TaxTMI 
TaxTMI 
2018 (6) TMI 618
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....he details accompanying the application, the facts of the case are stated to be as under: 2.1 The Applicant belongs to the MasterCard Incorporated group of companies, one of the leading global payment solution providers facilitating financial institutions, businesses, merchants, cardholders and governments worldwide to use electronic forms of payment instead of cash and cheques. The Applicant is a wholly owned indirect subsidiary of MasterCard's wholly owned direct Delaware incorporated subsidiary, MasterCard International Incorporated ("MCI"). The Applicant is the regional headquarter for the Asia Pacific, Middle East and Africa ("APMEA") region and carries out the MasterCard group's principal business of transaction processing and payment related services under a family of products including "MasterCard". "Maestro" and "Cirrus" in the APMEA region. 2.2 The MasterCard Business is structured as an open bankcard association, in which the cardholder and merchant relationships are managed principally by the Applicant's customers which are primarily banks and financial institutions ("Customers") in APMEA region. The Applicant does not issue cards, extend credit to cardholders, se....
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....he Merchant and presents a card for payment. 2. The Merchant forwards the transaction to its bank (i.e. acquirer bank) for authorization. This, in turn, is forwarded to the Cardholder's bank (i.e. issuer bank) via the MasterCard Network. If the transaction is authorized by the Issuer, the Merchant is paid by the Acquirer (and typically the Merchant would be required to pay a "merchant service fee" to the Acquirer). MasterCard facilitates authorization, clearing and settlement of the transaction between the Cardholder and the Merchant via the Issuer and the Acquirer. 3. The settlement process between the issuer and the acquirer bank typically occurs through a settlement bank appointed by MCI. MCI is usually the entity which owns the settlement bank accounts as it is the entity within the MasterCard group which provides settlement services to other group companies. These bank accounts are used primarily for the purpose of ensuring that payment for transactions that have occurred between the merchant and cardholder are settled via the acquirer bank and issuer bank. If settlement occurs successfully across the issuers and acquirers, the settlement bank account wou....
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...., whether provision of arm's length remuneration to such PE for the activities to be performed in India, would absolve any further attribution of the global profits of the Applicant in India? (3) Whether on the facts and circumstances of the case, the fees to be received by the Applicant from Indian Customers (comprising transaction processing fees, assessment fees and transaction related miscellaneous fees) would be chargeable to tax in India as royalty or fee for technical services within the meaning of the term in Article 12 of the India- Singapore DTAA? (4) Based on the answers to the above questions, and in view of the facts as stated in the subsequent part of the Applicant, whether any tax withholding at source would be required on the amounts to be received by the Applicant? 4. It is the Applicant's contention that the fees received from the customers are neither taxable as Royalty, nor as FTS. Further, since there is no PE it is also not taxable as business income. The Applicant's contentions in support of its claim, as contained in the application, are as under: 4.1 The Applicant is an entity incorporated in Singapore and does not have any presence ....
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....ices (e.g. foreign exchange margin, commissions, load fees), account and transaction enhancement services, holograms and publications. 4.4 The detailed processing of transactions shall be undertaken by the Applicant through the MasterCard processing centers situated outside India. The transaction data shall be transmitted outside India with the help of MIPs which shall be owned by the Indian subsidiary of the Applicant and shall be placed at the Customers' locations in India. MIPs are special purpose equipment with software embedded therein and consist of Central Processing Unit, Monitor, Router and Multi-protocol label switching unit. MIPs are used for undertaking preliminary examination / validation of information at the point of authorization. The preliminary validation generally involves activities such as PIN processing, validation of card codes, name and address verification etc.. In the case of errors, the MIP would alert the acquirer bank / financial institution on the need for a correction and the data is not authorized. If the initial validation is successful, the MIP located at the acquirer bank would transfer the data to the issuer bank's MIP, which performs ....
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....ined by the Indian subsidiary, provision of advisory services to customers in India, Provision of advisory support services to MAPPL and other overseas MasterCard group entities; Provision of authentication services in relation to the Unique Identification number (UIDAI) initiative of the Government of India; Provision of marketing and liaison services to other MasterCard group entities such as Access Prepaid UK; and Provision of technology related liaison and coordination services to MasterCard group entities such as MasterCard Technologies LLC. In consideration thereof, the Indian subsidiary shall earn service fees from the Applicant and the respective parties. 4.7 The facts for which questions are asked in this ruling came into effect on 1st Dec 2014. Before that the transaction processing activity was carried out by MCI and it had a liaison office in India. From 1st Dec 2014, all the functions, risks and assets of this liaison office were transferred to Indian subsidiary MISPL and the transaction processing activity was now being carried out by the Applicant from Singapore. 5. The Revenue has submitted detailed reports, as under: 5.1 The Revenue submitted a detailed no....
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.... Selwyn Kaitha) and none of them have technical qualification to address technology change associated with MIPs or take decision regarding MIPs. Before 1st Dec 2014, the maintenance was done by the overseas AEs and they continue to perform the maintenance work after 1st Dec 2014 under their name and not in the name of MISPL. The contract for maintenance continues to be entered by overseas AEs with the third party vendors, on their own account. The vendors carry out risk mitigation functions of maintenance of MIPs on behalf of overseas AEs and not on behalf of MISPL. It is only the cost of that maintenance that is allocated to MISPL. MISPL further allocates this cost to Applicant with mark-up, without any of its own value addition. This was demonstrated through actual figures. This clearly demonstrates that MISPL neither has financial capacity to undertake maintenance of MIPs nor technical qualification. It also does not undertake risk mitigation functions which involve taking decisions with regard to MIPs maintenance like taking decision to respond to technical changes, whom to contract for maintenance, when and how to upgrade the software inside MIPs. These decisions are taken by ....
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....tion. The Revenue has contended that this process of movement of fund between two banks happens when Bank of India passes the debit and credit entries and that happen in India. Revenue has relied upon the reply of Bank of India obtained under section 133(6) of the Income-tax Act to plead that this work is carried out by dedicated team of staff of Bank of India and this settlement happens every day after getting instructions from the MCI. BOI carried out this work, on behalf of the Applicant. Revenue has also quoted from the settlement agreement between the Applicant and Bank of India to contend that it is the Applicant who is responsible for any error in settlement. Thus, the Revenue has contended that both clearance and settlement also happen in India. 5.5 The Revenue has also contended that though on paper MIPs are owned by MISPL but the de facto ownership lies with the Applicant. For this it has relied upon the fact that there is no agreement of MISPL with the banks with regard to use of MIPs and their use is governed by the agreement between the Applicant and the banks. Revenue also contended that MIPs were originally owned by the AEs of the Applicant and were subsequently t....
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....nd the business purpose behind a transaction. If it was to contrive a loss, the same is to be disallowed. Based on this it has been stated in the Revenue's report that there was no business purpose to restructure the transactions in India other than to reduce tax liability in India. 5.9 The Revenue has contended that the Applicant has various types of PEs in India. It has submitted that the Applicant has a fixed place PE under Articles 5(1) and 5(2) of India Singapore DTAA in the form of MIPs, MasterCard Networks, Bank of India premises as well as Indian subsidiary. It has also submitted that there is a service PE under Article 5(6) of India Singapore DTAA. It has also submitted that there is a dependent agent PE in terms of Articles 5(8) and 5(9) of India Singapore DTAA. Revenue has submitted that any one form of PE would give taxation right to India, though there exist more than one form of PEs in this case. 5.10 The Revenue submits that the Applicant is carrying out its business of authorization (which is part of transaction processing) through MIPs in India which are at its disposal. It has been submitted that for creating fixed place PE it is not necessary that MIP shoul....
