India-Australia DTAA

DTAA stands for Double Taxation Avoidance Agreement, which is an agreement between two countries that aims to eliminate the double taxation of income earned by individuals or entities in both countries. The DTAA provides a mechanism for foreign investors to avoid being taxed twice on the same income. It allows foreign investors to claim tax relief in their home country for the tax paid in India. The DTAA also helps to prevent tax evasion and promote transparency in tax matters.

The DTAA came into force on 30 December 1991. It has been revised several times since then. The DTAA ensures that taxpayers who are residents of one country but earn income from the other country are not taxed twice on the same income. The agreement covers taxes on income and wealth and applies to residents of both countries.

Scope of India Australia DTAA

Foreign investors in India can be categorized into different groups based on their investment objectives, the nature of their investment, and the regulatory requirements they need to comply with. Here are some of the categories of foreign investors in India:

Residence-based Taxation

The DTAA provides clarity on the tax treatment of residents and non-residents in both countries. It ensures that individuals and businesses are not taxed twice on the same income.

Business Profits

The agreement provides guidelines for the taxation of business profits earned by companies in either country. It ensures that companies are taxed fairly based on their activities in each country.

Dividends, Interest & Royalties

The DTAA provides rules for the taxation of dividends, interest and royalties received by residents of either country. It ensures that these payments are taxed at a reasonable rate and not subject to double taxation.

Capital Gains

The agreement provides for the taxation of capital gains arising from the sale of assets, such as shares, real estate and other investments. It ensures that residents are taxed fairly and not subject to double taxation.

Exchange of Information

The agreement provides for the exchange of information between the tax authorities of both countries to prevent tax evasion and ensure compliance with tax laws.

Permanent Establishment (PE)

As per Article 5 of India-Australia DTAA, ‘Permanent Establishment’ refers to a fixed place of business through which an enterprise of one country carries on its business activities in the other country. It includes the following:
 

• a place of management,
• a branch,
• an office,
• a factory,
• a workshop,
• a premises used as a sales outlet,
• a farm, plantation or other place where agricultural, pastoral, forestry or plantation activities are carried on,
• an installation or structure used for the exploration or exploitation of natural resources,
• a building site or construction, installation or assembly project, or supervisory activities in connection with such a site or project, where that site or project exists, or those activities are carried on (whether separately or together with other sites, projects or activities) for more than 6 months:
• if an enterprise furnishes services, including consultancy services, through employees or other personnel engaged by the enterprise for such purpose, but only where activities of that nature continue (for the same or connected project) within India/Australia for a period or periods aggregating more than 183 days in any 12-month period,
• if an enterprise carries on activities (including the operation of substantial equipment) in the exploration for or exploitation of natural resources situated in India/Australia for a period or periods exceeding in aggregate 90 days in any 12-month period,
• operates substantial equipment in the other State for a period or periods exceeding in aggregate 183 days in any 12-month period,
• person acting in India on behalf of an enterprise of Australia shall be deemed to be a permanent establishment of that enterprise in India if (and vice versa):
          o    The person has, and habitually exercises in India, an authority to conclude contracts on behalf of the enterprise, unless the person's activities are limited to the purchase of goods or merchandise for the enterprise.
          o    The person has no such authority, but habitually maintains in India a stock of goods or merchandise from which the person regularly delivers goods or merchandise on behalf of the enterprise.
          o    The person habitually secures orders in India, wholly or principally for the enterprise itself or for the enterprise and other enterprises controlling or controlled by or subject to the same common control as that enterprise.
          o    The person manufactures or processes in India for the Australian enterprise goods or merchandise belonging to the enterprise.

Note: The mere presence of a company's goods or merchandise in the other country does not, by itself, constitute a Permanent Establishment.

The DTAA also considers the following activities as not constituting a PE:

• The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display.
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.
• The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise.
• The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.

In case an enterprise has a Permanent Establishment in both India and Australia, the business profits will be taxed in both countries, but the DTAA provides relief from double taxation by allowing the taxpayer to claim a credit for the taxes paid in one country against the taxes payable in the other country.

Overall, the definition of Permanent Establishment under the India-Australia DTAA plays a crucial role in determining the tax liability of foreign enterprises doing business in India or Australia.

A summary of structure of entities covered in Permanent Establishment is as follows:

Particulars	Indian Definition	Australia Definition	India-Australia DTAA Definition
Brief meaning	- Any fixed place of business serving the activities of an enterprise. - Any entity engaged in any activity, relating to the production, storage, supply or distribution. - Wider definition than Tax treaty.	- Any fixed place of business serving the activities of an enterprise. - entity perform clearly differentiated activities and the management of these is carried out in Australia. - Wider definition than Tax treaty.	- Any fixed place of business through which the business of an enterprise is wholly or partly carried on. - Narrower definition than respective taxation.
Examplaes
Place of Management	Yes	Yes	Yes
Branch or office	Yes	Yes	Yes
Factory or workshop	Yes	Yes	Yes
Fixed place solely for the purpose of purchasing goods or merchandise	Yes	Yes	No
Fixed place solely for the purpose of maintenance of a stock of goods	Yes	Yes	No
Building site or construction	Yes (if Duration > 6 Months)	Yes (if Duration > 6 Months)	Yes (if Duration > 6 months)

Withholding Tax as per Indian Tax Laws

A brief summary of withholding tax rates is as follows:

Nature of income	Indian Income Tax Ac	India-Australia DTAA *
Dividend	20%	15%
Interest	20%	15%
Royalty	20%	10%/15%
Fee for Technical Services	20%	Not covered under DTAA

*The rates as per Income Tax Act shall be increased by applicable surcharge (2%/5% - for Companies and 10%/15%/25%/37% - for individuals) and Cess (4%).

