TaxTMI 
TaxTMI 
2018 (6) TMI 618
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....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, set cardholder fees or determine interest rates or ....
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.... 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 would typically end up with a NIL bank balance. Settlement is usually in USD. ....
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....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 in India. The Applicant does not own or maintain any Network or MIPs in India. The processing activities such as clearing and settlement ....
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....he 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 certain other functions, edits and processes. The MIP at the issuer bank will then direct the data to the issuer bank for further processing an....
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....ard 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 note from OECD Transfer Pricing Guidelines (accepted by India) with regard to contractual terms of the transaction and analysis of risks in commercial or financial rel....
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.... 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 the Applicant and final cost is charged to the Applicant. The software inside MIP is also shown to be owned by the Applicant in the TP audit report of MISPL as all intan....
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....ia. 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 transferred to MISPL. However, no VAT/GST has been paid on such sale till now even after three years. Thus there is no sale in the eyes of law. Thus the ownership of MIPs remai....
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....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 should be fixed on the ground and for this reliance was placed on Note 5 of OECD commentary on Article 5 of Model Tax Convention. Further, it was submitted that there is no requirement that ....
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....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 behalf of the Applicant, only compiles that information into a consolidated settlement position, which incidentally is also known to banks in India beforehand. Based on this settlement posit....
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....he 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 provided through other personnel as well which in this case is Bank of India. 5.16 The Revenue has also claimed that MISPL is legally and economically dependent on the Applicant and is dependent Agent ....
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....d [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 functions/assets/risks not captured are the one which belong to MISPL as PE of the Applicant. Thus for these functions/assets/risks there is need for separate compensation to MISPL as PE of the Applicant. Ba....
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....tware 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-established rules when there is technical glitch. It also provides certain value added services through data centers based outside India. Thus, the Applicant contended that significant authorization processes take place outs....
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....cessing 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 data integrity to ensure that the transaction data can be processed. GCMS calculates various fees and sends out a file confirmation to the acquirer bank, containing the total count of transactions and any rejected transactio....
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....owed 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 Applicant has also submitted that it does not carry out its business through MIPs and related network that do not belong to it. It has further submitted that MIP and related network do not perform core functions. The Applicant has also....
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....ying 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 relied upon the ruling of the Hon'ble Delhi High Court in the case of UAE Exchange Center Limited vs UOI (313 ITR 94) to support its point that it is only carrying out preparatory and auxiliary activities in India. The Applicant has stated th....
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....icant 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 merely because MISPL is rendering Marketing support service does not mean that it is dependent agent PE. The Applicant has relied upon replies of Yes Bank, Central Bank, South Bank who has stated that they are not aware of role played by MISPL a....
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.... 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 by the Applicant. The Applicant has contended that application software do not serve any purpose on standalone basis. The Applicant has submitted that the facts of Verizon Communication case (supra)are different from the facts of this case. The Applic....
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....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 travelling in aircraft, consumer getting electricity, etc.. The Applicant has also contended that even if these are technical or consultancy services they are not in relation to the application/enjoyment of property for which royalty is received since there is no ....
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....ven 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 to be discussed are whether there is a requirement that MIPs should be owned by the Applicant, and whether they are at the disposal of the Applicant, and also whether they are performing activities which are of preparatory or auxiliary in character. 16.2.4 The first ....
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.... 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 then send a response (generally an approval message) through the MIP at the issuer bank to the MIP at the acquirer bank, which is then passed on to the acquirer bank for transaction approval." (emphasis added). 16.2.6 The above facts, submitted by the Applicant in its application as well a....
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....h 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 acquirer bank premises, which involve preliminary verification of PIN, checking card codes, names and address verification. The actual part of authorization is played by the issuing bank that does the balance checking, PIN checking and final validation which authorizes the transaction. In between, ....
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....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 data which is crucial to authorization (this happens both in India and outside through MIP and MasterCard network). Thus, the initial verification/validation of PIN, card codes, names and address, and encryption and communication of data is important and crucial function in the context of overall functions performed by the Applicant to facilitate ....
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....naging 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 agreement with banks. Thus all decisions with respect to MIPs are taken by the Applicant. All costs get charged to the Applicant. These facts, as brought out by the Revenue in its report, are not disputed by the Applicant. Further, the Applicant itself has admitted in the rebuttal that the software upgrade happens through data centers outside India, howeve....
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....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 delivery. These were held to be subsidiary activities, as the main activity of fund transfer had already happened overseas and only supporting activity was happening in India, subsequently. In our case an important component ie. transaction processing and authorization is happening in India though MIPs. In the case of UAE Exchange, the work performed was of fund ....
