and [the client's] employees, it would likely be important to allocate proportionally more employees from Australia than India in order to ensure that the work was done as efficiently as possible. Another example might be, given the time lag between India and Australia, if much of the work to be done was intended to be done out of business hours in Australia, Satyam could allocate more employees in India to do that work take advantage (sic) the time lag. 19 In balancing these sorts of factors and responding to a statement of work or purchase order, Satyam may engage in further discussions and negotiations with the customer, and the ultimate division of work may need the customer's approval. 20 Even, however, where the agreement was to provide services for a fixed price, employees would still enter their time. Furthermore, if time had to be written off because, for example, the total cost of the time worked by Satyam employees exceeded the fixed price, it was written off on a basis proportional to all of the time recorded by each employee in relation to the particular project. It was not the case that specific time entries by particular employees were written off.

2.3 Satyam's amalgamation with Tech Mahindra on 24 June 2013 21 Satyam amalgamated with Tech Mahindra on 24 June 2013 by a Scheme of Amalgamation and Arrangement under the Companies Act 1956 (India). On 3 December 2014, the Court ordered that Tech Mahindra become the applicant in these proceedings in place of Satyam. 22 Tech Mahindra was incorporated in India in 1982 and is currently listed on the Bombay Stock Exchange. Its headquarters are in Mumbai, India. It employs approximately 90,000 people and provides information technology services to large-scale enterprise customers in over 50 countries, including Australia. There are currently over 600 customers of Tech Mahindra and they carry on business in a wide range of industries.

The Indian Agreement and Australian tax law 23 Section 6-5(3) of the ITAA 1997 deals with assessable income of foreign residents and provides: If you are a foreign resident, your assessable income includes: (a) the *ordinary income you *derived directly or indirectly from all *Australian sources during the income year; and (b) other *ordinary income that a provision includes in your assessable income for the income year on some basis other than having an *Australian source. 24 Section 6-5(1) provides that "assessable income includes income according to ordinary concepts, which is called ordinary income." It is common ground that the amounts paid to the applicant by its Australian Customers were income according to ordinary concepts. 25 The term "Australian source" is defined in s 995-1 of the ITAA 1997 and has been construed in line with general common law principles. These look for the place at which substantial elements of production of income occur which is determined in turn by looking at the practical realities of the situation: Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183 at 189-190 (the Court); Thorpe Nominees Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1834 at 1841 (Lockhart J). 26 These provisions are subject to the operation of the International Tax Agreements Act 1953 (Cth) (the International Agreements Act). 27 At the relevant time s 11Z of the International Agreements Act gave the Indian Agreement the force of law, providing that: Subject to this Act, on and after the date of entry into force of the Indian agreement, the provisions of the agreement, so far as those provisions affect Australian tax, have the force of law according to their tenor. 28 The Indian Agreement was defined in s 3(1) of the International Agreements Act to mean the agreement to which reference has already been made and which was then set out in Schedule 35. Absent its enactment by s 11Z, the Indian Agreement would not form part of Australian domestic law: McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation [2005] FCAFC 67; (2005) 142 FCR 134 (McDermott Industries) at 137 [10] (the Court). 29 Section 4(2), in turn, gives precedence to the provisions of the International Agreements Act and, therefore, the Indian Agreement as a part of that law, over any inconsistent provisions in the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) and the ITAA 1997 other than the anti-avoidance provisions in Part IVA of the ITAA 1936. While the provisions of the International Agreements Act have since been amended, as has the Indian Agreement by a protocol done at New Delhi on 16 December 2011, those amendments are not relevant to the resolution of this case. 30 The purpose of the Indian Agreement is for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income, as is apparent from the title of, and preamble to, the Indian Agreement. That purpose is in part achieved by allocating under the Indian Agreement the right to tax the income of persons who are residents of one or both of the Contracting States, including exclusive rights to tax certain classes of income (Articles 1 and 2): McDermott Industries at 136 [2] (the Court). 31 Relevantly, Article 7(1) creates a general rule that the profits of an enterprise of one of the Contracting States is taxable only in that State. An enterprise of a Contracting State is defined in Article 3(1)(f) to mean an enterprise carried on by a resident of Australia or India, as the context requires. An enterprise in turn has been construed in analogous circumstances as comprising "one or more transactions provided they were entered into for business or commercial purposes": Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 (Thiel) at 344-345 (Mason CJ, Brennan and Gaudron JJ). 32 The rule in Article 7(1) is subject to an exception under paragraph (a) in the case of profits attributable to a permanent establishment through which the enterprise carries on business in the other Contracting State. "Permanent establishment" is defined in Article 5(1) to mean "a fixed place of business through which the business of an enterprise is wholly or partly carried on" which, by Article 5(2)(c), includes "an office". Article 7(1)(b) creates two further exceptions, namely, sales within the other Contracting State of goods or merchandise of the same or a similar kind to those sold through the permanent establishment, and relevantly here, other business activities of the same or a similar kind as those carried on through the permanent establishment. As such, subject to the proper interpretation of the second limb of paragraph (b), Article 7(1)(b) embodies what is commonly described in international practice as a "limited force of attraction rule". Article 7 also contains rules as to the manner in which profits are to determined, including allowable deductions (Article 7(3)). 33 Similarly, Article 14 establishes a general rule that income derived by an individual or a firm of individuals (other than a company) who is a resident of a Contracting State is taxable only by that State. Again, this rule is subject to exceptions. The other Contracting State has the right to tax the income of individuals or firms to the extent that that income derives from their activities in that other State if they have a fixed base in the other State or are present in the other State for more than a set number of days. 34 Article 12 of the Indian Agreement, on the other hand, does not create a general rule entitling only the Contacting State where the entity is resident to impose tax. Rather, Article 12 provides that both Contracting States may tax royalties as defined in Article 12(3) where a resident of one of the Contracting States is beneficially entitled to the royalties and the royalties arise in the other Contracting State (the source State). However, the right of the source State to tax royalties is capped by Article 12(2) which limits the tax which it may impose on the payments to 10%, 15% or 20% of the gross amount of the royalties paid or credited to the beneficial owners in the other State. Specifically, Article 12(2) provides that: (2) Such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: (a) in the case of: (i) royalties referred to in subparagraph (paragraph (3) (b); (ii) payments or credits for services referred to in subparagraph (paragraph (3) (d), subject to subparagraphs (paragraphs (3) (h) to (l), that are ancillary and subsidiary to the application or enjoyment of equipment for which payments or credits are made under subparagraph (paragraph (3) (b); or (iii) royalties referred to in subparagraph (paragraph (3) (f) that relate to equipment mentioned in subparagraph (paragraph (3) (b): 10 percent of the gross amount of the royalties; and (b) in the case of other royalties: (i) during the first 5 years of income for which this Agreement has effect: (A) where the payer is the Government or a political subdivision of that State or a public sector company: 15 percent of the gross amount of the royalties; and (B) in all other cases: 20 percent of the gross amount of the royalties; and (ii) during all subsequent years of income: 15 percent of the gross amount of the royalties. 35 Article 12(4) provides that amounts which constitute royalties are to be dealt with under Article 7 or 14 where (relevantly) the services in respect of which the royalties are paid "are effectively connected" with a permanent establishment or fixed base in the source State. 36 The income which may be taxed in Australia by virtue of (relevantly) Articles 7 or 12 is deemed to be income from Australian sources for the purposes of s 6-5 of the ITAA 1997 by virtue of Article 23 of the Indian Agreement and s 4(2) of the International Agreements Act. Article 23 provides that: (1) 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. (2) 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 Article 24 and of the law of the firstmentioned State relating to its tax be deemed to be income from sources in that other State. (Emphasis added.) 37 At the risk of oversimplification, Article 24(4), in turn, avoids double taxation in the case of India by allowing the amount of any Australian tax paid under the Indian Agreement by a resident of India in respect of income from sources within Australia as a credit against any Indian tax payable in respect of such income and vice versa.

The Tax Assessment for the relevant year and objection Decision

4.1 Initial assessment of tax for the relevant year 38 In its income tax return for the relevant year lodged on or about 25 February 2009, Satyam included income generated by the performance of the Indian Services, as well as the Australian Services. By s 166A(3) of the ITAA 1936, the Commissioner was taken on that day to have made an assessment of the taxable income of Satyam in Australia, the return was taken to be a notice of the assessment by the Commissioner served on the taxpayer on the same day, and tax was payable in accordance with Satyam's return. 39 Subsequently, Satyam formed the view that the income derived from the performance of the Indian Services was not liable to Australian taxation and should not have been returned as assessable income. On 23 January 2013 Satyam lodged an objection (the Objection) to the tax assessment for the relevant year on the ground that the income generated by the Indian Services was not liable to tax in Australia pursuant to Article 7 of the Indian Agreement and that the expenses referable to the Indian Services were therefore not allowable deductions in the relevant year. As a consequence it objected to the notice of assessment on the ground that the taxable income was overstated by almost one third.