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....ber optic cables, nodes and internet, which all are part of Master Card network in India. MIPs are shown to be owned by MISPL but are at the disposal of the Applicant. Application software is owned by the Applicant and is at its disposal. Transmission towers, leased lines, fiber optic cable, nodes, internet etc. are provided by third party service provider but are at the disposal of the Applicant. Reliance was placed on judgments of the ITAT Delhi in the cases of Amadeus Global Travel Distribution SA vs DCIT [2008] 113 TTJ (ITAT Delhi) 767 and Galileo International Inc. [2008] 19 SOT 257 (Delhi) to support the case of MasterCard network creating a PE in India. The Revenue also relied upon a case from Austria (from the book of Mr. Ashish Karundia) where a mile long cable route used by the company for data transmission was held to constitute a PE. 5.13 Revenue also contended that the Bank of India space where more than 90% settlement activity takes place through employees of BOI also creates a fixed place PE as the Applicant is carrying out its work of settlement through it. Settlement position transaction wise is captured in India and is already known to respective banks. MCI, on....
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....ch was earlier carried out by the PE of MCI and are still carried out by MISPL but not shown in the FAR of MISPL. Therefore, the subsidiary company MISPL creates PE of the Applicant in India. The Revenue has also relied on some foreign cases which are discussed later. 5.15 The Revenue has also contended that the Applicant has service PE in India as its own employees are visiting India. Further there is service PE through employees of Bank of India as through them service is being rendered. Details of visit of employees of the Applicant to India have been provided that which shows that in a year (FY 16-17), the threshold of 90 days of India Singapore treaty was crossed. The Revenue has relied upon Bangalore ITAT judgment in the case of ABB FZ LLC (ITA no 1103 of 2013) and Hon'ble Supreme Court judgment in E*Funds IT Solution Inc (86 Taxmann 240). The Revenue has also discussed the purpose of meetings, submitted by the Applicant, to support its case that the employees of the Applicant have visited India to render service to its clients. With respect to service PE through Bank of India's employees it has been submitted by the Revenue that for service PE the service could be provide....
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....6] (supra), Bangalore ITAT judgment in the case of Google India Private Limited [ITA no 1511 to 1518/Bang/2013], Hon'ble Madras High Court judgment in the case of Verizon Communication Singapore Pte Limited [361 ITR 525], AAR rulings in the case of Dishnet Wireless Limited (AAR no 863 of 2010), Hon'ble Madras High Court judgment in the case of Poompuhar Shipping Corporation (TS 528 HC 2013), Hon'ble Madras High Court judgment in the case of Skycell Communications Limited (251 ITR 53) and ITAT Delhi judgment in the case of Asia Satellite Telecommunications Co. Limited [2003] 78 TTJ 489. Various arguments put forward by the Revenue in support are discussed later. 7. In respect of question no 2, the Revenue has submitted that the Applicant has raised this question only on account of the Indian subsidiary creating a PE and not for other types of PEs. For other types of PEs, thus, there is no doubt that PE is to be remunerated and the remuneration given to MSIPL is not enough. With respect to the subsidiary PE as well, the Revenue has submitted that since the FAR profile of MISPL does not capture the full functions performed, assets employed and risks undertaken by erstwhile PE, the ....
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....es. MIPs, which are owned by the Indian subsidiary of the Applicant and are provided to issuer and acquirer customers, encrypt the date for sending it outside India. It is a simple communication device and has software embedded therein which does the task of transmitting data in an encrypted form. The MIP enables the flow of transactions data and the routing of an authorization message between the acquirer and issuer banks. MIPs route all transactions to the data center(s) outside India for further processing. From there an authorization request is sent to the issuer bank that approves or declines the transaction and sends the authorization message through the issuer MIP to the acquirer bank on the same route which the authorization message travelled. 8.3 According to the Applicant, the network consisting of computers located outside India carry out fraud checks on the transactions to prevent any kind of security breach. The Applicant, over the years, has developed detailed algorithms and also a computerized database that enable fraud detection and prevention. The Applicant, in certain situations, provides additional services like authorization of transaction using pre-establish....
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.... with the related machinery and equipment located outside India. MIPs are only routing and communication devices. The Applicant has spent significant sums of money in establishing and maintaining its computerized data processing centers outside India so that millions of transactions are undertaken on a daily basis in a secure manner. Cost of MIP is a fraction of the cost incurred by the Applicant in maintaining server and other equipment that are needed to facilitate and complete authorization, clearing and settlement. The Applicant's server, processing centers and other related machinery, which are located outside India, are valued at almost USD 248 million while value of MIPs located in India are only USD 300,000. 8.7 The Applicant has submitted that after authorization, the acquirer bank prepares a batch of the transactions undertaken for a certain period in a given day. Once the batch is closed, the acquirer bank uploads batch files (containing monetary transactions from their merchants) on the Applicant's network located outside India. At this stage, the files are in raw form. After this, GCMS processes the raw data. For each transaction, GCMS performs data validation and d....
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....ownership and functions of MIP, the Applicant has submitted that it was transferred by earlier owner (AE) to MISPL and the transferor has paid capital gains tax. MISPL has claimed depreciation on these MIPs which have also been allowed by the assessing officer in an order under section 143(3) of the Act. With regard to delay in VAT compliance it was submitted that MIPs are located in various states with different VAT laws and hence there is a delay in compliance. It has further submitted that customer banks have entered into an agreement with the Applicant for availing transaction processing services and the Applicant in turn has entered into an agreement with MISPL for provision of MIPs to the banks. Therefore, there is no need for MISPL to enter into any agreement with customer banks. The maintenance is done by third party specialized entity. 9.1 With respect to the Revenue's claim of MIPs and MasterCard network constituting fixed place PE of the Applicant in India, the Applicant has contended that its network is located outside India which consists of server and related machinery and equipment. The Applicant has said that it does not own MIP, routers, cables and wires. The Ap....
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....re given to the Applicant. The Applicant relied on Hon'ble Supreme Court decision in the case of Vodafone International Holdings B.V. (341 ITR 1) to state that it is conventional to incorporate a separate company in each country for carrying on the business operations in that country. It also contended that it cannot be treaty shopping exercise as both India US and India Singapore DTAA are similar. With regard to difference in tax liability pre and post restructuring it was submitted that the Applicant admitted LO of MCI as PE only under MAP settlement under the DTAA. It is submitted that MAP based settlements were made only in order to obviate protracted litigation with the Indian tax authorities and also because the amounts involved in those years were relatively negligible and did not at all justify such litigation. Reliance was placed on the Hon'ble Supreme Court decision in the case of E*Funds IT Solution Inc (supra) wherein it has been held that, a MAP agreement or settlement is in the nature of a concession made by the Applicant which is not binding on the Applicant for assessment years other than those specifically covered by the MAP settlement. 11. The Applicant has rel....
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.... case by stating that the person here was doing sales activity which was a significant activity. It has been contended that in settlement, significant activity of sorting and collating is done by the Applicant. It has been stated by the Applicant that the Revenue has mixed up the distinct concept of agency PE and service PE. The Applicant has again relied upon UAE Exchange Control case (supra) to argue that the settlement activity carried out by BOI is similar to downloading and dispatch activity performed in that case. 11.2 With respect to the Revenue's claim of Indian subsidiary MISPL constituting fixed place PE of the Applicant in India, the Applicant has submitted that LO of MCI was not a PE as it was doing only preparatory and auxiliary services and the fact of there being a PE has not been upheld by any court in India. It has quoted the Hon'ble decision in E*Funds (supra) to contend that MAP settlement does not lay down principle and tax paid prior to Dec 2014 was to buy peace and because the amount involved was not significant. 12. With respect to the Revenue's claim of MISPL constituting a Dependent Agent PE of the Applicant in India, the Applicant has contended that ....
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....t manner. They pay for the services and not for intangibles. The Applicant has also contended that no portion of settlement functions happen in India. The Applicant has relied on the Hon'ble Delhi High Court decision in the case of Formula One World Championship Limited(supra) to support its case that use of brand name, logo etc..is only incidental. The Applicant has further contended that service charges are based on the value and volume of transactions which are processed and hence it cannot be for use of brand name, logo etc.. The Applicant has also contended that it is not at all necessary that the Acquirer Bank should be a bank who has issued MasterCard cards bearing MasterCard logo. It could be a bank who has not issued any credit or debit cards or it would be a bank who has issued non Master Card cards. Even then he has to pay fees to MasterCard. This shows that the fee is for the services and not for royalty. 14.1 With respect to the Revenue's claim of use of equipment/ process to constitute royalty, the Applicant has submitted that customers pay service fee to the Applicant and use of MIP is preparatory and auxiliary. The Applicant has also stated that MIP is not owned ....