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....lian 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 centers that 'C' co. owns and operates in country 'B' (this is some third country where 'C' Company has a processing centre), 'C' co. provides the processing services to 'A' co. and receives fees. Some processing services are performed at the processing center in Australia which is owned by 'B'co. As between 'A' Co. and the customers, it is A co. that is responsible for t....
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.... 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 service providers for the maintenance of the MasterCard Worldwide Network (this includes the MIPs owned by MISPL). The direct and indirect cost of maintaining the MIPs are allocated by MCT LLC to MISPL which forms part of the cost base of processing support services". 17.2 Thus, it is admitted that MIP is part of MasterCard Network and so are the transmission tower, leased lines, fiber optic cable, nodes and in....
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.... 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 outside. There is no doubt that the data relating to transaction between two banks is transferred within India and outside India through transmission towers, leased lines, fiber optic cable, nodes and internet (owned by third party service provider) which is part of MasterCard Network. 17.4.1 The raw data is transferred outside by various banks using the two application software Master Connect and Master Card File express ....
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....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 in India for more than 90% of the transactions. The Applicant in its application before us has also admitted that settlement happens in India for domestic settlement. 17.5 We are of the view that the Revenue is justified in taking a position that clearance and settlement happen in India. We do accept that there are functions performed by GCMS and SAM outside India which are also significant functions. However, it is true th....
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.... 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 and it is installed in India. In the case of Amadeus and Galileo, it is installed inside the computers of travel agents (which could be computers of travel agent modified after including CRS or computer itself provided by assessee or its agent). In our case, the software and process technology (which is part of MIPs and is owned by the Applicant or licensed to it by the owner) is installed in the premises of the Customers (banks/F....
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.... 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 India in India. MIPs do preliminary validation/examination. Then the MasterCard Network helps in transmission of information amongst various entities. The Server in Singapore also does significant work of securing the transaction. Applicant also carries out maintenance of MIP and MasterCard Network. GCMS and SAM consolidate the data and give it final shape. In this background, the task performed by MIP (preliminary verification/validation part of auth....
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....nctions 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 Agent to instantly give a confirmed reservation to a customer in India in respect of a hotel room or an airline seat anywhere in the world. Further, as per the Applicant, it was a fact that a part of the CRS was actually installed in the travel agent's office which enabled the travel agent to instantly issue a confirmed air ticket to a customer in respect of any particular flight of any particular airline. The Applicant believes that it is of utmost importance to understand that it is not as ....
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....rovides 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 in this regard so as to enable the subscriber to book the airlines seat or hotel room. The request which originated from the subscriber's computer ended at the subscriber's computer and on the basis of information made available to the subscriber, reservations were also possible. It is to be noted that all the subscribers in respect of which income is held taxable are situated in India. The equipment, i.e., computer in some cases and the connectivity as well as configuration of the computer in all the ....
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.... 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 assessee and these are not auxiliary or preparatory in nature. The contention of Shri Vyas regarding reliance on the decision in the case of Fisher (supra ) in this case is misplaced. Whether the contract for sale of ticket is completed in India or outside is irrelevant for the purpose of present discussion as we are not to determine the taxability of income of various airlines accruing as a result of sale of tickets through the CRS in India. Thus, the availability of the tickets displayed through the CRS at the desk of travel agents in India is whether offer for sale....
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....uch 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 character and hence there is no fixed place PE in India in view of the Exception provided in paragraph 3 of Article 5. We are unable to accept such a contention. The function of the PE in India is not to advertise its products. The activity of the appellant is developing and maintaining a fully automatic reservation and distribution system with the ability to perform comprehensive information, communication, reservation, ticketing, distribution and related function on a worldwide basis. The computers installed at the premises of the subscribers are connected to the global CRS owned and operated b....
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....(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 to be apportioned between the income accruing in India and income accruing outside India. In the present case, we find that only part of CRS system operates or functions in India. The extent of work in India is only to the extent of generating request and receiving end- result of the process in India. The major functions like collecting the database of various airlines and hotels, which have entered into PCA with the appellant takes place outside India. The computer at Denver in USA processes various data like schedule of flights, timings, pricing, the availability, connection, meal preference, special facil....
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....ions 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) in our case, i.e. sending the request and receiving the result. Like Galileo, the final customer is also in India. The customer swipes a card in India, data flows between two banks in India, and the money too moves in India. Due to these activities income is generated for the Applicant. Thus like Galileo, Revenue generating activity is happening in India. Thus, till this point of time, the facts are quite the same, and relying on Delhi ITAT decisions of Galileo and Amadeus (supra) there is strong case for PE. 17.5.5.5 Further to the above, we are of the view that facts of this case are stronger for the crea....