4.2 The Objection Decision 40 By letter dated 30 October 2013, the Commissioner allowed the Objection only in part (the Objection Decision). Relevantly, the Commissioner determined that the income derived from the Indian Services was liable to Australian taxation on the ground that the profits were taxable in Australia under Article 7(1)(b) of the Indian Agreement because they were generated by "business activities of the same or a similar kind as those carried on through [Satyam's Australian] permanent establishment". Specifically, the Commissioner found that: Although different elements of the software development activities are divided between the Australian personnel and the overseas [Indian] personnel based on the type of the activity, it is considered that the software development activities which are performed under the one contract for the same Australian client are of a similar nature to the software development activities which are performed by the overseas personnel under that same contract for the same client. All the software development activities which are carried out partly within Australia and partly overseas are merely various elements of the activities that are necessary in the process of bringing the software to the completion stage. They are all elements of the software development process which would ordinarily be conducted by the one software development company. For instance, project initiation, project planning, writing the software code, testing the software code, high level design, system testing and fixing software bugs as part of warranty support, in a broad fashion, are all part of the service of developing software that would ordinarily all be performed by the software development team of one software development business and are not a separate and distinct services. 41 On this basis the Commissioner found that: …the severity support services and software development activities which happen to be performed by overseas personnel involve "business activities of the same or a similar kind as those carried on, through [the Australian] permanent establishment" within the meaning of Article 7(1)(b) of the Indian treaty. The limited force of attraction rule applies to all the activities performed by the overseas personnel. Accordingly it is considered that Article 7(1) of the Indian treaty allows Australia to tax the overseas service income. 42 In this regard, the Commissioner appears to have assumed that Article 7(1)(b) permitted Australia not only to tax income from business activities undertaken in Australia, but wherever they took place - an assumption which the applicant contends was in error. 43 It followed, the Commissioner reasoned, that Article 12(1) and (2) of the Indian Agreement regarding the taxing of profits which constitute royalties did not apply by virtue of Article 12(4) as the profits generated by the Indian Services were effectively connected with the applicant's permanent establishment in Australia. In so finding, it is apparent that the Commissioner did not regard the scope of Article 12(4) as limited to services effectively connected with the enterprise's permanent establishment in the sense that the profits for such services were attributable to its permanent establishment. To this extent, the Commissioner's construction of Article 12(4) in his reasons aligns with that urged in these proceedings by the applicant, as opposed to the construction for which the Commissioner now contends. 44 In the alternative, if the income from Indian Services was not caught by the limited force of attraction rule in Article 7(1)(b), the Commissioner considered that the profits from the Indian Services would be taxable as a "royalty" which "arises" in Australia because the payment was made by an Australian resident in terms of Article 12(5) of the Indian Agreement. Article 12(5) deems royalties to arise in a Contracting State where relevantly the payer is a resident of that State for the purposes of its tax laws. Specifically, the Commissioner found that software development and modification: …is a service which must be provided by persons knowledgeable in the information technology field and it results in the supply of computer code to the client. It is clear from the examples in the Addendum to the Explanatory Memorandum that software development and software modification would constitute a 'royalty' for the purposes of Article 12(3)(g) of the Indian treaty. It is considered that the taxpayer provides services 'which make available technical knowledge, experience, skill' and that the payment for the overseas service income constitutes a 'royalty' under the definition of Article 12(3)(g) of the Indian Treaty. Accordingly, if the overseas [Indian] service income is not caught by the limited force of attraction rule in Article 7(1)(b), the overseas income will be a 'royalty' which 'arises' in Australia because the payment is made by an Australian resident in terms of Article 12(5) of the Indian Treaty. Hence, the overseas service income may be taxed in Australia under Article 12(3).

4.3 The Appeal against the Objection Decision 45 By notice of appeal dated 20 December 2013, the applicant appealed pursuant to s 14ZZ(1)(b) of the Taxation Administration Act 1953 (Cth) (TAA) against the Objection Decision. The notice of appeal was amended on 19 January 2015 without objection so as to permit the applicant pursuant to s 14ZZO(a) of the TAA to rely upon additional grounds of objection to the effect that, if the payments were royalties, they were not subject to taxation in Australia by virtue of Article 12(4) of the Indian Agreement.

5.1 The Issues 46 The grounds on which the applicant contends here that it is not liable to Australian tax on its income for the relevant year from the Indian Services may be summarised as follows. (1) Even if the relevant amount constitutes royalties for the purposes of Article 12 of the Indian Agreement, Article 12(4) gives priority to Article 7. Accordingly, the question of whether Australia had the right to tax income derived from the Indian Services or some part thereof falls to be determined exclusively under Article 7. However, Australia does not have the right to tax the relevant amount under Article 7(1). The income was not attributable relevantly to other business activities of the same or a similar kind as those carried on by the Applicant through its Australian permanent establishment within Article 7(1)(b) because the business activities were carried on in India. India was the place where the labour comprising the services which generated the income was undertaken and has the exclusive right to tax the income under Article 7. (2) Even if, contrary to the applicant's primary submission, Article 12(4) does not give priority to Article 7, the relevant amount was not subject in any event to Australian tax as a royalty under Article 12(2). None of the payments comprising the relevant amount were made as consideration for the rendering of any services (including those of technical or other personnel) which "made available" technical knowledge, experience, skill, knowhow or processes (the first limb of Article 12(3)(g)). Nor were the payments made for the development and transfer of a plan or design (the second limb of Article 12(3)(g)). It follows that those payments did not constitute "royalties" within the meaning of Article 12(3)(g), which is the only aspect of the definition of royalty on which the Commissioner relies. Alternatively some only of those payments constituted royalties under the second limb of Article 12(3)(g). 47 The Commissioner disputes the applicant's interpretation of Article 12(4) of the Indian Agreement and submits that Australia has the right to tax all or some of the relevant amount under Article 12(2) on the grounds that it constitutes a royalty. In contrast to the applicant, the Commissioner contends that Article 12(4) gives priority to Article 7 only where, relevantly, Australia has the right to tax profits under Article 7(1)(a) on the ground that they were attributable to the permanent establishment of the non-resident enterprise. This represents a departure from the approach adopted by the Commissioner in his Objection Decision and was not raised until oral argument, drawing understandable criticism. Orders were made in the circumstances to permit the applicant to respond in writing after the hearing to the new argument. 48 In the alternative, the Commissioner contends that the relevant amount is liable to Australian tax by virtue of Article 7 on the ground that Article 7(1)(b) allocates the right to Australia to tax profits attributable to business activities (other than sales) of the same or a similar kind as those carried on through the enterprise's permanent establishment irrespective of where those activities take place. 49 Finally, the parties agreed that if I found that some or all of the categories of Indian Services identified by the applicant were liable to Australian tax under Article 12(2), I should not proceed at this stage to determine the precise amounts for which tax might be assessed. It was therefore proposed that I should make orders affording the parties the opportunity to reach agreement as to how those principles apply and to recalculate the assessment of income tax. 50 For the reasons given below, I agree with the Commissioner that payments for certain categories of Indian Services provided to Australian Customers constitute royalties. I also agree with the Commissioner's construction of Article 12(4) and therefore hold that the relevant amount is liable to Australian tax. If, however, I am wrong and the issue falls to be determined under Article 7, I accept the applicant's submission that the profits from the Indian Services in the relevant year are not liable to tax by Australia under Article 7.