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.... of Infrasoft Limited and M Tech India Private Limited in its support. 15. With respect to the Revenue's claim of payment made being in the nature of FTS, the Applicant has relied upon the Hon'ble Supreme Court decision in Bharti Cellular Limited (330 ITR 239) to contend that for service to be technical in nature there has to be an element of human intervention. It has been contended that in its case it is automated process and there is no human intervention. The Applicant has also relied on Hon'ble Supreme Court decision in Kotak Securities Limited (383 ITR 1) in support of its claim that what it provides is standard facility and not services. The Applicant has also relied upon Hon'ble Madras High Court Judgment in the case of Skycell Communications Limited (251 ITR 53) where it was held that the provision of facility for use of an electronic exchange, which had mobile communication network with a switching center did not constitute technical services. The Applicant has also contended that make available requirement is not fulfilled. The Applicant has given examples where use of technical equipment may not be use of technical service, like airline passenger paying for travellin....
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....e fixed to the ground. It is sufficient compliance that it remains on a particular site (Note 5 of OECD commentary on Article 5 of Model Tax Convention). This is also clear from the definition, as explained by the Hon'ble Apex Court in the Formula One case. Thus, even if MIPs are automatic equipment placed at the site of customer banks in India, they can create a PE provided other tests are satisfied. In its written submission, submitted post hearing, the Applicant has indirectly raised an objection on the first issue when it has said that in the cases of Amadeus and Galileo (supra) the assessee was feeding the entry through manual operation, while MIPs are automatic equipment and hence the facts of two cases are different. We shall deal with this objection later. 16.2.3 There is also no dispute that MIPs also pass the test of permanency. They are placed on the site of customer banks throughout the year. Thus, this issue is not in dispute. In fact in the FOWC case, the Hon'ble Apex Court said that it would be sufficient if the fixed place is at the disposal of the foreign entity till the time required by the business. It does not mean forever. The main issues that are required t....
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....ion device which is nothing but a glorified modem. The Revenue on the other hand submitted the extract from Applicant's own submission contained in the application made before us in Form no 34C, Annexure III (item 9) as well as in TP audit report of MISPL for FY 2014-15. It goes as under: "MIPs are special purpose equipment with software embedded therein and consist of Central Processing Unit, Monitor, Router and Multi-protocol label switching unit. MIPs are used for undertaking preliminary examination/validation of information the point of authorization. The preliminary validation generally involves activities such as PIN processing, validation of card codes, names and address verification etc.. In the case of errors, the MIP would alert the acquirer bank/financial institution on the need for a correction and the data is not authorized. If the initial validation is successful, the MIP located at the acquirer bank would transfer the data to the issuer bank's MIP, which performs certain other functions, edits and processes. The MIP at the issuer bank will then direct the data to the issuer bank for further processing and verification. The issuing bank will....
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.... transmit the PIN code number that is received in an encrypted form from the POS machine, in the same encrypted form to the Applicant's processing Center outside India. The verification and validation of the PIN code is subsequently done only by the Issuer Bank, which is then communicated through the Issuer Bank's MIP via the processing center outside India. The above facts also substantiate the point that MIPs are involved in preliminary validation/verification. There is no doubt that final validation (including PIN verification) is done by the issuer bank. However, it is also an admitted fact that preliminary verification/validation of PIN, card codes, names and address is done by MIPs (either at the premise of acquire bank or at the premise of issuer bank). The fact of MIPs raising an alert in case of error has also not be disputed by the Applicant. 16.2.8 Let us also have a look at as to how the authorization activity takes place. When a card holder sweeps his card, it is necessary to verify that he is the right person. For this, first there is a preliminary examination done by the merchant, which happens in India. Then the preliminary validation is done by MIPs located in a....
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....ignificant activity for authorization part of the transaction processing and cannot be said to be preparatory or auxiliary. We have no doubt that the server at Singapore is also doing important activities of securing the transaction and for preventing frauds, and sometimes stand in activities. However, when we have to see whether MIPs create a PE in India we need to look at the functions performed by them in India in detail and decide whether those functions are significant functions or preparatory or auxiliary in character. The functions performed by the facility at Singapore, such as securing of the transaction, prevention of fraud and add on functions performed by server outside India are also significant functions, but these would be important for attribution and apportionment purposes, which is not the issue under discussion. 16.2.9.1 It is an accepted fact that actual authorization is done by the issuer bank and the Applicant facilitates customer banks in doing that work. The work of facilitation involves preliminary validation/verification (performed by MIP in India), security/fraud detection/add on service (preformed by the Applicant in Singapore) and transmission of dat....
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....d upgradation ultimately get charged to the Applicant. Thus MISPL has neither financial nor the technical ability to do maintenance and upgradation. In the written submission post hearing it has been submitted by the Applicant that they have requisite skills to manage the operation of MIPs, though this is not substantiated. We are of the view that managing MIP is different from maintaining and upgrading, which require technical assistance. 16.2.10.3 The Applicant attempted to explain this position through the example of an owner of an electronic instrument, who need not have capability to undertake the maintenance work. This example doesn't help, since in the present case the owner, ie. MISPL does not exercise any of the rights of an owner, such as deciding whether and when to repair the instrument or buy a new one; agreeing to the terms and conditions of repair; whom to engage for repair and at what cost, and so on. In the present case, all these risk mitigation decisions are taken by the Applicant or its overseas AEs on its behalf. They enter into the agreement with third party service providers on their own behalf and not on behalf of the MISPL. The Applicant enters into agre....
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.... only if the fixed place/equipment is involved in all three stages. Involvement in even one stage (without it being preparatory or auxiliary) can create PE, provided they are significant. The distinction of these three stages (authorization, clearance and settlement) would be important for profit attribution and not for creating a PE. 16.2.13 Thus, we hold that the Applicant is carrying out its business of facilitation of authorization of transaction through fixed place, ie. MIPs, since MIPs situated in India are at its disposal. The functions performed by MIPs in facilitation of authorization transaction are not preparatory or auxiliary in character and are significant functions. Hence, MIPs create a PE of the Applicant in India. 16.3 Let us see some of the arguments of the Applicant, other than the functioning and role of MIPs. Its reliance on the decision of the Hon'ble Delhi High Court in the case of UAE Exchange Center Limited (supra) appears to be misplaced, as the facts of this case are different. In that case the LO in India was like a post office company which used to download the remittance particulars through electronic media and then print the cheques/drafts for d....
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.... ordinarily be inclined to accept the Ruling of the Australian Taxation Office (ATO), cited by the Applicant, where it was held by the ATO that the Applicant does not have a PE in Australia on account of MIP, provided the facts are similar. In the Australian case, MIPs were continued to be owned by a group company outside Australia and were not transferred to the Australian subsidiary. But in that case it appears that 'A' co. is tax resident of country A (the Applicant and tax resident of Singapore). 'B' co. is resident of Australia (subsidiary of MasterCard in Australia). 'C' co. is resident of country 'B' (some other MasterCard entity which owns MIPs and is resident in some third state, other than Singapore and Australia). These facts are confirmed by the applicant. Applying these to our case, we have 'A' as our Applicant, 'B' is the MasterCard subsidiary in Australia, and 'C' is MasterCard group entity outside Australia/Singapore, owning the MIPs. The ruling says that the computer processor (MIP) which performs the automated processing services is owned by 'C' co. and is located at each customer's premises. Through the computer processors (i.e MIPs) and through the processing ce....
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....ion processing service. Further, it may not have created PE under Australia Singapore DTAA due to requirement of being "substantial equipment" but it can create PE in India since there is no such requirement under India Singapore DTAA. 17. We now come to the question as to whether the MasterCard Network creates a fixed place PE of the Applicant, in India. Although we have held that MIP constitutes PE but it is important to see whether MasterCard network also creates PE or not. This is for the reason that MIP is involved only in the authorization part of the transaction processing while the MasterCard Network is involved in all the three phases of transaction processing, i.e authorization, clearance and settlement. Thus, this would be relevant for the assessing officer for attribution purposes. 17.1 The Applicant has submitted that MasterCard Network lies outside India and no part of it is in India. However, the Revenue has quoted the following from the TP report of MISPL for FY 14-15: "MCT LLC is responsible for management and maintenance of MasterCard Worldwide Network remotely from the USA. For the same, MCT LLC has entered into various agreements with third party ....