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....rman 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 automatically without human intervention. In so holding the Court also took into account Art. 5(3)(a) of the Germany-Switzerland tax treaty (which was similar to Art. 5(4)(a) of the OECD MC 2010). As per that provision, the term "permanent establishment" did not include facilities used solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise. In that respect, the Court expressed that only the assets that could be 'itemized' on the enterprise's balance sheet could be regarded as goods and merchandise. Therefore, in the Court's view, Art. 5(3)(a) of the tax treaty did not apply....
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....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 himself has stated that settlement process is essentially the movement of funds between the issuer bank and the acquirer bank. This task (for more than 90% of settlement) is done by BOI in India on behalf of the Applicant through a dedicated team. As discussed earlier, settlement position transaction wise is captured in India and is already known to respective banks. MCI, on behalf of the Applicant, only compiles that information into a consolidated settlement position, which incidentally is also known to banks in India already. Based on this settlement position the actual debit and credit is done by a dedicated team in BOI. If there is an....
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.... 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 interest expense. All banks that use MasterCard have to maintain floating money with Bank of India. This interest free floating money which is at the disposal of Bank of India is sufficient remuneration for Bank of India to carry out the work at low remuneration from MasterCard. Similar example is the case of advance tax payment in India. Banks compete with each other to collect advance tax from taxpayers in India, though they do not get any collection fee from Government of India. This is for the reason that they get to use the floating money in the form of tax collected for some time before remitting it to the Consolidated Fund of India. Thus, t....
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....nt 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. Downloading and dispatching may be auxiliary activity on the facts of one case but not when moving funds between two banks. We have already discussed as to how movement of fund between two banks by passing debit and credit entry is a major settlement activity and that is performed by BOI. Thus UAE Exchange Control case does not appear to be applicable on the facts of our case. 19. Next is the role played by the Applicant's subsidiary MISPL in India and whether that can constitute a fixed place PE of the Applicant. 19.1 The Revenue has submitted that till Dec 2014, MCI had a liaison office in India, and it (through its overseas AE) owned MIPs which wer....
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....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 details are given for the period prior to 1stDec 2014: - Assessment Year Income shown in the tax return by the assessee (MCI) GNOP rate declared by the assessee (MCI) GNOP rate agreed under MAP 2005-06 5.17 crore 14.64% 18.14% 2006-07 9.17 crore 16.55% No MAP in this case 2007-08 22.85 crore 22.85% 23.85% 2008-09 34.91 crore 30.76% 30.76% 2009-10 58.62 crore 40.16% MAP pending 2010-11 83.62 crore 45.82% MAP Pending 2011-12 105.05 crore 50.47% No MAP request 2012-13 128.99 crore 52.32% No MAP request 2013-14 171.16 crore No MAP request 2014-15 224.24 crore 55.43% No MAP request &nb....
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....epted 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 reorganization) to about 400 approx (after the reorganization). Indian operations just formed 4.54% of total APMEA operation and were carried out after business reorganization of many other countries in that region. Thus it claimed that business reorganization was carried out purely on grounds of business efficiency and commercial expediency. The Applicant relied on SC decision in the case of Vodafone International Holdings B.V. (supra) to support 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. 19.6.1 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 submitted that MAP based ....
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.... 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 Application submitted that the ownership of MIPs is with MISPL. The Applicant has contended that core activities are happening outside India, and that no facilities, personnel, premise of MISPL are at the disposal of the Applicant. The Applicant has submitted that under Article 5(10) of DTAA, subsidiary cannot be regarded as the PE, as held in the case of Morgan Stanley (supra). 19.7 We have gone through both the submissions of the Applicant and the Revenue. With regard to the reasons for restructuring/reorganization, we agree with the Applicant that there were reasons of business efficiency and commercial expediency for the operations to move from USA to Singapore. Board meeting minutes, conversation with US IRS, increase in employee strength, catering to entire APMEA region etc. necessitated such a move. Even otherwise, it is not for the Revenue to decide for the Applicant as to what structure is most sui....
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....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 colourable device we do notice that the transaction processing activity was earlier shown to be carried out by the office of MCI in India. However, MISPL has only shown these as support services in its FAR. Thus, there are some functions and risks related to transaction processing which were earlier carried out by MCI 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 PE of Applicant in India. The fact that MISPL is carrying on work of the Applicant, to that extent facility, service, personnel and premise of MISPL are at the disposal of the Applicant. This is for the reason that it is through these facility, service, personnel and premise, the Applicant is carrying on transaction processing activity and undertaking risks which are not reflected in the FAR of MISPL. 19.7.3 We will also like to con....