5.2 Applicable principles of construction 51 Ordinary principles of statutory construction apply to the interpretation of an international convention enacted into domestic law: Minister for Home Affairs of the Commonwealth v Zentai [2012] HCA 28; (2012) 246 CLR 213 (Zentai) at 238 [65] (Gummow, Crennan, Kiefel and Bell JJ); Maloney v The Queen [2013] HCA 28; (2013) 252 CLR 168 (Maloney) at 221-222 [134] (Crennan J) and 234-235 [174] (Kiefel J). It does not follow, however, that principles of treaty interpretation have no bearing on the issue of statutory construction. Rather, where, as here, the exact text of a treaty has been given effect by domestic law, Parliament's adoption of the treaty text shows its objective intention to fulfil its international obligations. It is therefore appropriate to construe that text for domestic purposes having regard to ordinary principles governing the interpretation of treaties: Federal Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74; (2011) 193 FCR 149 (FCT v SNF) at 186 [119] (the Court). Understood in this way, the application of international principles of treaty construction to a law enacting a treaty gives effect to the requirement in s 15AA of the Acts Interpretation Act 1901 (Cth) (the Interpretation Act) to prefer the interpretation that best achieves the object or purpose of the Act over each other interpretation. As, for example, Bell J reasoned in Maloney at 255-256 [235] with respect to the transposition of the definition of 'special measures' in Article 1(4) of the International Convention on the Elimination of All Forms of Racial Discrimination into s 8(1) of the Racial Discrimination Act 1975 (Cth): The legislative intention to be discerned is that the expression 'special measures' in s 8(1) bear the same meaning as in the treaty. That meaning is ascertained by reference to the ordinary meaning of the words in their context and in the light of the object and purpose of the Convention, and by reference to the materials comprising context and referred to in Art 31(2) and (3) of the Vienna Convention. 52 The same approach has been adopted in the construction of double taxation treaties enacted in whole under the International Agreements Act (FCT v SNF at 186 [120] (the Court)) and the Hague Rules contained in a schedule to the Sea-Carriage of Goods Act 1924 (Cth) (Shipping Corporation of India Limited v Gamlen Chemical Co (A/Asia) Proprietary Limited (1980) 147 CLR 142 at 159 (Mason and Wilson JJ)). 53 International law principles of treaty interpretation are embodied in the Vienna Convention on the Law of Treaties 1155 UNTS 331, [1974] ATS 2 (the Vienna Convention). While India is not a party of the Vienna Convention, that Convention has long been regarded as codifying principles of customary international law and therefore applies to the construction of the Indian Agreement: Thiel at 349 (Dawson J) and 356 (McHugh J); see also Commonwealth of Australia v The State of Tasmania (The Tasmanian Dam Case) (1983) 158 CLR 1 at 222 (Brennan J). 54 Article 31(1) of the Vienna Convention provides: General rule of interpretation A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 55 By heading the Article "General rule of interpretation" (emphasis added), the intention was "to emphasise that the process of interpretation is a unity and that the provisions of the article form a single, closely integrated rule": International Law Commission, Sixth Report on the Law of Treaties (UN Doc. A/CN.4/186); [1966] 2 Ybk ILC 169 at 219-220. 56 Articles 31(2) and (3) elaborate upon what is meant by context and other matters which may be taken into account: 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. 3. There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. 57 Finally, Article 32 provides that: Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable. 58 While these principles resemble principles of statutory construction under Australian law in certain respects, there are also differences. Importantly, treaty interpretation is approached in a holistic manner requiring a consideration of text, object and purpose, in line with the integrated rule of interpretation in Article 31 of the Vienna Convention: Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225 (Applicant A) at 231 (Brennan CJ) and 254-256 (McHugh J); Task Technology Pty Ltd v Federal Commissioner of Taxation [2014] FCAFC 113; (2014) 224 FCR 355 (Task Technology) at 358 [12] (the Court). In explaining what this approach requires, in Applicant A Brennan CJ said at 231 (in dissent but not on this issue): In interpreting a treaty, it is erroneous to adopt a rigid priority in the application of interpretive rules. The political processes by which a treaty is negotiated to a conclusion preclude such an approach. Rather, for the reasons given by McHugh J, it is necessary to adopt an holistic but ordered approach. The holistic approach to interpretation may require a consideration of both the text and the object and purpose of the treaty in order to ascertain its true meaning. Although the text of a treaty may itself reveal its object and purpose or at least assist in ascertaining its object and purpose, assistance may also be obtained from extrinsic sources. The form in which a treaty is drafted, the subject to which it relates, the mischief that it addresses, the history of its negotiation and comparison with earlier or amending instruments relating to the same subject may warrant consideration in arriving at the true interpretation of its text. 59 The decision in Thiel is an example of a case where, in line with these principles, regard has been had to international extrinsic material in construing a double taxation treaty also enacted into Australian domestic law by the International Agreements Act. The treaty in that case was between Switzerland and Australia (the Swiss Agreement). The Swiss Agreement provided (as does the Indian Agreement here) that, in the application of the agreement by a Contracting State, any term not otherwise defined in the agreement shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes to which the agreement applied. The High Court found, however, that the words "enterprise" and "profits" in the treaty which fell to be construed, had no particular or established meaning under Australian tax law which was relevant to the question for decision: at 343 (Mason CJ, Brennan and Gaudron JJ), 347 (Dawson J) and 355 (McHugh J). As such, the Court held that the issue of construction turned upon the meaning of the terms in the context of the agreement itself and any extrinsic material which may properly be considered: Thiel at 343 and 344 (Mason CJ, Brennan and Gaudron JJ), 347 (Dawson J) and 356 (McHugh J). As to the latter, all members of the Court took into account the Model Convention produced, and associated Commentaries issued, by the Organisation for Economic Co-operation and Development (OECD) on which the agreement was based: Thiel at 344 (Mason CJ, Brennan and Gaudron JJ), 348-350 (Dawson J) and 357 (McHugh J). 60 Finally, I do not consider that the decision in Zentai in 2012 departs from the approach adopted in cases such as Thiel or FCT v SNF. In Zentai, the High Court rejected the Minister's submission that a subsequent understanding between Australia and Hungary as to the meaning of a limitation contained in an extradition treaty between them should be taken into account in interpreting the treaty in line with Article 31(3)(a) of the Vienna Convention. That treaty had been given the force of law by the Extradition Act 1988 (Cth) in that regulations made under s 11(1) of the Act provided that the Act applied subject to the treaty set out in the Schedule (at [59]). In so holding, Gummow, Crennan, Kiefel and Bell JJ held at 238 [65] that: The meaning of the limitation set out in Art 2.5(a) [of the Treaty on Extradition between Australia and the Republic of Hungary] is to be ascertained by the application of ordinary principles of statutory interpretation. The limitation is not susceptible of altered meaning reflecting some understanding reached by the Ministry of Justice of Hungary and the Executive branch of the Australian Government. 61 In this regard, as their Honours earlier explained at 238 [65], "the Executive requires the authority of statute to surrender a person for extradition and that the power 'cannot be exercised except in accordance with the laws which prescribe in detail the precautions to be taken to prevent unwarrantable interference with individual liberty'". That executive authority could not, in other words, stem from a subsequent agreement between Australia and Hungary unless and until enacted by the Parliament. In short, as Kiefel J observed in Maloney, an Australian court may have regard to views expressed in extraneous material as to the meaning of the terms of a convention or treaty "provided that they are well founded and can be accommodated in the process of construing the domestic statute, which is the task at hand" (at 235 [175] (emphasis added)).

5.3 Does Article 7 take priority in this case over Article 12 by virtue of Article 12(4)?

5.3.1 Preliminary 62 The applicant contends that Article 12(4) poses a threshold issue. In its submission, even if the profits from the Indian Services are royalties as defined by Article 12(3), the right to tax those profits is not governed by Articles 12(1) and (2). Rather, the applicant contends that, by virtue of Article 12(4), the right to tax those profits is governed by Article 7 of the Indian Agreement. As the applicant submitted: …the fundamental hierarchy provision dealing with the relationship between Article 7 and Article 12 is to be found in Article 12(4), which has the consequence of giving priority to the application of Article 7 in respect of amounts coming within the royalties definition but as to which the property, right or services in respect of which the royalties are paid are effectively connected to the permanent establishment. The effective connection between both the contractual rights, and the Indian Services, with the permanent establishment, has the consequence that it is Article 12(4) which determines the hierarchy as between Articles 7 and 12. 63 On this basis, the applicant submits that, if the Court should accept its construction of Articles 12(4) and 7, there is no need to address the question of whether the payments for Indian Services constitute royalties because the only provision which could apply is Article 7. In turn, the applicant contends that Article 7 applies in this case so as to allocate the exclusive right to tax profits from the Indian Services to India. 64 These submissions raise two preliminary issues for consideration: whether Article 12(4) gives priority to Article 7, as the applicant contends; and, if so, is Article 12(4) engaged in the circumstances of this case? The latter question turns upon the construction of the criteria in Article 12(4).

5.3.2 Does Article 12(4) give priority to the substantive rules in Article 7? 65 Taking the first issue, Articles 12(4) and 7(7) contain rules for resolving cases where there is an overlap in the provisions of the Indian Agreement. Article 7(7) gives priority to other Articles which cover profits otherwise falling within Article 7 and reads: Where profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article. 66 It follows that, subject to Article 12(4), if the profits constitute royalties under Article 12, then Article 7(7) directs that they be dealt with under Article 12. Article 12(4), however, provides that: The provisions of paragraphs (1) and (2) shall 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 arise, 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 such permanent establishment or fixed base. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply. (Emphasis added.) 67 In my view, the applicant's submission on the first issue is plainly correct insofar as it contends that, when the criteria for its operation are engaged, Article 12(4) directs that the substantive rules in Article 7 apply. Article 12(4) does not pick up Article 7(7) so as to create a circularity. Rather, Article 7(7) applies in its own terms so as not to affect the operation of Article 12, including paragraph (4). I am reinforced in this construction by the fact that Article 7(7) plainly prescribes a general rule, while Article 12(4) deals with a specific situation.