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..... SAM facilitates the transfer of funds for the purpose of financial settlement of cleared transactions and the transfer of funds between MasterCard and its acquirers and issuers. On the basis of net settlement position sent out by SAM, Bank of India merely posts the entries in the accounts of the customer banks for the settlement to get completed. This is a very simple and clerical work which only takes a few minutes of work of one employee of BOI. Due to this low skilled nature of job, BOI is paid service charge of only USD 1500 per month. 17.4 Thus, it can be seen that the settlement position is nothing but the information as to which bank is to pay which bank and how much. It is accepted that in more than 90% of transactions both acquirer banks and issuer banks are in India. In a day, thousands of transactions happen amongst all these issuer banks and acquirer banks. Each transaction would make one bank liable to pay another bank. A sum total of all the transactions between two banks, on a given day, establish settlement position between those two banks. This is clearance. Now the question that arises, from our perspective, is as to whether this is happening in India or outs....
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....ar as the exact settlement is concerned, the Revenue has contended that this is done by Bank of India, since Applicant itself has admitted that settlement means movement of fund between two banks. This movement happens only when Bank of India passes debit and credit entries in the accounts of two banks here in India. Thus, the Revenue has contended that both clearance and settlement happens in India. In fact, Applicant has also admitted in Annexure III of its application that Domestic INR settlement happens in India through the settlement bank account of MCI in India. As discussed earlier, domestic INR settlement accounts for more than 90% of transactions. The Applicant in written submission post hearing has stated that Settlement Function consists of the preparation of the settlement statement by SAM abroad. We do not agree to this, for the reason that the Applicant itself has agreed that the movement of funds between issuer banks and acquirer bank is settlement. The preparation of settlement position is incomplete unless the Bank of India actually moves the fund from one bank to another bank. Thus, settlement happens when Bank of India carries out this movement and this happens i....
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.... by the Revenue on the decision of Delhi ITAT in the cases of Amadeus Global Travel Distribution and Galileo International (supra) to support the case of MasterCard network creating PE in India. In these cases the non-resident enterprise was running a fully automatic computer reservation and distribution system with the ability to perform comprehensive information, communications, reservations, ticketing, distribution and related functions on a worldwide basis for the travel industry, particularly participating airlines, hotels, etc. (hereinafter referred to as 'CRS'). In India CRS was installed on the computer of travel agents. Customers approached the travel agent who used this CRS to transfer the requests to main server outside India which did the processing to throw up the best possible results for hotels and airlines, matching the customers' preferences. On these facts it was held that CRS constitutes PE of the nonresident enterprise in India. What was CRS in the Amadeus and Galileo cases is MIP and application software (Master Connect and Master Card file) in the present case. It is this important instrument and software which conducts the business of the Applicant in India a....
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.... establishments. In an individual case, an activity of a specific kind exercised within the framework of an enterprise may be no more than of an auxiliary character, while being the sole business activity of some other enterprise, such as in the case of advertising or scientific research. Where a laboratory, generally performing nothing but preparatory services for the enterprise to which it belongs, or the advertising division of an enterprise, in certain cases also performs services directly for third parties, its activities will to that extent no longer be of an auxiliary character. The laboratory, or the advertising division, as a whole will then be subject to taxation as a permanent establishment........." 17.5.4 Thus, in order to decide whether a particular activity is preparatory or auxiliary we need to look at the work performed by the enterprise as a whole which is of transaction processing. In the context of transaction processing the work performed by MasterCard Network as outlined above cannot be termed as one of very little significance. Main authorization is done by issuer bank in India. The actual settlement by passing debit or credit entry is done by Bank of Indi....
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....ion System' or 'CRS' means an automated system which processes Booking data and other data to provide any or all of the following functions: (a) the ability to display flight schedules and seat availability; (b) the ability to display and/or quote airline fares; (c) the ability to make airline seat reservations; (d) the ability to issue airline tickets; and (e) the ability to perform any or all of the functions similar to the above functions in respect of hotel, car and other travel related services other than air services;" 17.5.5.1 According to the Applicant, the above-mentioned definition of CRS is critical because it clearly shows and establishes that in fact what was installed in the premises of the Indian travel agent was an integral part of the assessee's worldwide CRS which was seamlessly integrated and inter-connected with the rest of the system operating elsewhere all over the world. As a result, the worldwide CRS database became instantly and continuously a part of the database which was continuously available to and at the disposal of the Indian travel agent at all times. This is what enabled the Indian Travel ....
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....e judgment relied upon by the Applicant is as below: " 8.2 In light of the above provisions in the Income-tax Act and the judicial pronouncements, we may appreciate the facts and deal with the issue. The appellant has developed a fully automatic reservation and distribution system known as Galileo system with ability to perform comprehensive information, communication, reservation, ticketing, distribution and related functions on a worldwide basis. Through this Galileo system, the appellant provides service to various participants, i.e., Airlines and hotels etc..whereby the subscribers who are enrolled through the efforts of NMC can perform the functions of reservations and ticketing etc.. Thus the Galileo system or the CRS is capable not only processing the information of various Airlines for display at one place but also enables the subscribers to book tickets in a way which is a seamless system originating from the desk of the subscriber's computer which may or may not be provided by the appellant but which in all cases are configured and connected to such an extent that such computers can initiate or generate a request for reservation and also receive the information i....
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....network from SITA node to travel agent as evident at page 281 of assessee's paper book No. 1. (3) By Clause 15.3 of the Distribution Agreement, the assessee specifically authorises Interglobe (Galileo India) to conclude agreements with the Travel agents in India in accordance with the model Subscriber Agreement which forms an annexure to the said Agreement. (4) Assessee lays down targets and closely supervise and reviews the performance of Galileo India on day-to-day basis in accordance with the Annual Plan and the service manual prescribed by it as per clause 14 of Distribution Agreement. (5) Assessee allots access code to the travel agents for using the CRS. (6) The assessee's business comprises of : (a) Maintenance and running of CRS; (b) Providing computer modem and software to the travel agents in India so that they can use the CRS for making the bookings which generate charge on the airlines; (c) Assessee hires from SITA and maintains and operates telecommunication network in India so that travel agents could make the bookings. All these activities are integral part of the core business carried on by the ....
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.... premises of the subscriber, leave apart the shifting of such computer from one person to another. Thus the appellant exercises complete control over the computers installed at the premises of the subscribers. In view of our discussion in the immediately preceding paragraph, this amounts to a fixed place of business for carrying on the business of the enterprise in India. But for the supply of computers, the configuration of computers and connectivity which are provided by the appellant either directly or through its agent Interglobe will amount to operating part of its CRS system through such subscribers in India and accordingly PE in the nature of a fixed place of business in India. Thus the appellant can be said to have established a PE within the meaning of paragraph 1 of Article 5 of Indo-Spain Treaty. 17.2 The next question to be considered is if there is a permanent establishment, whether the exception provided in paragraph 3 of Article 5 applies so as to hold that there is no permanent establishment in India. The case of the appellant is that the existence of such computers are merely for the purpose of advertising and the activities are preparatory or auxiliary in....
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....n India referred to here is the one which enables computers to initiate or generate a request for reservation and also receive the information in this regard so as to enable the subscriber to book the airlines seat or hotel room. Thus, it is not a case that main processing of consumer request is done in India, as contended by the Applicant. This also becomes clear from paragraph 9 of the same Galileo judgment which is as under: " 9. The next question therefore, arises is whether having held that there is business connection in India, how much income is chargeable to tax in India. As per section 9(1)(i) of the Act, income accruing or arising whether directly or indirectly through or from any business connection in India shall be deemed to accrue or arise in India. As per clause (a) of Explanation 1 to section 9(1)(i) in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Thus in a given case if all the operations are not carried out in India, the income has ....