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.... 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 taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of Economic Nexus is an important feature of Attributable Profits (profits attributable to the PE)." This ruling actually supports the case of MISPL being PE of the Applicant. Since in our case we find that there are functions being carried out by MISPL on behalf of the Applicant, which are not reflected in the FAR profile of MISPL, hence an attribution on this score could be considered by the assessing officer. However, since the valuation or TP issues are not dealt with by the AAR and are beyond its scope, we shall not deal with this issue any further. 19.7.5 The Revenue has also quoted Spanish Roche Vitamins case and B....
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....he 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 India and do not provide service through them. It has been further submitted that the infrastructure and network is present outside India. Hence, there cannot be a service PE in India. Relying on the case of Morgan Stanley (supra) it is submitted that such activities should be categorized as stewardship in nature. The settlement activity is happening outside India. BOI is an independent entity which is carrying on minimal and clerical work for which it is getting compensation at arm's length. 20.2.1 We have considered the submission of both Revenue and the Applicant. The India Singapore DTAA under Article 5(6) states that: " 6. An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12, within a Contracting State through employees or other personnel, but only i....
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....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 are part of the service rendered to clients and are not steward activities. In our view these are part of service that Applicant renders to clients in India. Taking feedback is also part of service provider activity as it improves services to the customer. When employees visit India to inform clients about new products, this is also part of service that would be provided by the Applicant to these clients. In the context of transaction processing service that the Applicant is providing, this is an integral part of the Applicant's profession to provide new avenues of service to clients. Thus, we are of the view that the employees of the Applicant visiting India are providing services to Indian clients and hence, once they cross the threshold of 90 days in a year, a service PE is created. 20.2.5 The Applicant has relied upon the judgment in the case of Morgan Stanley (supra) to plead that stewardship activities cannot create service PE. The facts of the case are diff....
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....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 has also claimed that Indian subsidiary is securing orders for the Applicant. The India Singapore treaty has a clause for securing orders also. It has been claimed that the Indian subsidiary is securing orders from Indian clients and that creates a dependent agent PE even though the terms of the contracts are finalized by the Applicant. 21.1 The Applicant has opposed the above view of the Revenue. It is contended that merely because MISPL is rendering Marketing support service does not mean that it is dependent agent PE. The Applicant has relied upon the replies received from Yes Bank, Central Bank and South Bank who have stated that they are not aware of the role played by MISPL at the time of contract renewal. The Applicant has also relied on the statements of First Rand Bank, Canara Bank and Andhra Bank to contend that they have categorically said that MISPL is not involved. It is submitted that MISPL was not even incorporated when agreement with Andhra Bank was s....
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.... 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-mentioned State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise; or (c) he habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control, as that enterprise. 21.2.1 Clauses (a) and (c) may of relevance to us. Clause (a) talks about an agent habitually concluding contracts, on behalf of the non-resident enterprise. We agree with the Applicant that Revenue has produced no evidence to invoke this clause. The replies received from the banks in response to the information called for by the Revenue under section 133(6) of the Act, and discussed by the Applicant, clearly suggest that MISPL is not habitually concluding contracts. Almost all the banks have denied MISPL's role in this regard or have expressed lack of any information on the same. We do not have before us any evidence placed on....
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....) 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" in India Singapore DTAA are the same as in India UK DTAA. In this case of India UK DTAA, Rolls Royce Plc supplied aero engines and spare parts to Indian customers though the support services were provided through a UK incorporated subsidiary having an office in India. The UK incorporated subsidiary provided services such as procuring orders, organization of events and conferences in India, media relations and administrative support. The UK incorporated subsidiary being a dependent agent was not disputed by the taxpayer. The ITAT, Delhi observed that the UK incorporated subsidiary habitually secures orders in India for the taxpayer, and as a practice no customer in India sends its order directly to the taxpayer. They are required to be routed only through the subsidiary. Accordingly, it was held that an Agency PE is created. In our case, there are very few orders. 21.2.2.3 The case before us is not a case where there are several orders. There would be only a few agreements with new banks during the year an....