5.3.3 Is Article 12(4) engaged in this case so as to give priority to Article 7? 68 As I have earlier stated, the parties do not dispute that the first criterion for the application of Article 12(4) was met, namely, that the applicant carried on business in Australia through a permanent establishment. The real issue is, therefore, whether the second criterion in paragraph (4) is met. That requires in the first instance a consideration of what is meant by the requirement that the rights or services in respect of which the payment were made are "effectively connected" with the permanent establishment. 69 The applicant contended that the phrase "effectively connected" should be construed according to the ordinary meaning of those terms read in context. 70 The applicant contended that the second criterion in Article 12(4) was satisfied on two bases. First, it was said that the contractual rights with the Australian Customers "constituted the essential foundation for the business activities carried on by Satyam in Australia through the permanent establishment." Specifically it contended that: (A) "[t]he contractual arrangements with Customers define both the scope of the services to be provided to the Customers, and the entitlement to be paid for those services." As such, the applicant contended that it was appropriate to characterise the contractual rights as "a fundamental determining factor with respect to activities that may be carried on through the permanent establishment"; and (B) the contractual rights "serve to effect the purpose [of the permanent establishment] in that they provide the essential foundation or platform for the conduct of the business operations through the permanent establishment." 71 Secondly, the applicant submitted that the Indian Services in respect of which any royalties were paid in the relevant year were "effectively connected" to the permanent establishment. In this regard, the applicant further explained that: …the Indian Services were performed in concert with the services performed through the permanent establishment. It was only the Indian Services in combination with the Australian Services that together satisfied the contractual obligations to the Australian Customers. The close relationship had the consequence that the Indian Services were effectively connected with the permanent establishment. 72 In this regard, the applicant rightly contends that the evidence showed the interweaving of services performed in Australia and in India in furtherance of particular projects. 73 The Commissioner, however, contends that Article 12(4) will be engaged relevantly only where the services in respect of which the royalties are paid are "effectively connected" with the permanent establishment through which the non-resident beneficiary carries on business in the sense that those profits are attributable to that permanent establishment. In other words, in his submission, Article 12(4) gives priority to Article 7 where the criteria in Article 7(1)(a) are met so as to permit Australia still to tax the profits of the Indian Services but on the different basis prescribed by Article 7. It will be recalled that, unlike Article 12, there is no cap under Article 7(1) on the amount of tax which could be imposed by a Contracting State on the non-resident and deductions may be allowed for expenses. 74 In my opinion, the Commissioner's construction is correct. 75 First, Article 12(4) applies only where the payments in question are royalties as defined in Article 12(3). It therefore applies only where both Contracting States are entitled to tax those payments, subject to the cap to which reference has been made. By contrast, Article 7 prescribes that only the Contracting State of the enterprise may tax its profits subject to the limited exceptions in Article 7(1)(a) and (b). It follows on the applicant's construction that, while the Contracting States agreed that it is appropriate for the source State to tax royalties arising in its territory to a capped amount under Article 12(2), that State may "lose" any entitlement to tax the profits at all where there is an effective connection between the payments and the permanent establishment which does not satisfy Article 7(1)(a) or (b). While the applicant contends precisely for that result here, no reason or purpose is identified which would be served by such an outcome. The difficulties in identifying any comprehensible purpose are illustrated by contrasting a case where a connection exists between the payments and the permanent establishment albeit outside Article 7(1)(a) or (b), on the one hand, with a case where there is no effective connection between the payments and the permanent establishment, on the other hand. On the applicant's case, the source State would have no entitlement to tax the income at all in the first scenario, but retain its entitlement to tax royalties under Article 12 in the other. 76 On the Commissioner's construction, however, in those cases where there is an effective connection between the payments and the permanent establishment or fixed base in the sense articulated by Article 7(1)(a) or 14 but the payments would also constitute royalties under Article 12, then the source State where the royalties arise is entitled by virtue of Article 12(4) to impose tax at the potentially more generous rates permitted under Article 7(1). That is manifestly, in my view, the purpose which Article 12(4) is intended to serve. 77 Secondly, that being so, it follows that the words "effectively connected" with the permanent establishment or fixed base of the non-resident entity are intended to encapsulate in a short-hand way the different tests of connection under Articles 7(1)(a) and 14 which were regarded as sufficient justification for permitting a Contracting State to tax profits of an entity notwithstanding that it is not a resident of that State. By contrast, Article 7(1)(b) is premised on there being no sufficient connection with the permanent establishment, but a sufficient similarity in the sales and activities being undertaken through the permanent establishment to justify a departure from the general rule that only the Contracting State of which the entity is resident may tax its profits. 78 Thirdly, while Article 7(1)(a) gives content to the concept of a sufficient connection, the construction for which the applicant contends leaves the concept of "effectively connected" undefined - an outcome which seems unlikely to have been intended when regard is had to the subject-matter of the Indian Agreement and the detail otherwise used to determine how rights to tax are to be allocated between the parties. 79 Finally, the applicant contends that this construction is contrary to the decision in McDermott Industries. In that case, the issue was whether a Singaporean company which chartered barges to the appellant taxpayer had a permanent establishment in Australia for the purposes of a double taxation agreement between Australia and Singapore. If not, relevantly the gross charter fees would be subject to withholding tax as a royalty under Article 10 of the agreement (which was equivalent to Article 12 of the Indian Agreement). If, however, the Singaporean company had a permanent establishment in Australia, the net charter fees would be taxable as business profits in Australia under Article 5 (which was equivalent to Article 7 of the Indian Agreement). 80 In a passage on which both parties rely to support their contrary positions, the Full Court held at 149 [68]: …it is clear that Art 10, through subart (4), itself contemplated that Art 10 did not cover the field by imposing tax on rental from all equipment leases as royalties. Article 10(4) makes it clear that subarts (1) and (2) are not to apply to a case falling within the business profits provision (ie Art 5) where the property giving rise to what otherwise would be taxed as a royalty is effectively connected with trade or business carried on through that permanent establishment. It is conceded by the Commissioner that the effective connection required by Art 10(4) is to be found here. In other words, in such a case, Art 5 takes priority over Art 10. (Emphasis added.) 81 Article 10(4) of the Singapore Agreement was substantially to the same effect as Article 12(4) of the Indian Agreement in issue here. 82 The applicant submits that "[t]he reference [in this passage] to Article 7 taking 'priority' over Article 12 undermines any submission that there is some 'presumptive' allocation of income to tax in Australia merely because payments come within the definition of royalties." In response to the respondent's submission that this overlooks the statement that Article 10 makes it clear that sub-articles (1) and (2) were not to apply to a case "falling within the business profits provision", the applicant contends that "that comment was not intended to mean that the profits must necessarily have been taxed by Australia as business profits under the business profits provision, merely that they fell to be dealt with by the business profits provision." The short answer to that submission, however, is that that is not what the Full Court said. It follows that far from there being any inconsistency between the decision in McDermott Industries and the construction for which the respondents contend, the decision supports that construction. 83 As earlier explained, the parties agree that the payments for Indian Services were not attributable to the Applicant's permanent establishment in Australia and therefore that the criteria in Article 7(1)(a) are not met. As a result, on the Commissioner's construction, which I accept, Article 12(4) would not be engaged even assuming that the payments are royalties. Accordingly, the next issue which arises is whether the payments by Australian Customers to Satyam for the Indian Services in the relevant year constitute royalties for the purposes of Article 12.

5.4 Article 12 84 The Commissioner contended that the payments for all or some of the categories of the Indian Services constituted royalties on the ground that they fell within the definition of royalties in Article 12(3)(g).

5.4.1 What is meant by Article 12(3)(g) of the definition of "royalties"?

5.4.1.1 The parties' contentions 85 Article 12(3) defines royalties in the following terms: (3) The term "royalties" in this Article means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for: (a) the use of, or the right to use, any copyright, patent, design or model, plan, secret formula or process, trademark, or other like property or right; (b) the use of, or the right to use, any industrial, commercial or scientific equipment; (c) the supply of scientific, technical, industrial or commercial knowledge or information; (d) the rendering of any technical or consultancy services (including those of technical or other personnel) which are ancillary and subsidiary to the application or enjoyment of any such property or right as is mentioned in subparagraph (paragraph (a), any such equipment as is mentioned in subparagraph (paragraph (b) or any such knowledge or information as is mentioned in subparagraph (paragraph (c); (e) the use of, or the right to use: (i) motion picture films; (ii) films or video tapes for use in connection with television; or (iii) tapes for use in connection with radio broadcasting; (f) total or partial forbearance in respect of the use or supply of any property or right referred to in subparagraphs (paragraphs (a) to (e); or (g) the rendering of any services (including those of technical or other personnel) which make available technical knowledge, experience, skill, knowhow or processes or consist of the development and transfer of a technical plan or design; but that term does not include payments or credits relating to services mentioned in subparagraphs (paragraphs (d) and (g) that are made: (h) for services that are ancillary and subsidiary, and inextricably and essentially linked, to a sale of property; (i) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (j) for teaching in or by an educational institution; (k) for services for the personal use of the individual or individuals making the payments or credits; or (l) to an employee of the person making the payments or credits or to any individual or firm of individuals (other than a company) for professional services as defined in Article 14. (Emphasis added.) 86 The only basis on which the Commissioner ultimately contended that the payments were royalties was that they fell within Article 12(3)(g). 87 Relevantly paragraph 3(g) (including when regard is had to the exclusions) goes beyond the definition of "royalties" in Australia's domestic income tax law: see s 6(1) of the ITAA 1936. Paragraph 12(3)(g) also departs from the provisions in the OECD and UN model double taxation agreements. Article 12 of those model agreements defined royalties in a manner more akin to the traditional concept of royalties such as profits from the use of copyright material. In line with this, the Explanatory Memorandum to the Income Tax (International Agreements) Amendment Bill (No. 2) 1991 (Cth) (the 1991 Explanatory Memorandum) at 20 correctly observed that "[t]he definition of "royalties" contained in paragraph 3 varies from the comparable definition in Australia's domestic income tax law and other modern comprehensive tax treaties in that it includes fees for these furnishing of certain technical and consultancy services." 88 The parties disagreed as to the proper construction of the first limb of Article 12(3)(g) (the "make available" test) and of the second limb of that paragraph (the "development and transfer" test). 89 Turning to the first limb of paragraph (g), the applicant contended that it was not sufficient that the services rendered involved the use or application of technical knowledge, experience, skill, knowhow or processes (collectively referred to here as "technical knowledge"); rather the technical knowledge itself must be supplied or transferred to the payee by the rendering of the services. Thus the first limb of paragraph (g), in the applicant's submission, captures payments made in relation to the provision of technical knowledge by the rendering of services which enable the recipient to exploit, deploy and use that technical knowledge independently of the applicant. 90 The Commissioner contended that a significant portion of the disputed income would be taxable even if the applicant's construction were correct. However, in line with his Objection Decision, the Commissioner's primary position was that the first limb of paragraph (g) required the rendering of services which made the technical knowledge of the applicant's employees available to the customer in the sense only that its employees' technical knowledge was thereby applied to the project. In the Commissioner's submission, on this construction all of the payments in respect of the Indian Services would fall within the first limb of paragraph (g) because ultimately in enhancing, maintaining and developing software for clients and consulting on client's IT infrastructure, the applicant was supplying the services of its technical experts to undertake those tasks. The Commissioner also pointed out that this was consistent with the way that estimates were given on fixed price contracts (being based on estimates as to the number of hours or days that personnel may apply to the task) or non-fixed-price contracts which were charged by reference to the number of hours that services were rendered by those personnel according to their location and expertise. 91 In the alternative, the Commissioner submitted that certain payments were for services consisting of the development and transfer of a technical plan or design, being the second limb of Article 12(3)(g). However, the Commissioner's contention that some of the payments satisfied paragraphs (c) and (d) of Article 12(3) was abandoned at the end of the hearing. 92 For the reasons set out below, I agree with the applicant's construction of the "make available" limb of Article 12(3)(g), and on that construction find that none of the payments satisfied by the first limb. However, in my view, payments for some of the categories of Indian Services identified by the applicant satisfy the "development and transfer" limb of the definition of "royalties" in paragraph (g).

