(a) The issues before the Federal Court of Australia in one such case - Tech Mahindra Limited vs Commissioner of Taxation (2016) FCAFA 130 were (a) allocation of taxing rights (b) interplay between Article 7 and Article 12 of the 1991 DTAA between India and Australia (c) whether Article 12(4) of the DTAA applies to royalty (d) whether source state has a right to tax royalty under Article 7 or Article 12 of the DTAA. While there was no dispute that Article 7 (1)(a) of the DTAA gave Australia the right to tax the income of the company received in respect of services rendered in Australia, the question was whether Australia could have any taxing rights in respect of income from the services performed by the company in India. Australian tax authorities held that services performed by the company in India were royalties in terms of Article 12(3)(g), or in the alternative they were liable to Australian tax under Article 7(1)(b) of the DTAA. The Indian company's case was that payments did not have the character of royalties within the meaning of Article 12(3)(g); and even if once concedes that they were royalties, Article 12(4) comes into play which will apparently trigger Article 7 characterizing the payments being received as business receipts, In the latter situation, no part of income received from services rendered in India could have been subject to tax under Article 7(1)(a) of the DTAA.
(b) The Federal Court proceeded to hold that some categories of payments referred to the Indian services were royalties within the meaning of Article 12(3)(g), and that Article 12(4) was not engaged.
(c) Outcome in few other cases, some prior and some subsequent - Tech Mahindra Limited vs FCT [2015] FCA 1082 and Satyam Computer Services Limited vs FCT [2018] FCAFC 172 - were identical: that the payments for services rendered in India were taxable in Australia. Newer justifications also emerged in support of that view. One such justification was that payments even though rendered for services performed in India were deemed to have an Australian source by virtue of Article 23 of DTAA, and section 4(2) of Australia's International Tax Agreement Act, 1953, and hence taxable under section 6 of Australia's Income Tax Assessment Act, 1997. Article 23 of the DTAA reads as follows:
"SOURCE OF INCOME
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 purpose 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 first-mentioned State relating to its tax, be deemed to be income from sources in that other State."
(d) The thrust of arguments of the Indian companies was that definition of royalty under Article 12 (3) of DTAA was far more extensive that what constituted royalty within the meaning of Australia's domestic tax law. That Australia can be said to have and exercise that right to impose tax on those amounts only if Australia had the right to levy tax on those amounts under Australia's own domestic tax laws. If there is no such prior taxing provision under the domestic law, then it cannot be triggered on the back of a DTAA. That DTAA proceeds to allocate prior existing taxing rights. DTAA does not create a new taxing right.
(e) The underlying conflict in interpretation of law and approaches to a solution for both sides was seemingly intractable- (a) India in favour of omitting Article 23 which Australia resisted on the ground that being a source rule, it is part of all Australia's DTAAs and (b) Australia's offer of omitting definition of royalty under Article 12(3)(g) being resisted by India on the ground that Article 12 (3)(g) also being a part of India's DTAA with many countries including USA, UK, Canada- few more possible permutations such as carving out an exception in Article 12(3)(g) from the scope of Article 23 either through amendment in DTAA or domestic tax law or even taking recourse to Article 25(3) at the level of competent authorities were also on the table.
(f) Exchange of options between the 2 countries since November 2015 (when India sought deletion of Article 23) up until 2022 (when India sought to carve out an exception in Article 23 to eliminate the impact of Article 12(3)(g) in respect of Indian companies remotely providing services to Australian customers) did crystallize in an understanding at the signing of the Australia-India Economic Cooperation and Trade Agreement in April 2022, whereby it was conveyed by the Australian government that " The Government of Australia has agreed to amend Australian domestic taxation law to stop the taxation of offshore income of Indian firms providing technical services to Australia. This would resolve the issue that the Indian government has raised about the Double Taxation Avoidance Agreement between the Government of Republic of India and the Government of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, done at Canberra on 25 July 1991."
(g) Treasury Laws Amendment (Measures for Consultations) Bill 2022 for 'adjustment to tax on certain payments or credits paid to Indian firms' was moved soon after proposing to bring in amendment to Australia's International Tax Agreements Act, 1953 to stop Australian taxation on income of non-resident Indian firms (a) providing technical services remotely (and not through a PE) to Australian customers that are covered by Article 12 (3)(g) of the DTAA (b) payments or credits not being a royalty within the meaning of the Income Tax Assessment Act, 1936.
(h) Changes to the International Tax Agreements Act, 1953 and not the Income Tax Assessments Act 1936 to incorporate the required changes in law to stop Australian taxation on Indian firms providing technical services remotely were strategic and tactical owing to 2 basic reasons: one, (a) the long title of the International Tax Agreements Act clarifies that the said Act is on statute " to give the force of Law to certain Treaties and other Agreements with respect to Taxes on Income and Fringe Benefits, and for purposes incidental thereto " and (b) a clear intendment in section 4 of that Act stating inter alia "The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than the provisions covered by subsection (3)) or in an Act imposing Australian tax "
(i)The table of provisions as amended in the International Tax Agreements Act, 1953 thus introduced section 11J as under to give effect to the legislative intendment, and stop Australian taxation on Indian firms who rendered services offshored to them as part of local contracts:
"The Indian agreement (as amended by the Indian protocol (No. 1)) does not have the effect of subjecting to Australian tax any payments or credits, whether periodical or not, and however described or computed, to the extent to which they:
(a) are made as consideration for the rendering of any services covered by paragraph 12(3)(g) of that agreement (as amended); and(b) are not royalties (within the meaning of the Income Tax Assessment Act 1936); and(c) would, apart from paragraph 12(3)(g) and Article 23 of that agreement (as amended), not be subject to Australian tax."
IT is not uncommon for a state to take up cases of its citizens with another state, in the event that its citizens have been injured by acts of another state which apparently militate against international law, by using available diplomatic measures or international judicial forums. 'Wrongful taxation' through specific tax measures by a state is generally accepted as an internationally wrongful act. There was a time in our history when Permanent Court of International Justice took up these bilateral cases of wrongful taxation- for example in Free Zones of Upper Savoy and District of Gex as early as in 1928 on levy of impermissible customs duties under the guise of fiscal taxes and in defiance of a country's treaty obligations- or the International Court of Justice taking up the case of US Nationals in Morocco on the ground that that France has disregarded the fiscal immunity of US nationals in France's protectorate in Morocco. However, evolution of international tax law no longer posits with any international organization any jurisdiction over bilateral disputes on most tax matters including wrongful taxation, rather tax disputes, when contracting states are unable to ascertain the governing law for their treaty resulting in divergent legal characterization of income or its underlying transactions, are mostly resolved through treaty specific mutual agreement procedures and after comprehensive negotiations. Further, access to an effective remedy through domestic courts while being long and protracted, and carrying the risk of lack of impartiality, does not guarantee effectiveness of the tax dispute resolution to the satisfaction of the contracting parties, and hence the need for recourse to negotiation within the terms of the treaty for an effective resolution. 