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....ually important to note that but for the presence of the assessee in India and the configuration and connectivity being provided in India, the income would not have generated. Thus the initial cause of generation of income is in India also. On the basis of above facts we can reasonably attribute 15 per cent of the Revenue accruing to the assessee in respect of bookings made in India as income accruing or arising in India and chargeable under section 5(2) read with section 9(1)(i) of the Act. 17.5.5.4 Thus, CRS in India only performed the functions of generating requests and receiving end results. Main functions like collecting data base of airlines/hotels, processing of this data to find suitable flight/hotel with appropriate pricing was happening outside India. Thus, we do not accept the contention of the Applicant that in Galileo case (supra), the main processing of customer request was being done in India. Quite clearly this was done overseas and results were sent to the computer in India. Even then, this was found to be enough to create PE. What CRS is doing in Galileo case (supra) is the same what is being done by the application software (Master Connect and MasterCard File....
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....nstance)], D Co -tax resident company of Germany - owned an Internet server installed at a rented place in Switzerland. The company stored programs and dealt with its Swiss client's files, in the server. The server functioned without involvement of D Co's employees in Switzerland. A second company, S Co, which was D CO's affiliate and a Swiss tax resident, managed the server (i.e. computer programs and information about D Co's clients in Switzerland). D Co argued before the German tax authorities that its Swiss server amounted to permanent establishment and its income attributable to it was exempt from German tax. The German tax authorities rejected this argument. In D Co's appeal, the German Tax Court of First Instance held that the server constituted Deco's fixed place of business and a fixed place permanent establishment in Switzerland. The Court's view was that, for a fixed place permanent establishment to exist, it was unnecessary that the server had to be operated by human beings (i.e. employees of D Co, a contractor or any other enterprise). The Court pointed out that any equipment could amount to a fixed place permanent establishment even if it functioned fully automaticall....
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....activities are happening outside India; there cannot be a PE in India, even though significant activities are also happening in India. For deciding whether there is PE in India, we need to see what are the functions performed in India in the context of overall functions performed by the Applicant and whether the tests of PE are passed or not. 17.6 In view of above discussion, we hold that MasterCard Network also creates fixed place PE of the Applicant in India. 18. Now let us examine the role of the Bank of India premises, and whether any fixed place PE is formed on its account. 18.1 The Revenue has contended that the Bank of India space where settlement activity takes place through employees of Bank of India creates a fixed place PE. This is for the reason that there is dedicated team in Bank of India to carry out the settlement activity under the direction and on behalf of the Applicant and these employees of Bank of India have space available to them. The Applicant has objected to this claim of Revenue. 18.2 We have already discussed that more than 90% of transaction involve domestic INR settlement for which Bank of India passes necessary entries. The Applicant himse....
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....r control and supervision of the Applicant and the space occupied by them in Bank of India is at the disposal of the Applicant. It is true that Bank of India is also carrying out other activities as it is an established bank in India. However, it is well understood that for constituting PE the space may not be exclusively used by the non-resident enterprise. OECD has also agreed to this principle in Note 4 of OECD commentary on Article 5 of Model Tax Convention. Thus we hold that Bank of India premise constitutes fixed place PE of the Applicant. 18.4 The Applicant has contended that job of BOI is clerical and they pay only USD 1500 per month for this job. It is not material whether passing debit and credit entry is clerical or what fees is paid. What matters is that this is a settlement and this activity only triggers the movement of fund between banks which is admitted by the Applicant itself as settlement. 18.4.1 Further, the remuneration cannot determine whether the work carried out by Bank of India is significant or not. This is more so for the reason that Bank of India gets other benefit in the form of floating money from all the banks at its disposal without any interes....
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....e 32 of Taxmann's Law and Practice relating to Permanent Establishment written by Ashish Karundia) in which a Norwegian company hired a Swedish sale person who used to work from his home office and used to receive remuneration for that activity. It was held that home office constitutes a PE of the Norwegian company. The Applicant has tried to distinguish the Swedish home office case by stating that the person here was doing sales activity which was a significant activity. It has been contended that in settlement, significant activity of sorting and collating is done by the Applicant. We have already discussed that significant activity in settlement is movement of fund by passing debit and credit entry which is done by BOI in India and hence the objection of the Applicant is not tenable. 18.6.2 The Applicant has again relied upon UAE Exchange Control case (supra) to argue that the settlement activity carried out by BOI is similar to downloading and dispatch activity performed in that case. We have already dealt with this issue earlier when we discussed preparatory and auxiliary activity. This is to be seen in the context of the overall functions performed by the enterprise. Downl....
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....in the hands of MCI or the Applicant and only support services are shown to be carried on by MISPL. Thus, the income offered in India has reduced from more than 50% of revenue from India to about 2.5% of revenue from India. This has resulted in suppression of income in India of the tune of 300 to 400 crore every year. Based on this Revenue has contended that this is a colorable device to reduce the tax liability in India. Revenue has also relied upon the decision of Hon'ble Delhi High Court in the case of CIT v. Abhinandan Investment Limited (supra).This decision has considered various judgments like Hon'ble Supreme Court judgments in McDowell, Vodafone International Holdings BV, Azadi Bachao Andolan, Hon'ble Gujarat High Court decision in the case Banyan and Beery, Sakarlal Balabhai, and concluded that it is important to understand the business purpose behind a transaction. If the main purpose is to contrive a loss, then that is to be disallowed. Based on this it has been stated in the Revenue's report that there was no business purpose to restructure the transaction in India other than to reduce tax liability in India. 19.3 To illustrate the above contention, the following det....
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....CI in India and are still carried out by MISPL(as MISPL had taken over everything) but not shown in the FAR of the MISPL. Therefore, the subsidiary company MISPL creates a PE of Applicant in India. 19.6 With respect to the Revenue's allegation of colorable device, the Applicant has contended that this issue has already been examined by the AAR at the time of admission of the application. This issue of tax avoidance could have been considered only at the time of admission and cannot be considered now. Reliance was placed on Hon'ble AP High Court decision in the case of Sanofi Pasteur Holding SA (supra) to plead that there is no power to review the decision. It has further provided commercial reasoning as to why the APMEA operations were given to the Applicant. The proposed restructuring plan had approval of the Board and evidences were produced in support. It also submitted that this was also accepted by US IRS. Thus the business restructuring was not done with an intention to avoid tax. It further submitted that pursuant to this decision to effect business reorganization, the workforce of the Applicant was substantially increased by more than three times from about 115 (prior to....
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....ucing Customer Business Application (CBA) before the Revenue, the Applicant has submitted that this information does not have any relevance to the core issue arising in the application filed before AAR. It was also submitted that Revenue has already obtained it from Syndicate Bank under section 133(6) of the Act. 19.6.2 With respect to the Revenue's claim of Indian subsidiary MISPL constituting fixed place PE of the Applicant in India, the Applicant has submitted that LO of MCI was not a PE as it was doing only preparatory and auxiliary services and the fact of there being PE has not been upheld by any court in India. It has quoted the E*Funds case (supra) to contend that MAP settlement does not lay down any principle and tax paid prior to Dec 2014 was to buy peace and because the amount involved were not significant. The Applicant has again submitted the commercial reasoning behind restructuring to support that restructuring was not for avoidance of tax. The Applicant has quoted from the reply of various banks that there has been no change in the operation because of restructuring. This does not lead to conclusion that the restructuring was done for avoidance of tax. The Applic....
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....view that there is no PE there should be nil income returned in India. In that case, the assessing authority will look into the PE issue. However, once MCI admits income in its tax return, on account of 100% attribution of profit to India, it means that legally it has accepted carrying out those operations in India through PE. In that situation the assessing authority would not look into this aspect. Thus, MCI having accepted income in India in its tax return cannot at the same time say that it was actually not carrying out these activities. 19.7.2 It is submitted by the Revenue that the assessing officer also has passed an assessment order assessing the income with a finding that there is PE and attributed 100% income from transaction processing activity to that PE, and the same has been accepted by MCI. We would take it that it is carrying on transaction processing activities in India through a PE. The argument that the PE was accepted as the amount was small has also been opposed by the Revenue, as in last four years income disclosed is more than Rs. 100 crore, whereas there was a reduction of Rs. 300 crore due to the change. 19.7.2.1 While we do not hold that there is a c....