5.4.1.2 Consideration: the proper construction of the first limb of Article 12(3)(g) 93 First, in my view, the applicant's construction of the first limb of Article 12(3)(g) accords with the ordinary meaning of the paragraph. To say that the contractual arrangements make available the technical knowledge of the applicant's employees to the customer gives no content to the requirement that the technical knowledge must be made available by the rendering of the services, as opposed to comprising the service that is rendered. 94 Secondly and consistently with this, the other payments which constitute royalties within the definition are those made for the use of, or right to use, intellectual property or equipment, the supply of technical information, or the rendering of services ancillary to the use of intellectual property or equipment, or supply of technical information. The common feature of the services to which these other payments relate is that they place the payee in the position where she or he is enabled to use the property in question, or the service is ancillary to such use. 95 Thirdly, I agree with the applicant that its construction is confirmed by Article 12(3)(j). Paragraphs (h) to (l) contain certain exemptions from the ambit of Article (3)(d) and (g) only, with paragraph (j) exempting payments or credits made for teaching in or by an educational institution. It is difficult to see that paragraph (j) could impose any relevant limitation on the scope of paragraph (d) which is concerned with the rendering of technical or consultancy services ancillary to the enjoyment of equipment or the supply of technical information. However, an educational institution provides a service in teaching students as a result of which those students are thereby enabled to apply the knowledge which they have gained for themselves. Teaching does not simply, in other words, involve the provision of a service but has this additional aspect which means that, absent paragraph (j), it would be captured by paragraph (g). 96 Some support for the applicant's construction may also be found in Commissioner of Income Tax v De Beers India Minerals Pvt Ltd [2012] 346 ITR 467, a decision of the High Court of Karnataka at Bangalore. That case concerned the construction of a similar provision in a double taxation treaty between India and the Netherlands. Specifically Article 12 provided that royalties and fees for "technical services" arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. "Fees for technical services" were defined to include among other things, "payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services… (b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design." In that case the Court held at 30-31 [14] that: The technology will be considered 'made available' when the person who received the service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge, experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render such technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical services… The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. (Emphasis added.) 97 As the Court later explained at 38 [22]: The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology 'making available', the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. (Emphasis added.) 98 However, cl (IV)(2) of the agreement between India and the Netherlands provided that if India should under a later convention with a third State limit its taxation at source on fees for technical services to a more restricted scope, then the same scope also applied under the convention with the Netherlands. India had in fact later entered into an agreement with Singapore which contained a clause defining fees for technical services as meaning payments in consideration for services of a technical nature if such services make available technical knowledge etc., "which enables the person acquiring the service to apply technology contained therein" (at 28). The Court held that by virtue of cl (IV)(2), the clause in the Singapore agreement had to be applied and read into the agreement with the Netherlands. That clause, the Court held, made the meaning of the phrase "make available" explicitly clear and it followed that the technology would be made available when the person who received it is enabled to apply it. While there is no equivalent restriction on the meaning of the words "make available" in the Indian Agreement with Australia, nonetheless the Court's reasons do not exclude the possibility that it may have read the clause in the same manner even without the later agreement with Singapore. 99 Finally, the applicant sought to rely upon the 1991 Explanatory Memorandum. The applicant contended that reference can properly be had to extrinsic material of this nature either to confirm the ordinary meaning of Article 12 of the Indian Agreement as enacted into domestic law, or in order to assist in resolving its meaning if, in the alternative, the meaning is ambiguous or obscure, or the ordinary meaning of the text leads to a result that is manifestly absurd (the Interpretation Act, ss 15AB(1)(a) and (b) respectively). The applicant relied in support of its approach upon the Full Court's decision in Task Technology. In that case, the Court, in construing an amendment to the double taxation agreement between Australia and Canada by an amending protocol given the force of law by the International Agreements Act, had regard to the explanatory memorandum to the bill for the enactment of the amending protocol in identifying the purpose of the agreement: Task Technology at 358 [12]-[13] (the Court). 100 The respondent, however, contended that it was not open to the Court to have regard to the 1991 Explanatory Memorandum as it post-dated the conclusion of the Indian Agreement. In this regard, it may be said that it is not self-evident that an explanatory memorandum in such circumstances is a document to which recourse might be had under supplementary principles of treaty interpretation in line with the international law principles earlier explained; it is plainly not preparatory work of the treaty or the circumstances of its conclusion within Article 32 of the Vienna Convention. Nor was it suggested that reference could be had to it as evidence, for example, of subsequent practice, and any such argument may encounter among other things the kinds of difficulties identified by the majority of the High Court in Zentai. 101 However, such difficulties aside, the short point is that the amending protocol considered in Task Technology had also preceded the introduction of the explanatory memorandum into the Parliament. Yet the Full Court evidently did not consider that that precluded its consideration. As such, I do not consider that it is open to me to take a different view, as urged by the respondent. That said, it must also be borne in mind that "[s]tatements as to legislative intention made in explanatory memoranda or by Ministers, however clear or emphatic, cannot overcome the need to carefully consider the words of the statute to ascertain its meaning": SAEED v Minister for Immigration and Citizenship [2010] HCA 23; (2010) 241 CLR 252 at 264-265 [31] (French CJ, Gummow, Hayne, Crennan and Kiefel JJ). 102 In this case, I consider that the 1991 Explanatory Memorandum confirms the ordinary meaning of Article 12(3)(g) of the Indian Agreement. In particular, the 1991 Explanatory Memorandum explains at 23 that "[t]he expression "make available" is used in the sense of one person supplying or transferring technical knowledge or technology to another. It contrasts with the mere application by the person rendering the services of that person's own technical knowledge or technology in the performance of the services." As the Explanatory Memorandum continued: Generally, technology will be considered "made available" therefore when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not mean per se that technical knowledge, skills, etc are made available to the person purchasing the service, within the meaning of subparagraph 3(g). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. (Emphasis added.) 103 The point is illustrated by contrasting two examples given in the Addendum to the 1991 Explanatory Memorandum at 40-41 which was intended to provide guidance as to the services intended to be covered by the definition of "royalties" in Article 12(3)(d) or (g), namely: Example (3) An Australian manufacturer has experience in the use of a process for manufacturing wallboard for interior walls of houses which is more durable than the standard products of its type. An Indian builder wishes to produce this product for its own use. It rents a plant and contracts with the Australian company to send experts to India to show engineers in the Indian company how to produce the extra-strong wallboard. The Australian contractors work with the technicians in the Indian firm for a few months. The payments to the Australian firm would be treated as royalties under subparagraph 3(g). The services are of a technical or consultancy nature which make available to the Indian company technical knowledge, skill, and processes. Example (4) An Australian manufacturer operates a wallboard fabrication plant outside India. An Indian builder hires the Australian company to produce wallboard at that plant for a fee. The Indian company provides the raw materials, and the Australian manufacturer fabricates the wallboard in its plant, using advanced technology. The fees would not be royalties within the meaning of either subparagraph 3(d) or 3(g). Although the Australian company is clearly performing a technical service, no technical knowledge, skill, etc., is made available to the Indian company, nor is there any development and transfer of a technical plan or design. The Australian company is merely performing a contract manufacturing service.

5.4.1.3 Consideration: the proper construction of the Second Limb of Article 12(3)(g) 104 The second limb of Article 12(3)(g) requires that the rendering of the services consist of the development and transfer of a technical plan or design. The words in their ordinary meaning overlap to some degree, with the word "plan" also meaning "design" in some contexts, and vice versa (see e.g. the definitions of "plan" at [2] and "design" at [11] in the Macquarie Dictionary (online edition)). However, notwithstanding some overlap, the words are put in the alternative and it may be inferred are not intended to be wholly repetitive of each other. 105 The applicant submitted that the words "plan" or "design" have a forward looking meaning with the result that the use or development of a computer program does not fit within those concepts. In certain contexts, it is true that the word "plan" is forward looking in the sense that it provides a scheme of action, for example, or plan for something to be constructed, although it may also be, for example, a representation of an existing thing or structure. Source code on which software is based may also be described in my view as a technical plan. 106 Equally, the meaning of "design" is not limited to a forward looking meaning. Design also means the combination of details or features of a picture, building or object, or an artistic work (Macquarie Dictionary (online edition) at [9] and [15]). Equally in my view a computer program may be described as a combination of features and as a creative work analogous to an artistic work. Phrases such as "computer software design" or the "design of a computer program" are well known in common parlance. The short point in my view is that the ordinary meaning of "design" is also apt to embrace computer software. 107 This construction is confirmed, in my view, by the fifth example given in the Addendum to the 1991 Explanatory Memorandum at 41 concerning a fee for computer software modifications made by a computer programming firm: An Indian firm owns inventory control software for use in its own chain of retail outlets throughout India. It expands its sales operation by employing a team of travelling salesmen to travel around the countryside selling the company's wares. The company wants to modify its software to permit salesmen to access the company's central computers for information on what products are available in inventory and when they can be delivered. The Indian firm hires an Australian computer programming firm to modify its software for this purpose. The fees which the Indian firm pays are royalties within the meaning of subparagraph 3(g). The Australian company clearly performs a technical service for the Indian company, and it transfers to the Indian company the technical plan (i.e., the computer program) which it has developed for that company. 108 The applicant accepted that the suggested analysis was to the effect that the provision of a computer program would satisfy the "development and transfer" test in the second limb of Article 12(3)(g), rather than the "make available" test in the first. I agree. In contrast to the examples earlier given at [103], the example does not refer to any technical knowledge, skill, etc., which is made available to the customer but rather was considered to satisfy the second limb of paragraph (g).