Note: Taxability of dividend is on gross basis and the amount of tax is deducted by the source Country. Interest is also taxable on gross basis and the tax is withheld by the source country.

Benefits and Rates of Tax as per DTAA

Royalty

As per Article 12 term "royalties" mean 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 sub-paragraph (a), or 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 (1) motion picture films; (2) films or video tapes for use in connection with television; or (3) 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).

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.

Fees for Technical services

The term "fees for technical services" is not specifically defined in the India – Australia Double Taxation Avoidance Agreement. However, some of the services of technical nature are covered in the definition of royalty defined above. Hence, if any company which is resident of Australia provide such services in India, then it shall be taxed at the rates as per Income Tax Act i.e., 20% and if such services are provided through a PE, then the PE shall be taxed as per rates of Income Tax Act (i.e., 40%).

Dividend Income

“Dividends” as used in Article 10 means — income from shares and other income which is subjected to the same taxation treatment as income from shares by the laws of the country (India/Australia) of which the company making the distribution is a resident for the purposes of its tax. Such dividend earned in India by a resident of Australia is taxable in India at a rate of 15% and vice-versa.

Interest

As per Article 11, the term “Interest” in this article includes interest from government securities or from bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and interest from any other form of indebtedness as well as all other income assimilated to income from money lent by the law, relating to tax, of the Contracting State in which the income arises, but does not include interest on funds connected with operation of ships or aircraft [referred to in paragraph (1) of Article 8]. Such interests earned in India by a resident of Australia is taxable in India at a rate of 15%.

Note: The above rates and taxability are not applicable if such incomes are earned through a PE situated therein. Then the PE shall be taxed as per rates of Income Tax Act (i.e., 40%).

Independent Personal Services

As per Article 14, the term "professional services” includes services performed in the exercise of independent scientific, literary, artistic, educational or teaching activities as well as in the exercise of the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. Income derived by a resident (individual or firm) of Australia and who earns income from the performance of professional services or other independent activities of a similar character shall be taxable in India only if any of the following conditions is satisfied:

• if he has a fixed base regularly available to him in India for the purpose of performing his activities and in that case, only so much of the income as is attributable to that fixed base may be taxed in India.
• If his stay (or stay of one or more members of firm) in India is for a period or periods amounting to or exceeding in aggregate 183 days in the relevant fiscal year; in that case, only so much of the income as is derived from his activities performed in that other State may be taxed in India.

Dependent Personal Services

As per Article 15, salaries, wages and other similar remuneration derived by a resident of Australia in respect of an employment shall be taxable in India only if the employment is exercised in India and such income shall be taxable at the rates in force.

Such salary can be taxed in Australia only after fulfilment of the following conditions:

(a)    The recipient is present in India for a period or periods not exceeding in aggregate 183 days in the fiscal year concerned.

(b)    The remuneration is paid by, or on behalf of, an employer who is not a resident of India.

(c)    The remuneration is not borne by a permanent establishment or a fixed base which the employer has in India.
However, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of Australia may be taxed in Australia (and vice-versa).

Tax on Capital Gains (Article 13)

• Immovable Property: Gains derived by a resident of Australia from the alienation of immovable property situated in the India may be taxed in India and vice versa.
• Movable Property: Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of Australia has in India or of movable property pertaining to a fixed base available to a resident of Australia in India, such gains shall be taxable in India.
• Sale of securities: Gains from the alienation of shares of a company the property of which consists, consists wholly or principally, of immovable property situated in India will be taxed in India and vice versa. Otherwise, they shall be taxable in the country of which the company is resident (vice-versa).

Comparison with Other Tax Treaties

Treaty Partner	Dividends	Interest	Royalties	Fee for Technical Services	Capital Gain on Shares held in India
Canada	15% / 25%	15%	10%/15%	10%/15%	Capital gain arises in both India and Canada
France	10%	10%	10%	10%	Capital gain arises in India if more than 10% Shares are held
Spain	15%	15%	10%/20%	20%	Capital gain arises in India if more than 10% Shares are held
Australia	15%	15%	10%/15%	Not Covered under DTAA	Capital gain arises in India
Germany	10%	10%	10%	10%	Capital gain arises in India
Netherlands	10%	10%	10%	10%	Capital gain arises in India if more than 25% Shares are held
United Kingdom	10% / 15%	10% / 15%	10% / 15%	10% / 15%	Capital gain arises as per Indian/UK Income Tax Act

Conclusion

A key issue specific to India-Australia DTAA comes from the CUB Pty Ltd. v. Union of India case. In a landmark decision, the High Court of Delhi held that income accruing from the transfer of intangible assets licensed for use in India was not taxable in India because the situs of ownership was elsewhere.

The petitioner (formerly AB Fosters Australia Ltd.) had earlier sought a ruling from India's Authority for Advance Rulings (AAR), asking if income arising from the transfer to a UK company, of the right and title to and interest in Foster's trademarks licensed for use in India, was taxable in India under the Income Tax Act 1961 and the Australia-India income tax treaty. The AAR held that income accruing in India is taxable in India.

The petitioner then filed a writ petition before the High Court of Delhi. This decision is based on legal ownership, and the High Court concluded the proceedings based on the situs of the legal owner. Nonetheless, the Revenue Department and the AAR brought to the forefront the view that because the trademarks are related to business operations in India, the consideration for those trademarks must be taxed in India. This indirectly points to the concept of economic ownership of marketing intangibles, which has been litigated at length in the Indian transfer pricing arena.