Intellectual Property Law

Data Processing Services under the Australia-India Double Taxation Treaty

By Martha L. Arias

Double taxation avoidance agreements are significant for e-commerce transactions and, particularly, for transactions involving foreign outsourcing of data processing services.   Application of these agreements, however, may turn complex in cases involving technology and data processing services. This article provides a practical example of the application of the double taxation avoidance agreement between Australia and India in the context of data processing services. 

Australia and India entered into a Double Taxation Avoidance Agreement (DTAA, in short) in 1992, 194 ITR Statute 91.  This tax treaty provided allocation of taxing rights between the contracting states. Regarding royalty payments, Art. 12(3) of the agreement defines what constitutes royalty payments.  Art. 12(3)(a) says that royalty payments include those made for ?the use of, or the right to use of, any copyright, patent, design or model, plan, secret formula or process, trade mark, or other like property or right.? Also, it would be a royalty payment, according to Art. 12(3)(b), when the payment is for "the use of, or the right to use, any industrial, commercial or scientific equipment."  Art. 12(3)(c) provides that when the payment [from one company to the other foreign company] is for ?the supply of scientific, technical, industrial or commercial knowledge or information,? this payment should be considered royalty for purposes of Art. 12(3).

The following also constitute royalty payments according to Art. 12(3): ?(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 sub-paragraph (a), any such equipment as is mentioned in sub-paragraph (b) or any such knowledge or information as is mentioned in sub-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 sub-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, know-how 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 sub-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.?

 According to Indian tax law, Income Tax Act 1961, Art. 90(2), the provisions of this tax treaty prevail over domestic law unless the domestic law is more beneficial to the assessee.

In the Indian case of Kotak Mahindra Primus Ltd. v. Deputy Director of Income-Tax, the court was to decide whether the Indian tax authority could demand an Indian company to withhold tax at 15% from payments made to an Australian company.  Kotak Mahindra Primus Ltd (Kotak) is an Indian company jointly formed by the Indian company Kotak Mahindra Finance Limited, and a United States company named Ford Credit International Inc.  Kotak is engaged in the business of providing finance for car purchases.  Kotak contracted data processing services with an Australian company named Ford Credit Australia Limited.

The Indian tax authorities demanded Kotak to pay withholding tax at 15% from payments made to the Australian company. Kotak claimed not such payments were required under the Australia-India DTAA. The Indian court reviewed the Australia-India DTAA, particularly Art. 12 regarding royalty payments, and concluded that Kotak was not required to pay this withholding tax.   The court specifically analyzed Art. 12(3)(a), (b), (c), and (d) because they were relevant to the issue of whether payments for data processing services constitute royalty payments for withholding tax purposes.  Regarding possible application of Art. 12(3)(a), the court held that payment for data processing are not payments for the use of software.  Regarding royalty payments for the use of scientific equipment, Art. 12(3)(b), the court held that data processing does not required the exclusive use of mainframe computer. Although data processing services involve the use of mainframe computers, they did not exclusively required control or physical access to that mainframe computer.  Art. 12(3)(c) does not apply, the court held, because data processing does not involve the transfer of knowledge or information.  Indeed, the information is supplied by the Indian company to the Australian company, and the later just processes that information.  Lastly, the Indian court held that payments for data processing services are not royalties under Art. 12(3)(d) because those services do not constitute consultancy services.  Payments to the Australian company are not made to obtain any technical knowledge, experience, skill, know-how or processes. 

Therefore, the Indian Income Tax Appellate Tribunal in Kotak held that ?a company's payment to an Australian company for data-processing services was not a royalty payment under the Australia-India income tax treaty and that no Indian withholding tax was due.?

Full post as published by IBLS Internet Law Blog on October 04, 2009 (boomark / email).