5.4.1.4 the categories of the Indian Services identified by the applicant 109 The applicant contends that, properly understood, the Australian and Indian Services performed by Satyam personnel for seven of its Australian Customers during the relevant year comprise nine categories (the 9 categories). Those customers together represent approximately 97.5% of Satyam's income attributable to Indian Services in the relevant year. On the basis explained below, the applicant submits that this evidence provides a basis for determining the proportion of income attributable to Indian Services which might fall within the definition of "royalties" - a proposition which was not disputed by the Commissioner. 110 Broadly, the 9 categories are described as: (1) New software, namely, development (category 1) and customisation (category 2); (2) Software maintenance, namely, supervision of applications (category 3), problem solving involving no change to source code (category 4), and software fixing involving a change in the source code (category 5); (3) Enhancements to existing software, namely, enhancements (category 6), development of test cases and test scripts (category 7), and running tests of new releases (category 8); and (4) One-off consulting or advisory assignments relating to the customer's information technology infrastructure (category 9). 111 The first eight categories were developed by the applicant's legal team in the course of preparing these proceedings on the basis of consultation with the applicant's employees, with category 9 being identified as necessary by a process manager with the applicant in the course of undertaking the first categorisation review. Mr Nair said the applicant does use the terminology employed in the categories of services identified, but largely categorises work by reference to projects and particular orders under contracts with customers. 112 Further details of these categories of services are considered in the context of determining whether or not they meet the criteria in paragraph (3)(g). Mr Nair gave detailed evidence as to the manner in which the categories were identified and the means by which the proportion of services provided by Satyam to three of its major customers in the relevant year were attributable to each of the 9 categories of work (the first categorisation review). Mr Chakravarthy gave evidence that the second categorisation review in relation to the other four major customers of Satyam used the same technique and methodology as the first and adopted the same categories. The results of the categorisation reviews were compiled into tables in relation to each of the seven customers. These contained information about, relevantly: (A) the project identification number and name; (C) whether the project was T&M or fixed price; (D) in the case of one major customer, whether it was discretionary, non-discretionary or consulting; (E) the income earned, relevantly, through the Indian Services; (F) which of the 9 categories of services were involved in the project; and (G) where multiple categories were identified for a project, the apportioned effort as a percentage of each project referable to each category (e.g. a particular project may have involved the provision of services within categories 3, 4 and 5, with 20% of the services provided relating to category 3, 60% to category 4, and 20% to category 5). 113 The total of the last of these figures in relation to all projects was then applied to the total income attributable to the Indian Services so as to apportion the total income in the relevant year attributable to each category of services.

5.4.1.5 Do all or any of the categories of the Indian Services constitute Royalties under the first or second limb of Article 12(3)(g)? 114 The applicant submits that each of these categories are separate categories, none of which satisfy the first or second limbs of Article 12(3)(g). Alternatively, the applicant contends that some only of the 9 categories are caught by the development and transfer test in Article 12(3)(g), namely, payments for services falling within categories 1, 2, 5 and 6 on the basis that there may have been a plan and/or design supplied to the customer. The applicant does not contend that any of the exemptions in Article 12(3)(h)-(l) have any application. 115 The evidence in relation to the categories of Indian Services was not challenged save insofar as the Commissioner contended that it was apparent from the nature of the tasks performed and the results of the categorisation reviews that the delivery of certain categories of services required the applicant to perform a number of interdependent tasks. Specifically, the Commissioner submitted that the work described in categories 7 and 8 was inextricably linked with the work in categories 1, 5 and 6, and further that: In particular, it is apparent that particular projects very frequently required employees - in India and Australia - to perform tasks in categories 3, 4 and 5 or alternatively in categories 6, 7 and 8. It is also apparent that modification of software necessarily involved testing… 116 In this regard, the Commissioner submitted that where the services required employees to do work that met the description of a number of "categories" of tasks in such a manner, it was appropriate to characterise the services for the purposes of Article 12 having regard to those services as a whole, namely as the provision of all of the categories of work identified for each project. In so contending, the Commissioner accepted that a payment may be a royalty only to some extent but submitted that it remains necessary to identify the services for which each payment is made and to reach a conclusion as to the character of those services. Based on this approach, the Commissioner contends that a significant proportion of the disputed income is taxable as royalties pursuant to Article 12(2) of the Indian Agreement. 117 It is helpful to consider each of the categories as they are grouped by the applicant. 118 Under the broader rubric of "New software", Categories 1 and 2, Development of new software, and Customisation of software were described in the following terms: i. Category 1: Development of software: This category refers to the development of entirely new software applications for a Customer, based on the request from the Customer that software be developed for a particular task or tasks. ii. Category 2: Customisation of software. This refers to work done to customise a Customer's existing software applications, again based on the specific request by that Customer for such work. This work could include both major and minor amendments to software, though it usually entailed amendments to software that generated a substantial amount of work. 119 Neither category falls with the first limb of Article 12(3)(g) on the construction which I prefer. However, on the view which I have taken of the second limb of Article 12(3)(g), the development and customisation of software is properly characterised as the rendering of technical services that consist of the development and transfer of a technical plan or design, as does the customisation of existing software applications because it involved amendments to software applications. I note that this understanding accords with that in the 1991 Explanatory Memorandum at 23 which explained that: Typical categories of services that generally involve either the development and transfer of technical plans or technical designs, or making technology available as described in subparagraph 3(g), include: (i) engineering services (including the subcategories of bio engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering); (ii) architectural services; and (iii) computer software development. (Emphasis added.) See also the fifth example in the Addendum to the 1991 Explanatory Memorandum quoted at [107] above. 120 The question of whether the amendments to source code or the software itself are major or minor amendments does not detract from the nature of the service rendered. It follows that categories 1 and 2 constitute royalties for the purposes of Article 12(2) of the Indian Agreement. 121 Categories 3, 4 and 5 relating to supervision of applications and problem-solving, in turn appear under the rubric "Software maintenance" and constitute the following: i. Category 3: Supervision of applications. Pursuant to its agreements with Customers, Satyam was given responsibility for a particular application portfolio, that is, a particular subset of the software that a Customer used. As part of this role, generally speaking, Satyam was responsible for the monitoring and use of these applications. In fulfilling this role, Satyam undertook tasks directed towards ensuring that the applications ran properly; it used those applications to fulfil the tasks for which they were designed and it monitored the applications so that problems that arose were dealt with swiftly. ii. Category 4: Problem solving involving no change to source code. Work within this category usually arose as a result of Satyam monitoring a Customer's applications pursuant to category 3 above. If a problem arose regarding the functionality of an application that Satyam was responsible for monitoring, it was Satyam's responsibility to resolve that problem. Problems usually involved some loss of application service functionality or availability to a Customer or particular employees within the Customer. It was also possible, depending on the application that the problem could also manifest in problems in service functionality for end consumers of that Customer's services. Once the problem was diagnosed, Satyam employees undertook steps to resolve the problem. Most of the time, the fixes needed to resolve the problem did not require a change to the source code of the Customer's applications. iii. Category 5: Software fixing involving a change in the source code. Not all problems referred to in Category 4 above could be solved without a change to the source code of a Customer's software. In the case of work within this category, Satyam would develop and roll out amendments to the source code of the applications themselves in order to fix the problem that arose. 122 Mr Nair gave evidence of examples of tasks that would fall into category 3, namely: 1. Monitoring applications. One example of such a task would be an application "health check" that would involve running set of scripts (that is, commands to the computer program) and monitoring certain parameters in relation to the application, such as the available disk base, CPU utilisation and so on. 2. Running a batch job. A batch task refers to a repetitive task given to a computer for the execution of multiple programs without manual intervention. The computer might be requested to access the same kind of information from multiple locations, or in relation to multiple similar entries. 