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....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 be on account of the employees taken on deputation. However, the Revenue has submitted that it has not examined the aspect of employees of the Applicant on deputation to MISPL since the Applicant vide reply dated 20th Nov 2017 has submitted that no employee was ever deputed to MISPL. Under these circumstances the Revenue did not press the point of a PE being created due to deputation of employees to Indian subsidiary. Revenue has pleaded that if new facts emerge later, the department would like to examine afresh on this issue as to whether it creates PE. Since the Applicant has categorically stated that none of its employee has ever been deputed to MISPL, we would like to consider that there is no PE on this account at present, unless subsequent facts are suggestive of a different picture. In that case, of course, this Ruling on this issue would become inapplicable. 23. We now come to question number 3, ie. whether, the fees to be received by the Applicant from Indian Customers, such as transaction processing fees, assess....
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....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. The Revenue has also relied on the decision of Bangalore ITAT in the case of Google India Private Limited (supra) to support its contention that licensing of trademark was the main activity and was not incidental. 23.2 With respect to the Revenue's claim of use of brand name, trademarks and marks, logo, patent etc. to constitute royalty, the Applicant has contended that all banks in their reply have submitted that the fees are for transaction processing service and not royalty. It is further contended by the Applicant that customer banks are not concerned with the machinery, equipment and the intangibles that are used for rendering transaction processing services. The banks only want their transactions to get authorized, cleared and settled in an efficient manner. They pay for the services and not for the intangibles. The Applicant has of course been contending that no portion of settlement functions happen in India. The Applicant has relied on Hon'ble Delhi High Court judgment in the case of Formula One World Championship Limit....
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.... 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 promote the Formula One Grand Prix of India event for a consideration of USD 40 million. An Artworks License Agreement (ALA) was also entered into the same day through which Jaypee was permitted the use of certain marks and intellectual property belonging to FOWC, for a consideration of USD 1. One of the questions before AAR was if the payment of USD 40 million is also for the use of marks and IP and hence royalty. AAR concluded that it was royalty. However, in appeal Hon'ble Delhi High Court held that the payment is not royalty as the use of logo, trademark etc. is only incidental. With this background, let us examine the reasoning of Hon'ble Delhi High Court in FOWC and examine whether it applies to the facts of our case. 23.4.1.1 The Hon'ble Delhi High Court had relied upon the Note 10.1 of OECD commentary on Article 12 of the Model Convention. According to this Note, payments solely made in consideration for obtaining the exclusive distribution rights of a product or service in a given territory are not royalty, since the resident ....
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....important clause: "2. Grant of License. MCI grants to Licensee, and Licensee accepts (as granted), a non-exclusive license to use the Marks now identified in Schedule A of this License Agreement solely in connection with Licensee's payment card programs in the geographic area(s) and to the extent indicated in Schedule A; presided that such uses and such programs comply with the quality assurance and other standards set forth in the rules, procedures, policies, bulletins, memoranda, actions of the board of directors, and other directives adopted, modified, supplemented, changed or rescinded, from time to time in connection with such Marks (each, a "Rule"). Upon application by Licensee, and approval by MCI, MCI may, from time to time, amend Schedule A by adding new trademarks/service marks or by modification of existing Marks, in which event, such added or modified trademark/service marks shall be included in the defined term Marks for purposes of this License Agreement. Licensee may use a particular Mark only in the manner authorized in Schedule A and only after the date indicated on Schedule A for such Mark." From this it can be seen that MCI has granted Licensee right to us....
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....d programs. The payment card programs are programs of Licensee (i.e. of Banks and FIs) and not of MasterCard. 23.4.1.4 It was also noted by the Hon'ble Delhi High Court in the FOWC case that there are strong indications that the parties did not intend, through the RPC and the ALA, to license the trademark. They most certainly are not for the use of trademarks or IP rights, but rather for the grant of the privilege of staging, hosting and promoting the Event at the promoter's racing circuit in Noida(NCR). This is a finding of facts. It was also observed that Jaypee's permitted use, as it were, was for a limited duration and of an extremely restricted manner; as event promoter and the host Jaypee had to publicize the F1 Grand Prix Championship. Therefore, it was bound to use the F1 marks, logos and devices. 23.4.1.5 Unlike RPC and ALA in FOWC, there is clear indication in our case that the parties intend to license the trademark. In fact the agreement between the Applicant and customer banks is quite clear that the dominant purpose is to license the trademark/mark. The Agreement has no reference to transaction processing. Further, unlike FOWC, the use of trademark/mark is not f....