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.... between MSCO and MSAS at arm's length, nothing more is to be attributed. The relevant portion of the ruling reads as under: "32.......................Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the PE (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis is undertaken; there is no further need to attribute profits to a PE. The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account all the risk- taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the....
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....90 days in a year (FY 16-17). The purpose of the visits of employees in India was stated by the Applicant (in its reply dated 17th October 2017) as business meeting with clients. Hence, it creates service PE. 20.1.1 With respect to service PE through Bank of India's employees it has been submitted by the Revenue that for service PE, the service could be provided through other personnel as well which in this case are the employees of the Bank of India, which is carrying out settlement functions in India on the direction of the Applicant and the responsibility of the work lies with the Applicant. Thus, a part of transaction processing function of the Applicant is being carried out through other personnel (Bank of India) in India and it creates a service PE. 20.2 The Applicant has not accepted the Revenue's above referred contention regarding service PE. It is submitted that the Revenue has not submitted any evidence to support the contention that visiting employees are rendering services to customer banks. It has been pleaded that the Applicant's system and processes are automated and do not require constant interaction with the customers. Hence, it does not have employees in I....
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.... pass debit and credit entries. Even otherwise, other employees are required to facilitate transaction processing. It is admitted by the Applicant, in its rebuttal, that employees' strength in Singapore increased from 115 (prior to reorganization) to about 400 (after the reorganization). This indicates that there is requirement of human beings to undertake the transaction processing service. 20.2.4 During these proceedings, the Revenue cited the example of Automated Teller Machine (ATM), provided by banks. Customers can get money in cash using a card through an automated machine without going to a bank branch. But that does not mean that there are no humans associated with this rendering service. Even if the main task of disbursing cash is done by an automatic machine, there are human beings who are needed to facilitate that service, such as the guard, the person who checks the functioning of ATM, the person who puts cash in the box and tallies the withdrawal etc. Same is the situation in this case. Even if a part of the process is automated, employees are needed to check if the process is working alright; to interact with clients, to meet clients and take feedback etc..These ar....
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....gaged by the Applicant to render its services. As employees of the bank they render services to the bank in lieu of the salaries they receive from the bank. As bank employees they are rendering services on behalf of the bank to the Applicant. Thus the Revenue has incorrectly understood the role of the bank employees in coming to the conclusion that these bank employees working in the bank premises for the settlement function also constitute a service PE of the Applicant in India. Disagreeing with the Revenue, we hold that the employees of the Bank of India, in India, do not constitute a service PE of the Applicant in India. 21. The Revenue has also claimed that MISPL is legally and economically dependent on the Applicant, being 100% subsidiary, and is a dependent agent PE of the Applicant. It gets instructions from and caters only to the Applicant, and has no business other than related party business, and it is compensated through cost plus remuneration model with no risk being undertaken. The Revenue has quoted from the replies received from various banks (obtained under section 133(6) of the Income-tax Act) about their dealing with employees of the Indian company. The Revenue....
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....s, it cannot be said that the activity is being habitually done by the Applicant. The case of Nortel Networks India International Inc ( 386 ITR 353) has been cited where it has been explained by the Hon'ble High Court that concluding contracts is not the only criteria for constituting the dependent agent PE and such contracts should be concluded habitually. The Applicant has also relied on Note 33.1 of OECD commentary on Article 5 of the Model Tax Convention in support. 21.2 Let us first see what Article 5(8) of India Singapore DTAA says: "8, Notwithstanding the provisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if- (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first-mentione....
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....tomers there is constant interaction between the Applicant and MISPL. This process clearly establishes that orders or agreements are routed through MISPL though the finalization of the contract is by the Applicant in Singapore. To illustrate, if MISPL takes the proposal, vetted by the Applicant, to the customer bank and the bank accepts that proposal, immediately an order is placed to the Applicant through MISPL. In some cases, this may happen after a few rounds of proposals and counter proposals. Though the proposals and counter proposals would be vetted by the Applicant in Singapore, it would ultimately get accepted by the customer banks in India when MISPL brings that proposal or counter proposal to it. 21.2.2.2 In our view, the above position may not satisfy the requirement of "concluding contract" but it certainly satisfies the requirement of "securing order". We have taken support from Delhi ITAT and Hon'ble Delhi High Court judgment in the case of Rolls Royce Plc v DIT [(2008) 19 SOT 42 (ITAT Delhi) affirmed by Hon'ble Delhi High Court(2011) 339 ITR 147 (Del)] to arrive at this conclusion. This case is useful since the provisions of agency PE on account of "securing order....
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....down a precise frequency test." 21.2.3.1 It may be clarified that above comments in OECD commentary are with respect to "authority to conclude contract", since OECD Model Article does not have provision of "securing of order" in the Article concerning dependent agent PE. However, since both "authority to conclude contract" and "securing order" use the term "habitually", the commentary is equally applicable to "securing order" as well. Thus, it is acknowledged that the term "habitually" is to be interpreted in the context of business of the Applicant. When the business is trading and there are hundreds of orders, the term will have a different meaning from that as in our case, where there are only 7 new agreements in three years, as we mentioned in the para above. In our case, if the above process is followed in all the new agreements, even though only 2 or three new contracts are entered into in a year, the requirement of "habitually" would be satisfied. Thus, we have no hesitation in holding that MISPL constitutes a dependent agent PE under Article 5(8) of India Singapore DTAA on account of habitually securing orders wholly for the Applicant. 22. The other possible PE could ....
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....iable, safe and secured system and credible and efficient network. Thus, licensing of IP is not incidental to transaction processing service. The Revenue has also given details as to how huge expenditure is incurred on advertising MasterCard brands in India. The Revenue has also produced an agreement between the Applicant and MCI to show that the Applicant is paying royalty to MCI in the US (the actual owner of brand, logo, trade name, trademark, patent etc.) for use of intangibles in Asia Pacific. The Indian part of the royalty pertains to use of intangibles in India. The Revenue has pointed out the reply of the Applicant that this payment of royalty is for right to carry on business in India, but no agreement has been produced to support that contention. The agreement produced clearly states that the royalty paid by the Applicant to MCI is for use of IP in India. Hence, a part of the fee collected by the Applicant from Indian clients is also for use of IP in India. 23.1.1 The Revenue has also produced a list of patents for transaction processing technology which are registered in India in the name of MCI, and MCI has granted a license to the Applicant for using such patents. T....
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.... by the real nature of the transaction and not by how it has been classified. In Google India Private Limited (supra),the ITAT has held the payments referred to in that case, as royalty, though the same were classified as service. Similarly in Godaddy.com LLC (ITA no 1878/Del/2017) the ITAT Delhi classified the payment as royalty even though the assessee had classified it as service. 23.4 To decide whether a payment is royalty or service, there are certain tests which have been laid down by Hon'ble Delhi High Court in the case of Formula One World championship Limited (FOWC)(supra). Incidentally, both the Applicant and the Revenue have relied upon this judgment. Although the Hon'ble Delhi High Court decided that on facts the payment is not royalty, the Revenue has relied on this judgment since it is of the view that if we examine the five reasons for which Hon'ble Delhi High Court decided in favour of the assessee, and apply these five reasons to the facts of our case, the payment would be classified as royalty in our case. 23.4.1 In brief, FOWC entered into a Race Promotion Contract (RPC) with Jaypee Sports through which it granted Jaypee sports the right to host, stage and ....
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....hosting, staging and promotion of the event". FOWC under the RPC, made available to Jaypee all of the elements which constitute the event. In particular, this includes nominating (to FIA) the promoter's event for inclusion in the official F1 racing calendar; after such inclusion the F1 racing teams with their F1 cars and drivers were bound to participate in Jaypee's event held at the Promoter's racing circuit, strictly in conformity with the requirements of the F1 Sporting and Technical Regulations and the FIA Sporting Code. Therefore, it was held that the grant of F1 rights by the FOWC to Jaypee is merely incidental to the hosting and staging of the event by Jaypee. Unlike RPC and ALA in FOWC, there is no indication in our case that license is granted as incidental to some other rights. 23.4.1.3 At this point we may refer to the MasterCard Electronic License Agreement between MCI (AE of the Applicant) and the Indian customer banks (who pay fees to the Applicant), which were later assigned to the Applicant, and here we find an important clause: "2. Grant of License. MCI grants to Licensee, and Licensee accepts (as granted), a non-exclusive license to use the....
