If you make payments to a service provider in India, then read on (of course, you are most welcome to read on even if you don’t).
The recent Full Federal Court decision in Tech Mahindra Limited v Commissioner of Taxation [2016 FCAFC 130] is interesting for a number of reasons.
One issue that has captured our attention is that payments that would clearly not be considered to be a royalty under our domestic law or under almost any other Double Taxation Agreement (DTA), were so found, and royalty withholding tax was imposed.
Unhelpfully, in trying to work out what this may mean for payments that you are making to India, there is little to no Australian guidance (beyond the case at hand) on how to interpret the extended definition of royalty in the Australia/India DTA (see article 12(3)(g). Helpfully however, some of the key concepts have been considered in various Indian decisions, due to these concepts being included in Indian domestic tax law and most or all of their DTA’s.
On an initial review, one of the really key questions in many of these cases has been whether technical knowledge has been ‘made available’. The principles applied by the Indian courts seem generally aligned to comments made on this point in Tech Mahindra, although as is often the case, the waters get muddy on some of the ‘border line’ cases.
With all of this in mind, now is a good time to take stock of any payments already being made to India to determine whether royalty withholding tax may apply and, if so, whether the relevant service contract deals with this appropriately and whether the service provider will be entitled to a full or partial credit under domestic Indian tax law.