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....f trademark/mark/logo etc. (IP) is the dominant purpose as can be seen from the license agreement between MCI US (the actual owner of these IPs) and the Applicant, which is actually for licensing of intangibles referred to as intellectual property (IP) in the agreement. This agreement was submitted by the Applicant to the Revenue and was also produced before us. Some of the relevant clauses of this agreement are: "WHEREAS, LICENSOR owns the entire right, title and interest in and to certain Intellectual Property (as defined in Section 1.3 below) relating to the design, development, marketing, distribution and license of global payment solutions; WHEREAS, LICENSEE is a wholly owned indirect subsidiary of LICENSOR; and WHEREAS, LICENSEE desires to acquire, and LICENSOR desires to grant to LICENSEE, certain rights to use and sublicense the Intellectual Property in conjunction with the promotion, performance and sublicensing of the Services. 1.3 "Intellectual mean and include any and all inventions, Patents (as defined in Section 1.11), works of authorship, copyrights, Mark (as defined in Section 1.4), trade secrets, computer programs (in source code and object code form), flow....
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.... from time-to-time. A list of the countries in the Territory are attached hereto as Schedule E, which may be amended from time to time. 2 Grant of License; Assignment of MLAs; Ownership Rights Reserved. 2.1 Grant of License. Subject to the terms and conditions set forth in this Agreement, LICENSOR hereby grants to LICENSEE a non-exclusive license, with the right to grant sublicenses, to use the Intellectual Property in the Territory solely in connection with the promotion and sale of the Services (the "License"). 2.2 Sublicensing Rights. LICENSOR hereby grants to LICENSEE the right to grant sublicenses of the rights granted in the License solely to Member Banks and MCI Affiliates. LICENSEE shall be responsible for enforcing the terms and conditions in the MLAs and shall provide regular reports to LICENSOR on the Member Banks' compliance with the MLAs and the MCI Affiliates' compliance the MCI Affiliate License Agreements. 2.3 Assignment of MLAs. LICENSOR hereby assigns to LICENSEE all of its rights and obligations under the MLAs, and LICENSEE hereby accepts such assignment and assumes such obligations. LICENSOR shall give notice of this assignment to the other parti....
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....defined in paras 1.4 and 1.11 above. Intellectual property includes trade mark, service mark, trade name, logo, patents, inventions, computer programs, copyright, trade secrets, process technology etc. Quite clearly the royalty paid by Applicant to MCI US (in INR) is for the use of intellectual property in India for and in connection with the promotion and sale of services. Intellectual property in the form of brand, logo, patents, marks etc. are almost always used for promotion and sale of goods or services, and in this case the agreement clearly establishes that royalty paid is for use of these intangibles in India. The Applicant has further licensed these IPs to banks so that banks can use them for selling their cards which in turn would increase the transaction processing activity of the Applicant. By using these IPs, banks/FIs were issuing cards to its customers. These customers of banks/FIs see the MasterCard logo, marks etc. and buy these cads for the trust, brand name and reliability associated with such logo, marks etc.. This in turn helps Master Card to increase the transactions on its network and hence more Revenue from Banks/FIs. Thus, the agreement is clearly for use o....
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....banks in India for selling their cards. Thus, the payment received by the Applicant represents consideration for use of the IPs in India and hence is to be classified as royalty. 23.4.4.4 The Applicant has further submitted in its written submission filed post hearing that, in the MLA entered into between the Applicant and its customers in India, a license or permission to use the said trademark/logos has been given not separately/independently, but only as an inseparable part of the package of services rendered by the Applicant to its Indian customers. In other words, there is no grant of any license to use the trademark/logos independently from the card transaction processing services availed of by the said customers from the Applicant. We have already discussed this issue earlier when we discussed that the license agreement between the Applicant and customer banks (earlier between MCI and customer banks which got assigned to the Applicant post restructuring) clearly states that banks are allowed to use these trademarks/logos solely in connection with bank's payment card programs. Thus it is clear that the dominant purpose of the agreement is to allow use of intangibles for the ....
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....riate attribution by the assessing officer. 23.4.6 The Applicant has also contended that the customer banks are not concerned with the machinery, equipment and the intangibles that are used for rendering transaction processing services. The banks only want their transactions to get authorized, cleared and settlement in an efficient manner. They pay for the services and not for intangibles. It is true that customer banks pay for the service. But they also pay for licensing of IPs which they have taken on license from the Applicant for selling their cards. This licensing of IPs is not incidental to the transaction processing service because that service is provided by the Applicant, and IPs are used by the banks for selling their cards (and not Applicant's cards). In fact, the use of IPs is actually by the final consumers who buy MasterCard debit/credit card based on its brand, logo, reputation, reliability, trust, etc.. It is these final consumers (the holder of credit/debit card) who are ultimately making the payment for the services. It may appear that it is banks that are making payment to the Applicant, but in reality the incidence of this payment falls on final consumers as me....