123 Mr Nair also gave examples of how that it was possible that problems in category 4 may lead to work in category 5: For example, if a problem that could be dealt with without amending the application source code repeatedly arose, it might be discovered on closer investigation that there was a root cause to the problem that did require a change to the source code. Should that occur, the work done to fix the source code would fall into category 5. Examples of tasks that would fall into this category include: a. Resetting a batch job that was being undertaken that had malfunctioned; b. amending a data entry in an application that was causing a corruption; c. implementing a work-around to bypass incorrect records that may have been causing an application to function incorrectly; or d. restarting a server to reinstate a business service. 124 Finally with respect to category 5, Mr Nair explained that the extent of the changes and the speed at which they occurred would depend on a number of factors, such as the scale of the problem, the severity of the problem, and the type of work required to fix it. He gave a couple of examples of the scope of tasks that would fall into this category, namely, fixing disruption to business functionality due to a bug caused by a newly implemented change in a particular application, or fixing an existing deficiency in a system such as a design weakness that arose only in certain conditions. 125 As was the case with respect to categories 1 and 2, categories 3 to 5 involve only the rendering of technical services and do not therefore satisfy the "make available" limb of Article 12(3)(g). 126 The question as to whether they satisfy the "development and transfer" limb of paragraph (g) is more complex. In my view, category 5 is relevantly indistinguishable from categories 1 and 2 as it also involves amendments to source code. It therefore follows that category 5 satisfies the definition of a royalty in the second limb of paragraph (g). Considered in their own terms, however, neither category 3 or 4 fall within the second limb of paragraph (g) as they do not involve the development and transfer of a technical plan or design. Nonetheless, the Commissioner submits that categories 3 and 4 should be characterised in the same way as category 5 because the categorisation reviews reveal that they were frequently undertaken in conjunction with category 5. 127 In my view, however, the evidence does not establish that the tasks are by their nature interdependent such that categories 3 and 4 should draw their characterisation from category 5. For example, while in the first categorisation review these three categories appear together in relation to 26 projects, that is not the case in relation to 19 other projects. It may well be that in some of those cases services of the kind in categories 3, 4 and 5 are undertaken together and that the payment for services across all three categories should properly be characterised as a royalty. However the evidence suggests that in a significant number of cases the issues may be able to be resolved without any amendments to source code and that it was only where problem solving of the kind identified in categories 3 and 4 was unable to resolve the issue, that services of the kind in category 5 might need to be undertaken. In cases of that kind, I do not consider that payments for services within categories 3 and 4 constitute royalties. 128 The position is different, in my view, with respect to enhancements and testing of upgrades and enhancements, categories 6, 7 and 8, appearing under the rubric "Enhancements to existing software". These categories comprise the following: i. Category 6: Enhancements. This category refers to work undertaken by Satyam in coding upgrades or enhancements to the source code of a Customer's applications. These enhancements would usually be relatively minor amendments made to existing source code with a view to enhancing the functionality of these applications. ii. Category 7. Development of test cases and test scripts. Given the importance of the applications of a Customer that Satyam was requested to upgrade or enhance, it was essential that the enhancements were adequately tested before being rolled out to ensure that they did not destabilise either the application that was being altered, or other applications which interacted with it. Therefore, a substantial amount of work was engaged in advance of the amendments being 'rolled out' to a Customer at large to ensure that problems with enhancements did not arise. This category refers to work undertaken by Satyam to design, plan and develop mechanisms (including designing scripts to test the enhancements) in order to test the functionality and robustness of the enhancements, along with their effect on existing applications. iii. Category 8: Running tests of new releases. As part of the testing process referred to above, Satyam would carry out extensive testing and evaluation to ensure the integrity of the enhancement and the application which was being amended, as well as the flow-on effects from the amendment to other applications or datasets which rely on the application. 129 Mr Nair gave examples of tasks that would fall within each of these categories. First, with respect to category 6, examples included amending data entry windows in an application so that extra information could be recorded, adding a new business functionality by adding a new feature to an existing application, migrating data from an old system to a new system, and opening new interfaces between existing applications. Examples within category 7 given by Mr Nair included developing strategy and plans in relation to the testing and execution of an enhancement, designing and creating test cases (individual tests) and test scripts to test the functionality and stability of enhancements, and preparing test data that is similar to the usual data input into the application in order to be able to run a test case or test script. These examples indicate that there is no point in providing the services within category 7 without running the tests themselves, being the services falling within category 8. The examples given by Mr Nair of work in the category 8 included: 1. Running test cases and test scripts in relation to an enhancement. 2. Reviewing and testing the results arising from an enhancement, for example, if the enhancement was to increase the functionality of the data entry mechanism in an application to allow for a person's middle name to be entered into the application, a test that might be carried out would be to produce a report with the application that had been enhanced in order to ensure that middle names did in fact appear. 3. Recording test results by means of screenshots and producing output files or logs that record the tests that had been undertaken, producing test summary reports and recording defects. 4. Undertaking further testing in order to resolve the defects and then recording those test results. Category 6 involving coding upgrades and amendments to source code cannot be distinguished as a matter of principle from categories 1, 2 and 5, and therefore satisfies the second limb of Article 12(3)(g). I also agree with the Commissioner that the applicant's evidence demonstrates that categories 6, 7 and 8 are by their very nature interdependent. Thus the applicant's evidence is that it is "essential" that enhancements are adequately tested by services of the kind in category 7 and that as part of that testing process, Satyam would carry out extensive testing and evaluation services of the kind described in category 8. As Mr Nair further explained, "[e]very time any change is made to a software, testing is done" and this is necessary because it would not make good business sense to enhance software without testing it to ensure that it worked. Similarly, Mr Penmasta explained that "[a]ny product that we develop, it involves the testing of that" and that is so whether new software is being delivered or enhancements made to existing software, there being no point in designing and delivering untested software. Thus in my view both the development of tests and their implementation are ancillary to, and comprise part of, the work undertaken by Satyam in coding upgrades or enhancements. The fact that the enhancements to source code may be relatively minor does not in my view affect this characterisation. Consistently with this evidence, it is apparent from the first and second categorisation reviews that in a significant number of instances, categories 6, 7 and 8 are undertaken together. In short the evidence supports the inference that payment for projects involving enhancements to software necessarily carried with it the development of test scripts and testing. I therefore agree with the Commissioner that payments for these services should be regarded as payment for a single service which is properly characterised as the development and transfer of a technical plan or design within Article 12(3)(g) of the Indian Agreement. 130 Category 9, one off consulting or advisory assignments appears to be a stand-alone category and is described as: Category 9: One-off consulting or advisory assignments relating to the Customer's information technology infrastructure. This category refers to work undertaken by Satyam for a Customer in advising it in relation to information technology issues. The nature of the advice depended on what was requested, but would often relate to whether Satyam recommended that the Customer procure particular software, its recommendations regarding the Customer's information technology software and hardware make-up, its recommendations regarding the best software solution for a particular project and so on. 131 In this regard, Mr Nair explained with respect to one of the major clients, that the provision of such services could then lead to the applicant being involved in the particular subject matter that it had advised on which would fall within one of the other eight categories, although this would not necessarily occur. Examples given by him of tasks within category 9 involving that major client included: i. [the client] considering the adoption of a new technology. Satyam could be consulted by [the client] to advise it on the adoption, such as whether it was a good acquisition for [the client], whether there were alternatives, what possible pitfalls there were (in circumstances where Satyam may have worked with that software for other companies) and so on. ii. [the client] identifying a new service that they wish to offer to their customers. Satyam could be engaged to provide advice (in the form of a blueprint or plan) for the implementation of that service within [the client], and what particular IT implications it would have. iii. [the client] wanting to implement a framework or develop a set of processes. Satyam would be engaged to assist in that development or implementation through consulting services. 132 This evidence again does not suggest that services falling within category 9 would be caught by the first limb of the definition of a royalty in Article 12(3)(g). However, the second and third examples given by Mr Nair indicate that in some cases the services provided within this category may fall within the second limb. 133 To conclude, in my view, payments for services in categories 1, 2, 5 and 6 constitute royalties, as do payments for 7 and 8 on the basis that they are ancillary to undertaking the services of the kind in category 6.