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.... certain reliability and trust associated with MasterCard brand name and network which attracts people to buy these cards. This is also evident from the agreement when it says that MCI has granted Licensee right to use various trademarks and marks owned by it, solely in connection with License's payment card programs. This fact is also admitted by the Applicant in its application before us, where it has submitted that: "the MasterCard network is important for Customers on account of its reliability and broad reach. The network allows the Customers to provide their cardholders and merchants access to a safe and secured transaction processing system. Accordingly, the Applicant will enable its Customers to enhance their businesses by providing a credible and efficient network." Thus, we are of the view that unlike in the case of FOWC, in MasterCard License Agreement, granting of license of trademarks/marks is the main purpose. MCI has granted Licensee right to use various trademarks and marks owned by it solely in connection with License's payment card programs. The payment card programs are programs of Licensee (i.e. of Banks and FIs) and not of MasterCard. 23.4.1.4 It....
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....nding in Ericson case based on lumpsum payment is not applicable in this case. 23.4.2.2 The Hon'ble Delhi High Court also relied on the judgment in the case of Sheraton International Inc (313 ITR 276)in which it pointedly observed that there was no evidence brought on record by the Revenue to enable them to hold that the agreement was a colourable device, in particular, that the payments received were for use of trade mark, brand name and stylized mark "S". In our case, the Revenue has made out a case that the payment of transaction processing is actually for the use of trademark/mark/logo disguised as part of payment for transaction processing fee, and hence our case is different. We also find that the main activity in Sheraton case was provision of hotel rooms and use of trademark was incidental to that. Hence the facts are different in the two cases. 23.4.3 Thus, we do find that the facts of FOWC case are different from the facts of our case and the judgment of Hon'ble Delhi High Court is not applicable on the facts of our case. In fact, in our case the licensing of trademark/mark/logo etc. (IP) is the dominant purpose as can be seen from the license agreement between MCI ....
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....ross Revenues, as determined under U.S. Generally Accepted Accounting Principles, derived from licenses ( including assessments, fees and other Revenue ) and sales of Processing Services in the Territory, less any rebates and incentives, credits, discounts, allowances, returns and refunds with respect to such Revenues and excluding any value-added tax ("VAT"), goods and services tax ("GST"), consumption tax or similar taxes applied to such Revenues. 1.11 "Patents" shall mean and include all patents, patent applications, and patent disclosures (including all related divisions, continuations, continuing prosecution applications, continuations in part, reissues, renewals, reexaminations, and extensions thereof), as set forth on Schedule C, which may be amended from time to time. 1.13 "Processing Services" shall mean and include the transaction processing services that facilitate payments between Cardholders and Merchants. 1.14 "Territory" shall mean and include all of the geographic areas that constitute the Asia Pacific and Middle East and Africa regions under the MasterCard Bylaws and Rules, as may be modified from time-to-time. A list of the countries in ....
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....g normal business hours, to inspect the operations of LICENSEE in connection with the Intellectual Property to confirm that the Services offered by LICENSEE under the Intellectual Property are of a quality adequate to preserve the goodwill and good reputation associated with the Marks, Services and LICENSOR. LICENSOR-shall be responsibilities for all costs associated with such inspections unless otherwise agreed to by the parties. 5.1 Royalties- In consideration for the rights and licenses granted to LICENSEE by LICENSOR under this Agreement, LICENSEE shall pay to LICENSOR royalties equal to a percentage of LICENSEE's Net Revenues, as specified in Schedule D attached hereto. 23.4.3.1 Hence, through this License agreement, MCI US has granted to the Applicant a non exclusive license, with the right to grant sublicenses, to use the Intellectual Property in the Territory (India in our case) solely in connection with the promotion and sale of services. And for these rights and licenses granted by MCI US to the Applicant, the Applicant is paying royalty to MCI US. 23.4.4 Intellectual property is defined in para1.3 of the above agreement and what constitute marks and patent....
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....these intangibles in India. We see a direct nexus. There cannot be a situation where the Applicant is based in Singapore and paying royalty to its US parent company for use of intangibles in India but it does not receive that royalty back from Indian banks to whom these intangibles have been further licensed for use. The clauses of the above referred Agreement were brought out by the Revenue in its report, but have not been rebutted by the Applicant in its submissions or during the course of the hearing in this case. 23.4.4.3 In its written submission, post hearing, the Applicant has only submitted that this agreement is of no relevance or consequence whatsoever to the present case, for the simple reason that MCI is not rendering any transaction processing services or any other services to the Applicant. The objection of the Applicant does not address the real issue. The Applicant has not disputed that it is paying royalty to MCI for use of IPs in India. Whether MCI is rendering transaction processing service or not does not matter. What matters is that these IPs for which the Applicant is paying royalty to MCI, is further sublicensed by the Applicant to various Banks and are us....
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....terCard was only incidental to transaction processing, there was no need to incur such expenditure for advertisement / promotion in India. Thus, this high spend on advertisement / promotion also supports the Revenue's contention that licensing of brand/trademark is not incidental but the main activity, so that people buy credit cards with MasterCard logo. 23.4.5 Based on above reasoning we are of the view that licensing of various IPs in the form of brand/trade name/mark etc. are not incidental to the activity of transaction processing and the payment made by various customer banks in India to the Applicant is also for the use of these IPs and hence is royalty. We also hold that this is effectively connected with various types of PEs that we have discussed. Thus it would get taxed with the PE under Article 7 and not under Article 12. How much of the transaction processing fees would constitute royalty and how much would be in the nature of business income are issues that are not in the domain of the AAR. However, once we have held that it would be taxable under Article 7, the bifurcation may not be material, as the entire amount will get taxed under Article 7 of India Singapore ....
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....irer bank and then by acquirer bank to the Applicant. Issuer bank/Acquirer bank is only a medium for the fee to be ultimately paid to the Applicant by the final consumer. And this consumer uses the intangibles of MasterCard in the form of brand, reputation, trust, reliability, logo etc. and hence constitutes royalty. This classification gets further strength from the fact that after getting this royalty from India, the Applicant pays it to MCI and the Applicant has admitted that this payment to MCI is royalty. 23.4.7 The Applicant has also contended that service charges are with reference to the value and volume of transactions which are processed and hence they cannot be royalty. We have noted from the billing manual, produced by the Applicant and reproduced in the Revenue's report, that payment of fee is also for license fee which are not based on value and volume of transactions and are one time. To illustrate, the licensing agreement clearly talks about MasterCard one time licensing fee and Maestro/Cirrus one time licensing fee. In addition, there are other fees like minimum Revenue fee, warning bulletin fees etc. which are not based on value and volume of transaction. Even ....
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....1 made it clear that payment was against a right to use the process and/or right to use a commercial or scientific equipment. It also relied on the coordinate bench ruling in Poompuhar Shipping Corporation (supra) where it was remarked that the 'retrospective amendment' has thus removed all doubts in so far as the expression 'use or right to use' to be understood in the context of possession, control or location. The Hon'ble Madras High Court held that the Hon'ble Delhi High Court ruling in Asia Satellite Telecommunications Co. Ltd (supra) is not effective after insertion of Explanation 4 and 5. It held that process includes transmission by satellite, cable, optic fibre or any other similar technology and it need not be secret. It also held that there is use of equipment and cable in the transmission of the data/voice from one end to the other and it is difficult to accept the case of the assessee that the nature of transaction is only that of service. 23.5.2 Revenue has pleaded that the facts of the Verizon case (supra) are similar to the present case. In the Verizon case it was DCE/CPE which was installed at the premises of customers, and in this case MIP is installed ....