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....ent could also be based on volume and value of transactions, for example, the advertisement and use of intangibles to increase the use of MasterCard in India reflect a relationship with the value and volume of transactions in India. In CGI Information Systems and Management Consultants Pvt. Ltd. [ITA No. 209/2008] (Karnataka), w.r.t Cost Sharing Arrangement as a basis, it was held that the methodology of payment does not alter the nature of the arrangement, and receipt under such an arrangement could be in the nature of Royalty, irrespective of the mode of payment. In fact, in the FOWC case (supra) the fact of lump sum payment went against its characterization as royalty. 23.5 Another issue raised by the Revenue is with regard to the use of equipment, and whether allowing the use of the same would constitute royalty. It is contended that the use of MIP along with MasterCard network and processing technology constitute equipment/process royalty. The Revenue has contended that the Applicant is the real owner or licensee of MIP though on paper it is shown to be owned by MISPL. MIPs continue to be owned by overseas AEs even after 1st Dec 2014 and are licensed to the Applicant. The Pro....
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....mers. Master Connect and MasterCard File express applications owned by Applicant (or under license to it) are used by Banks/FIs in India. In both cases, the payment is actually for use of this equipment and the network associated with the equipment (cable, optical fibre, internet etc.) is used to transfer the data. By placing the equipment in the premises of the customers, the customer acquired significant, economic or possessory interest in the equipment of the Applicant to the extent of the dedicated network hired by the customer, which enable it to carry out its functions. Revenue has also pleaded that Note 9.1 of OECD commentary on Article 12 only requires physical possession with the customer to constitute equipment royalty for cases where in the equipment royalty provision is there, and there is no condition of control being with the customer. Thus, requirement of control is not a Treaty requirement and it can always be clarified through clarificatory amendment in domestic law. The insertion of Explanation 5, so far as it gives clarification on 'control', does not amount to overriding the DTAA as there is no requirement of control in the DTAA. Revenue has also pleaded that th....
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.... 23.6 We have considered the arguments of both the Applicant and the Revenue. In order to classify a payment of fees as royalty for use of equipment (MIP), it is necessary that MIP is to be owned by the Applicant or is under license to it. The Revenue has cited Verizon case (supra) but in that case the CPE installed at the premises of the customers were owned by the assessee. In our case the MIPs are shown to be owned by MISPL. The Revenue has made a claim that effectively MIP is owned by the Applicant. This is based on the submission that MIPs are under the control of the Applicant, a stand that we have accepted earlier, and that ownership of MIPs were not transferred under ST/VAT as no invoices were issued and these taxes were not paid. The Applicant has claimed that the seller of MIPs has paid capital gains tax and has been allowed depreciation by the assessing officer under section 143(3) of the Act. There is no dispute on these facts. But we are of the view that the main purpose of Income- tax Act is only to determine taxable income. For a transfer of ownership, a sale must be effected and sales tax/VAT paid. Only then it is complete. Hence, the latter is a better determinant ....
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....the process and/or right to use a commercial or scientific equipment. The Hon'ble Madras High Court 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' is to be understood in the context of possession, control or location. The Revenue has also pleaded that the Hon'ble Madras High Court decision should be relied upon as it is on the India Singapore DTAA. Revenue has also pleaded that Note 9.1 of OECD commentary on Article 12 only requires physical possession with the customer to constitute equipment royalty for cases where, in Treaty, equipment royalty provision is there, and there is no condition of control being with the customer. Thus, requirement of control is not a treaty requirement and it can always be clarified through a clarificatory amendment in domestic law. 23.7.1 We are of the view that the Hon'ble Madras High Court decision in Verizon Communication (supra) has more persuasive value than Hon'ble Delhi High Court decision since Verizon case is on India Singapore DTAA, which is relevant to our case....
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....nication which was on the India Singapore treaty has clearly held that the process need not be secret. Without prejudice to this, in Panamsat there was a factual finding that transponder technology is available off the shelf in the form of published literature and hence it is not a secret process. However, the facts in our case are different. There is no published technology of transaction processing. If we see the list of patents filed by the Applicant in India (which were produced as an annexure to license agreement between the Applicant and MCI US) we can see that there are a number of patents related to process used for transaction processing. Some examples are: a system and method for secure telephone and computer transaction, customer authentication in e-commerce transaction, a system for authenticating card holder transaction with a merchant on an electronic network, method and system for authorizing a transaction using a dynamic authorization code, system and method for generating collision free identifiers for financial transaction cards, method and system for using contactless payment cards, method and system for conducting contact less payment cards, reference equipment ....
