Satyam Computer - Double Tax Agreements: a sword not a shield

On 11 October 2018, the Full Federal Court in Satyam Computer Services Limited v CoT (2018) held the ‘source’ rule in Article 23 of the Australia–India Double Taxation Agreement (Indian DTA) prevailed over the domestic definition such that payments from Australia to a company in India for work performed in India was taxable in Australia.


This case is the second decision in which the Australian Courts have found against the same taxpayer. The taxpayer, Satyam Computer Services Limited (Satyam) is a tax resident of India. In 2013, Satyam and Tech Mahindra Limited (a second Indian company) amalgamated. In 2015, Perry J of the Federal Court in Tech Mahindra Limited v CoT (2015), a case with  the same facts, held that the payments received  by the amalgamated Indian company for services provided by employees located in India were royalties by virtue of Article 12(3)(g) of the Indian DTA and deemed to have an Australian source.

This case essentially revisits the decision but on different grounds and is run under the name Satyam instead of Tech Mahindra. The case addresses the conflict between the scope of source under Australia’s domestic law and Article 23 of the Indian DTA which deems an item of income or capital derived by a resident of one of the contracting states (say India) and taxable in the other state (say Australia) to be sourced from the other contracting state (Australia in this example).

Satyam provided software products and information technology services to clients in Australia. The services provided were performed partly by employees located in Australia and partly by employees located in India.

The question in dispute was whether payments received for the services provided by Satyam to Australian clients had an “Australian source” when employees in India performed the services?

Applicant’s arguments

The definition of “Australian source” in the Income Tax Assessment Act 1997 (ITAA 1997) states that income has an Australian source if, and only if, the income is derived from a source in Australia. Income from services will prima facie have its source where the services are performed (see FCT v Mitchum (1965) 113 CLR 401).

It was agreed that the payments were ordinary income within section 6-5 of the ITAA 1997 and likely that the payments would not be sourced in Australia under domestic law apart from the Indian DTA as they were performed in India, but the Indian DTA allowed Australia to tax them under Article 12 (royalties) as they were paid by Australian residents.

Satyam contended that Article 23 of the Indian DTA did not create a tax liability in circumstances where a tax liability did not arise under the domestic law of the relevant contracting state (Australia in this case). That is, double tax agreements only work to allocate a taxing right between Contracting States and do not itself impose tax – a double tax agreement could only be a “shield”, not a “sword”.

Whilst Australia could tax the payments as royalties under the Indian DTA, Satyam argued that Australia could only exercise that right if it has the right to impose tax on those amounts under its domestic law and as Australian domestic law does not give Australia that right, the taxing rights could not be allocated to Australia and Australia did not have a right to tax the payments made to Satyam.


The Full Federal Court unanimously held that the payments made by the Australian clients to Satyam were derived and sourced from Australia even though the work was performed by employees based in India.

Critical to this judgment was the interpretation that the Indian DTA and Australian legislation are “to be read as one”. The Full Federal Court held that there is no notion of the Indian DTA “amending” the definition of “Australian source” in section 995-1 of the ITAA 1997. Instead, there are two “source” rules and subject to the enacting provisions for tax treaties, the Indian DTA prevails as the “leading provision” whilst the section 995-1 definition, as the “subordinate provision”, “must give way” to the former.

Therefore, Article 23 of the Indian DTA operates to deem an item of income to be sourced from the contracting state that has the taxing right, namely Australia in this case.

As a result, the payments made to Satyam from Australian clients were deemed under the Indian DTA to be derived from an Australian source resulting in Satyam being liable to tax on those payments, even though the work was performed in India by Indian employees.


The decision confirms that the source rule in Article 23 of the Indian DTA can result in an Australian tax liability even when a liability would not otherwise arise under Australian domestic law.

This case specifically involved the Indian DTA, but the Court held that the source rule in that treaty meant what it says. While the source rule in Australia’s tax treaties varies significantly between treaties, there was nothing in this case to suggest that a court would interpret the source rule in other Australian tax treaties differently than what the rule in that particular treaty says.

This case also means that someone from a treaty country (such as India) could end up paying more tax in Australia than someone from a non-treaty country (such as Hong Kong). Foreign parties deriving income from Australia need to be aware of Australian domestic and international tax rules. This case, while clarifying one issue, makes the application of those rules more complicated with greater variation depending on the residence of the foreign party.

To discuss or for further information please contact:

Neil Brydges
Special Counsel | Accredited specialist in Tax Law
Sladen Legal
M +61 407 821 157 | T +61 3 9611 0176
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia  

Kelvin Yuen
Sladen Legal
T +61 3 9611 0177
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia

Annabell Rehmer
Law Clerk
Sladen Legal
T +61 3 9611 0196
Level 5, 707 Collins Street, Melbourne, 3008, Victoria, Australia