5.5 In the alternative, can income derived from the Indian Services be taxed by Australia as 'business profits' falling within Article 7(1) of the Indian Agreement?

5.5.1 Does Article 7(1)(b) limit Australia's capacity to tax profits from business activities not attributable to the applicant's permanent establishment to profits from business activities carried on within Australia? 134 In the event that I am wrong in concluding that Article 12 of the Indian Agreement takes priority over Article 7 and that certain payments for Indian Services in the relevant year constituted royalties, I agree with the applicant that Australia would not be entitled to tax those payments under Article 7. 135 Article 7 provides that: 1. The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to: (a) that permanent establishment; or (b) sales within that other Contracting State of goods or merchandise of the same or a similar kind as those sold, or other business activities of the same or a similar kind as those carried on, through that permanent establishment. (Emphasis added.) 136 The Commissioner did not contend that the applicant's profits from Indian Services were attributable to the permanent establishment for the purposes of Article 7(1)(a) or to sales of goods or merchandise under the first limb of Article 7(1)(b). Nor was it in issue that the services provided to Australian Customers by the applicant's employees in India could be described in ordinary parlance as the same or a similar in kind to the services provided to the applicant's Australian Customers by its employees in Australia. 137 The issue is whether, as the applicant contends, Australia had the capacity to tax profits from the provision of the services in Australia only under the second limb of Article 7(1)(b) even though the second limb is not subject to express limitation to this effect in contrast to the first limb dealing with sales. For the reasons given below, I agree with the applicant's construction and therefore do not consider that Australia has the capacity to tax the services undertaken in India. This is, in my view, the only sensible way in which the second limb of paragraph (b) can be read. 138 First, while no words of express limitation exist, equally the implication is not excluded by text of Article 7(1)(b). 139 Secondly, I consider that the Commissioner's interpretation would run counter to the intention of the Contracting States. It is evident from the terms of Article 7(1)(b) that it is intended to encapsulate what is known in the international tax context as a "limited force of attraction" rule. While not commonly now used, the purpose of such a rule is well established in international practice, namely, to permit a country to tax, in addition to profits attributable to a foreign resident's permanent establishment, other income attributable to related sales or other business activities where they are made or carried on within that country otherwise than through the permanent establishment. For example, Article 7 of the United Nations Model Double Taxation Convention between Developed and Developing Countries 1980 (United Nations Publication, ST/ESA/102, Sales No. E.80.XVI.3) provides that: The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to (a) that permanent establishment; (b) sales in that other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (c) other business activities carried on in that other State of the same or similar kind as those effected through that permanent establishment. 140 Similarly, while explaining that the OECD Model Tax Convention does not contain a limited force of attraction rule but confines the right of the State where the permanent establishment is located to profits attributable to the permanent establishment, the 2010 Commentary to Article 7(1) of the Model Convention explains at [12] that: This is a question on which there have historically been differences of view, a few countries having some time ago pursued a principle of general "force of attraction" according to which income such as other business profits, dividends, interest and royalties arising from sources in their territory was fully taxable by them if the beneficiary had a permanent establishment therein even though such income was clearly not attributable to that permanent establishment. (Emphasis added.) 141 The Commentary continued at [12] to explain that: Whilst some bilateral tax conventions include a limited anti-avoidance rule based on a restricted force of attraction approach that only applies to business profits derived from activities similar to those carried on by a permanent establishment, the general force of attraction approach described above has now been rejected in international tax treaty practice. The principle that is now generally accepted in double taxation conventions is based on the view that in taxing the profits that a foreign enterprise derives from a particular country, the tax authorities of that country should look at the separate sources of profit that the enterprise derives from their country and should apply to each the permanent establishment test, subject to the possible application of other Articles of the Convention. This solution allows simpler and more efficient tax administration and compliance, and is more closely adapted to the way in which business is commonly carried on. 142 It follows that the construction for which the Commissioner contends would involve a significant departure from the limited force of attraction rule which Article 7(1)(b) embodies as understood in international custom and practice. I accept the applicant's submission in this regard that if the parties had intended to agree on a limited force of attraction rule which was so radically different from that rule as previously understood in international custom and practice, it would be expected that the parties would have done so in language of unmistakable clarity. 143 Thirdly, as the applicant contends, it makes no sense to limit the first limb of Article 7(1)(b) to sales of goods of a similar kind within Australia, but to construe the second limb of Article 7(1)(b) so as to apply to business activities of a similar kind wherever they may occur in the world. As the applicant submitted, "[t]he force of attraction rule would then operate without limitation. It would make liable to Australian tax not only the income from the Applicant's provision of services to its Australian customers, but its worldwide income from 'other business activities of the same or a similar kind' but which had no connection with Australia." No rationale for such a construction was suggested. 144 Fourthly, in my view the applicant's construction is supported by the reference to "the enterprise" in the umbrella paragraph of Article 7(1). 145 Read in light of the way that an "enterprise" has been construed (see at [31] above), the umbrella paragraph of Article 7(1) reads (with my insertions) relevantly that: The profits of an enterprise [i.e. one or more commercial transactions carried on by a resident] of [India] shall be taxable only in that State unless the enterprise carries on business in [Australia] through a permanent establishment situated therein. If the enterprise carries on business as aforesaid [i.e. in Australia through a permanent establishment], the profits of the enterprise may be taxed in the other State, but only so much as is attributable to: (a) the permanent establishment; or (b) sales within that other Contracting State or goods or merchandise of the same or a similar kind as those sold, or other business activities of the same or a similar kind as those carried on, through that permanent establishment. (Emphasis added.) 146 In my view, read in the context of the first sentence in the umbrella paragraph and noting the use of the definite article, the reference to "the profits of the enterprise" in the second sentence should be read as a reference to the profits of the enterprise in carrying on business in Australia. This, in turn, must, in the case of Article 7(1)(a) be through the permanent establishment and, in the case of the second limb of Article 7(1)(b), be of a similar kind to those carried on through the permanent establishment. There is no warrant, in my opinion, for reading the reference to "the profits of the enterprise" as profits earned, not only through business activities undertaken in Australia, but anywhere else. 147 Finally, the construction urged by the applicant is supported by the 1991 Explanatory Memorandum. Specifically, in relation to Article 7 of the Indian Agreement, the Explanatory Memorandum explains that: This article is concerned with the taxation of business profits of an enterprise carried on by a resident of one country that are derived from sources in the other country. The taxing of these profits depends on whether they are attributable to a permanent establishment of the taxpayer in that other country. If they are not, the profits will be taxed only in the country of residence of the taxpayer who carries on the enterprise. If, however, a resident of one country carries on business through a permanent establishment (as defined in Article 5) in the other country, the country in which the permanent establishment is situated may tax the profits of the enterprise attributable to the permanent establishment. That country may also generally tax income attributable to certain related sales of goods or merchandise or other business activities where those sales are made or business activities are carried on within that country other than through the permanent establishment. (Emphasis added.) 148 The respondent submits that the explanatory memorandum cannot be relied upon as a guide to interpretation of the Indian Agreement because that Agreement was concluded before the 1991 Explanatory Memorandum. However, for the reasons which I have already given, I consider that I am able to have regard to such extrinsic material in line with the Full Court's decision in Task Technology (see above at [99]).

5.5.2 Where did the business activities take place? 149 While the issue was not raised in its appeal statement, the respondent contends that even if Article 7(1)(b) permits Australia to tax the profits of an Indian enterprise through the conduct of business within Australia, the applicant's business activities were carried on within Australia for the purposes of that article for the following reasons: 36.1 First, the whole of the IT Services provided by the applicant constitute "business activities" carried on within Australia, because the applicant's Australian Customers received the benefit of those services in Australia. 36.2 Second, all income from the IT Services was derived from Australia. 36.3 Third, the IT services were provided in furtherance of agreements between the applicant and Australian Customers, which were concluded in Australia and are "fundamental" to the operation of the applicant's business through its permanent establishment in Australia. 36.4 Fourth, the location of the applicant's offices in Sydney and Melbourne were significant to the performance by the applicant of work for its Australian Customers. 150 On the other hand, the applicant submitted that the "business activities" for the purposes of Article 7(1)(b) took place where the labour of the applicant's employees and use of materials was undertaken, being India in the case of the Indian Services. 151 In my view, the applicant's approach must be preferred. 152 First, the term "business activities" is not defined in the Indian Agreement and neither party suggested that the phrase had any particular meaning under the tax laws of Australia which would be picked up by Article 3(2) of the Indian Agreement. That being so, the natural and ordinary meaning of the phrase "business activities", when read in the context of a provision for the allocation of rights to tax profits, is the business activity undertaken by the resident of a Contracting State which generates the profits in question, namely, the labour provided by the applicant's employees in India. 153 Secondly, this conclusion is reinforced, as the applicant submits, by the fact that the payments made to it for the provision of services were either, as I have earlier found: (A) directly related to the labour of its employees where payment was made on a "time and materials" basis, where the charge to the customer calculated by reference to the hourly rate of the employees multiplied by the period of time they worked; or (B) indirectly related to the labour where payment was made on a fixed price basis based on an estimate of the amount of labour required. 154 Thirdly, the factors on which the respondent relied do not lead to any different result. (A) As to the first factor, the fact that the applicant's Australian Customers receive the benefit of the Indian Services is irrelevant on the construction which I prefer. It is a factor which says nothing about where the activities which generated the profit took place. (B) It is not clear what is meant by the second factor and in particular what differentiates the second factor from the third factor identified at [36.3] of the respondent's submissions. (C) As to the third factor, Article 7(1)(b) is concerned with profits which are not covered by Article 7(1)(a) and therefore are not attributable to the permanent establishment. Nonetheless, while disavowing any reliance upon Article 7(1)(a), the third factor identified by the respondent effectively seeks to apply the criteria in Article 7(1)(a). In any event, the activity which generates the profits is not the agreement to provide services but the supply of services in compliance with the agreement. (D) The submissions do not develop the significance of the fourth factor identified by the respondent, and in any event, the factor focuses merely upon the locations of the permanent establishment as opposed to the location where a profit-earning business activity takes place.

Conclusion 155 For the reasons set out above, I consider that those payments which fall within categories 1, 2, 5, 6, 7 and 8 comprise royalties for the purposes of Article 12 of the Indian Agreement as enacted by the International Agreements Act. As such, those payments are deemed to have an Australian source by virtue of Article 23 and are therefore taxable as Australian source income by reason of s 6-5(3)(a) of the ITAA 1997. Certain payments within category 9 may also be taxable on the same basis. As earlier mentioned, the parties are agreed that I should not make findings as to the precise proportions of the total income from the relevant year which satisfies the definition of royalties in Article 12(3)(g) but rather afford the parties the opportunity first to seek to agree those proportions based upon my factual findings as to which of the 9 categories are correctly described as giving rise to royalties. That course is reflected in the orders providing only at this stage that the matter is set down for further directions. I certify that the preceding one hundred and fifty-five (155) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perry.

Taxation Administration Act 1953(Cth)ss 14ZZ(1)(b), 14ZZO(a)

Legislation: Acts Interpretation Act 1901 (Cth) ss 15AA, 15AB Explanatory Memorandum to the Income Tax (International Agreements) Amendment Bill (No. 2) 1991 (Cth) Income Tax Assessment Act 1936 (Cth) ss6(1), 166A(3) Income Tax Assessment Act 1997 (Cth) ss 6-5, 995-1 International Tax Agreements Act 1953 (Cth) s 11Z Taxation Administration Act 1953 (Cth) ss 14ZZ(1)(b), 14ZZO(a) Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed 25 July 1991, [1991] ATS 49 (entered into force 30 December 1991) Vienna Convention on the Law of Treaties, opened for signature 23 May 1969, 1155 UNTS 331, [1974] ATS 2 (entered into force for Australia and generally 27 January 1980)

Cases cited: Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225 Commissioner of Income Tax v De Beers India Minerals Pvt Ltd [2012] 346 ITR 467 Commonwealth of Australia v The State of Tasmania (The Tasmanian Dam Case) (1983) 158 CLR 1 Federal Commissioner of Taxation v SNF (Australia) Pty Ltd [2011] FCAFC 74; (2011) 193 FCR 149 Maloney v The Queen [2013] HCA 28; (2013) 252 CLR 168 McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation [2005] FCAFC 67; (2005) 142 FCR 134 Minister for Home Affairs of the Commonwealth v Zentai [2012] HCA 28; (2012) 246 CLR 213 Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183 SAEED v Minister for Immigration and Citizenship [2010] HCA 23; (2010) 241 CLR 252 Shipping Corporation of India Limited v Gamlen Chemical Co (A/Asia) Proprietary Limited (1980) 147 CLR 142 Task Technology Pty Ltd v Federal Commissioner of Taxation [2014] FCAFC 113; (2014) 224 FCR 355 Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 Thorpe Nominees Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1834

At a glance

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Legislation Cited (8)

Cases Cited (18)

Cited By (4)