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.... in the case of Google India since it was the case of a related party and the facts are not the same. We are of the view that there is no need for two parties to be related to each other to constitute a payment as royalty. The Applicant in its rebuttal and written submission post hearing, has submitted that the facts of our case are different from facts of Karnataka ITAT judgment in Google India case (supra). It is true that exact facts are different but material facts for which the ITAT held the payment as royalty in the Google case are similar to facts in our case. Like in the Google case, in our case as well, right in intellectual property of master card is allowed to be used by Indian customers. Indian customers are allowed to use trademark of MasterCard to sell the cards owned by them. Further, intellectual property in the MIP and in the Master Card network (in the form of software and process technology) is used for authorization, clearance and settlement. This process works only with the help of patented tools, software and process technology owned by MCI and licensed to the Applicant. Without the use of these intangibles, the entire process of authorization, clearance and s....
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.... in the case of SkillSoft Ireland Limited (supra) considered the decision of Hon'ble Delhi High Court in the case of Infrasoft and still ruled that use of software is royalty. Hence, we also hold that the use of software is royalty and is effectively connected to the PE. 24. In its written submission, post hearing, the Applicant has submitted that facts of the Skillsoft case(supra) and Synopsis case (supra) are different. These judgments deal with sales of packaged software, which carry a license granted by the owner to make copies of the said software for use on the purchaser's hardware. On the basis of said grant of license, it was successfully contended by the Revenue that payments were in the nature of royalty. There is no such provision of software, either in a sale or license basis, by the Applicant to any of its customers. We do not agree with this submission of the Applicant. In these two cases there was no license to copy and sell the software. What was allowed under license was only to copy the software on the computer enabling the user to use the software. We find similar facts in the case before us. Customer banks have to copy the application software on their computer....
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.... services. The Applicant has also contended that in its case, the 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 travelling in aircraft, and a consumer getting electricity. The Applicant has also contended that even if these are technical or consultancy services they are not in relation to the application/enjoyment of property for which royalty is received since there is no royalty in this case. The Applicant also submitted that since "make available" test is not satisfied, it cannot be taxed as FTS under the India Singapore DTAA. Various case laws have been relied upon. 25.3 Before we examine the question of applicability of FTS provision in the India Singapore DTAA, we need to see whether the service is a facility as laid down by various courts. Hon'ble Supreme Court in Kotak Securities Limited (supra) has stated that fees paid in connection with standard facility cannot be classified as FTS. Although the Applicant has relied upon Bharti Cellular Limited (SC) (supra) as well, however, in Kotak Securities subsequently it was held that modern day s....
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....erson receives such transmission of television signals through the cable provided by the cable operators, it can't be said that the home owner, who has such a cable connection, is receiving a technical service. No doubt the 'public' (analogous to the subscribers to the cellular phone in that case) use the facility provided by the cable operators (analogous to the petitioners in that case) but the payment made by the TV channels for receiving, processing and relaying the programmes is for the use of the process provided to them. Thus, the Revenue has pleaded that the relation between the banks and the Applicant is for the use of process, though the relation between final user of cards and the Applicant may be of use of a facility. 25.3.2 We are unable to agree with the stand taken by the Revenue on the above issue. We have already held that ultimately the beneficiary is the final consumer who is using the card. Whether a particular payment is royalty or service or facility needs to be seen from his perspective. Banks are only a medium for payment of fee to the Applicant. Hence, we hold that the relation between final consumer and the Applicant is of use of a standard fa....
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.... the subsidiary. To illustrate, in this case there was a PE in India. All the functions performed by this PE, all assets/liabilities of this PE were taken over by MISPL. However, the FAR profile of MISPL does not capture the full functions performed, assets employed and risk undertaken by erstwhile PE. Thus there are functions that are being performed, risks that are being undertaken by MISPL on behalf of Applicant which are not reflected in its FAR. As MISPL constitutes a PE of the Applicant, the Assessing Officer may consider a further attribution to this PE on this score. 26.3 Coming to agency PE, we have already discussed the decision in Morgan Stanley (supra) earlier. Even in the case of dependent agent PE, the FAR profile of the Applicant AE is different from FAR of the dependent agent (Indian subsidiary). It is only when the two FAR are the same that one can say that there cannot be any further attribution. We have already held earlier that in this case the PE of the Applicant created through Indian subsidiary (agency PE) is entering into contract with Indian Customers by securing orders. This function performed and risks undertaken are not reflected in the FAR profile of t....