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....o Andolan (supra) to claim that where provisions of tax treaty is more beneficial then such provisions should be made applicable. The Applicant has relied on Hon'ble Delhi High Court decision in the case of Asia Satellite Communication Co Ltd (supra) to support its argument that charges received are for rendering service and not for use of secret process. The Applicant has also relied upon AAR rulings in the cases of Dell International Services India Private Limited (supra), Cable and Wireless Network India Private limited (supra) and Factset Research systems Inc. (supra) who have reiterated the proposition laid down by Hon'ble Delhi High Court. The Applicant has further contended that the payment made by customer banks is for availing of service and not for the use of a process. The Applicant has also contended that the process is not secret. It has relied upon Delhi ITAT decision in the case of Panamsat International Systems Inc. (supra) to support its contention. The Applicant has also contended that the Revenue's reliance on decision of Bangalore ITAT in the case of Google India (supra) is erroneous, as in that case Google India was using brand name, logo, and right in IPs. Fur....
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....emises they are installed. There is no dispute that control is not with the Banks. The Applicant has relied on the Hon'ble Delhi High Court decision in Asia Satellite (supra) as well as on New Skies Satellite (supra) to claim that since control is not with the user, there cannot be a royalty. With regard to explanation 5 to section 9(1)(vi) of the Act it has been submitted that the Hon'ble Delhi High Court has held in New Skies Satellite NV (supra) that amendment to the domestic law cannot be read into the tax treaty. The Revenue has relied upon the decision of Madras High Court in the case of Verizon Communication Singapore Pte Limited (supra). The Hon'ble Madras High Court in this case, has held that after the amendment introduced in the year 2012, with effect from 01.06.1976, irrespective of possession, control with the payer or use by the payer or the location in India, the consideration would nevertheless be treated as 'royalty'. The Hon'ble Madras High Court relied on the AAR ruling in the case of Cargo Community Network Pte Ltd (supra) as well as Dishnet Wireless Limited (supra) where AAR had remarked that Expln. 5 and 6 to Sec. 9(1)(vi) of the Act made it clear that the....
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....e DTAA and just as in our case, the process in that case was also happening in India. On the other hand, in Asia Satellite and New Skies, the facts were such that use of process and equipment was outside India and only footprint of that use was in India. These were important material facts in these cases for which it was held that there is no royalty. These facts are not present in our case since both the equipment and the process are in India. 23.8.1 The next question is whether it is a secret process. Although Explanation 6 to section 9(i)(vi) of the Act makes it clear that process may not be secret, the Revenue has submitted that the payment is royalty for use of or right to use of secret process in the operation of MIP, which is not in public domain. The Revenue has relied on the agreement between MCI and the Applicant to plead that process technology is intellectual property licensed to the Applicant who in turn has sublicensed it to Indian customers (Banks/FIs). On the other hand the Applicant has contended that the process is not secret. It has relied upon Delhi ITAT decision in the case of Panamsat International Systems Inc. (supra). We find that this decision too was no....
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.... edge payment technologies. The team in India will be developing solutions that enhance online transactions and payments value chain, as well as innovation around mobile and contact less payment services. It further adds that the 2014 acquisitions of Vadodra based C-SAM and Pune based ECS brought MasterCard development and processing expertise to India. Several innovations developed in India are already being integrated into MasterCard solutions. Thus it is evident that patented and secret technology is used in transaction processing, some of which are developed in India. The list of patents granted includes such technologies. Thus, there is use of a secret process and hence, we hold a part of the fee paid to the Applicant is also for use of secret process and hence royalty. It is not necessary that this secret technology is licensed to customer banks. It is sufficient if secret process is used, as the definition of royalty in India Singapore DTAA classifies use of secret process as royalty. This royalty is also effectively connected to the PE created on account of MasterCard Network as well as other PEs. 23.8.3 We do not agree with the Applicant's contention that reliance shoul....
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....llSoft Ireland Limited (AAR no 985 of 2010). It has also relied upon explanation 4 to section 9(1)(vi) of the Act to contend that use of software amounts to transfer of right in copyright and hence it is royalty. 23.8.5 The Applicant has contended that there is no standalone provision of MIP and application software (MasterCard Connect and MasterCard File express) and that the transaction is rendering of transaction processing service. The Applicant has relied upon the Hon'ble Delhi High Court ruling in the case of Infrasoft Limited and M Tech India Private Limited in its support. 23.9 We have considered both the arguments. We have already discussed that classification as done by the Applicant is not important. The fact is that there is use of software, and the legal position is that use of software would amount to royalty. Hence, it needs to be held as royalty. There is nothing like standalone provision of MIP and application software. The use of software inside MIP, and cards in the application software are essential part of the transaction without which no transaction can be completed. The Applicant has relied upon the Hon'ble Delhi High Court ruling in the case of Infraso....
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....echnical or consultancy service provided by MasterCard to its customers in India which make available technical knowledge, experience, skill, know-how in the form of spending habits of the person who uses MasterCard. The fee charged from the banks also include a component for making available technical knowledge, experience in the form of spending habit of persons using MasterCard. Thus, with respect to these advisory services even make available test is satisfied. 25.2 The Applicant has replied by relying upon Hon'ble Supreme Court decision in the case of Bharti Cellular Limited (supra) to contend that for service to be technical in nature there has to be an element of human intervention. It has been contended that in his case it is automated process and there is no human intervention. The Applicant has also relied on the decision in Kotak Securities Limited (SC) (supra) in support of its claim that what he provides is standard facility and not services. The Applicant has also relied upon the judgment in the case of Skycell Communications Limited (Madras) (supra) where it was held that the provision of facility for use of an electronic exchange, which had mobile communication n....
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....ase are different. The operation starts by up linking the signals from the earth stations by the TV channels to the satellite and then after undergoing various processes in the satellite the signals are down linked so as to be made available to the cable operators, who in turn provide these to the public. In this chain of processes it was observed by Delhi ITAT that first is the relation between the TV channels and the assessee, second is the relation between assessee and the cable operators and the third between cable operator and public. In the light of the difference between the use of 'facility' and 'process', the ITAT held that the relation between the cable operators and the public is that of use of 'facility', whereas the first relation between the TV channels and the assessee is for the use of the 'process', as a result of which the programmes uplinked by TV channels become fit for being relayed. 25.3.1.1 Delhi ITAT further observed that the decision of the Hon'ble Madras High Court was in the context of the third relation in the context of their facts, namely, the cable operators and the public. It was explained at p. 58 of the Madras jud....
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....e which is taxable under Article 7 and not under Article 12 of India Singapore DTAA. Since we have already held that there is PE in India, the fee paid will get taxed as business income arising through the PE. 26. In Question no 2 the Applicant has asked whether where a PE of the Applicant (in the form of its Indian subsidiary) is found to exist in India, whether provision of arms' length remuneration to such PE for the activities to be performed in India, would absolve any further attribution of the global profits of the Applicant in India. 26.1 This question is with respect to our ruling where we have held that the Indian Subsidiary MISPL is the PE of the Applicant as fixed place as well as dependent agent. The Applicant has relied on the decision of the Hon'ble Supreme Court in the case of Morgan Stanley (supra), to contend that no further attribution can be made to the PE even if there is a PE. 26.2 The judgment cited by the Applicant is with respect to agency PE and not with respect to fixed place PE. Thus, where a subsidiary is a fixed place PE, the above cited rulings would not apply. More so because, the functions performed and risks undertaken by a nonresident....
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....rying on business in India through a PE, and the right, property or contract in respect of which royalties is paid is effectively connected with such PE, in terms of Article 12(6) of the DTAA between India and Singapore, the royalty is to be taxed on net basis with the income of the PE. Hence, tax is required to be withheld at source at the full applicable rate at which the non-resident is subjected to tax in India. We however agree that all the revenues received by the Applicant from customers in India would not be attributed to the Indian PE since significant activities are also carried out by the Applicant outside India. Thus, there is a need for attribution which is required to be done by the assessing officer. On such attribution of income to the PE, the tax is required to be withheld at full applicable rate at which the nonresident is subjected to tax in India. 28. During course of these proceedings, the Revenue had raised certain issues regarding possibility of change of facts and laws and had requested that ruling should not apply to the new facts and the changed position of law. Examples were cited, such as that (i) the Applicant has not produced details of import of MI....