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2018 (6) TMI 618 - AAR - Income TaxFixed place PE of the Applicant in India - Taxability of fees in respect of the services rendered for use of a global network and infrastructure to process card payment transactions for customers in India - DTAA with Singapore - functions performed by MIPs as significant functions - payment card programs are programs of Licensee (i.e. of Banks and FIs) or MasterCard - consideration for use of intangibles in India - Withholding of tax - Held that - 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. It is clearly laid down in Note 4.1 of OECD commentary on Article 5 of Model Convention that the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal right to own or use that place is therefore required. It is sufficient if it is placed at the disposal of the foreign entity. Thus, the fact that MIPs may not be owned by the Applicant is not relevant, if other tests are satisfied. Applicability of Australian Ruling in India - Held that - 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. Whether the MasterCard Network creates a fixed place PE of the Applicant, in India - Held that - Once we look at MIPs, we can see that MIPs are performing more than what CRS was doing in India. MIPs, apart from generating signal for transaction processing and receiving end results of transaction processing, are also doing activity relating to facilitation of authorization. It has been discussed earlier that the Applicant itself has admitted in the AAR application as well as in TP report of MISPL that 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 MIPs alert the acquirer bank/financial institution on the need for a correction and the data is not authorized. With these additional activities besides sending and receiving signal (which CRS in India was doing in Galileo case) the case of MasterCard network creating a PE is actually stronger. Role of the Bank of India premises, and whether any fixed place PE is formed on its account - Held that - 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. - The fact that BOI is acting as an agent of the Applicant and under its instruction and supervision, and has a space at its disposal, it means that the space is at the disposal of the Applicant. - Bank of India premise constitutes fixed place PE of the Applicant. Role played by the Applicant s subsidiary MISPL in India and whether that can constitute a fixed place PE of the Applicant - Held that - Same activities which were creating a PE for MCI in India and for which full attribution out of transaction processing was done is now shown as only support activities and not actual transaction processing activities. Thus, there are some functions and risk 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 a PE of Applicant in India. Creation of a PE through the Applicant s visiting employees and employees of Bank of India - Held that - 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. Creation of PE through marketing support service - Held that - 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. Taxability of fees to be received by the Applicant from Indian Customers, such as transaction processing fees, assessment fees and transaction related miscellaneous fees - royalty or fee for technical services ( FTS ) - Held that - all banks in their reply to Revenue under section 133(6) of the Act have admitted that the payment made by them to the Applicant is for services and not for royalty. - it can be seen that MCI has granted Licensee right to use various trademarks and marks owned by it, solely in connection with License s payment card programs. Thus, it is clear that the dominant purpose of the agreement is to allow use of intangibles for the payment card programs of licensees, ie. of the banks and FIs. There is no mention of any transaction processing service in this agreement or any other agreement. - the 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. - it would get taxed with the PE under Article 7 and not under Article 12. Nature of fee received for use of equipment, and whether allowing the use of the same would constitute royalty. - Held that - there is no compliance of sales tax at the time of transfer of ownership in Dec 2014, in fact even till today, there is no transfer of ownership under the eyes of law, and hence, the MIPs continue to be owned by the overseas AEs of the Applicant (as before reorganization) and that AEs have given the MIPs to the Applicant under a license. - the MIPs are defacto owned by the Applicant as they are charging fee for cost of MIP installation. Thus, the first test for equipment royalty is held to be satisfied. Whether the fee payable to the Applicant is taxable as FTS under India Singapore DTAA. - Held that - they do not make available technical knowledge, experience, skill, know-how to the service recipient. Hence, they cannot be classified as Fee for Technical Services under Article 12 of India Singapore DTAA. - the part of fee paid to the Applicant, which is not royalty, is business income 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. Process royalty - whether it is a secret process. - Held that - The fact that only three patents are granted so far in India, would not have an impact on the inference that technology is patented and hence secret. Quite clearly, they are patented and hence cannot be known to and be used by the public. Thus these are secret process. - 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. Ruling - (1)The Applicant has a PE in India under the provisions of Article 5 of the India Singapore DTAA in respect of the services rendered/to be rendered with regard to use of a global network and infrastructure to process card payment transactions for Customers in India. There is fixed place PE, service PE and dependent agent PE. (2) Arm s length remuneration to PE on account of Indian Subsidiary for the activities performed / to be performed in India, would not absolve the Applicant from any further attribution of its global profits in India since the FAR of the Indian Subsidiary does not reflect the functions/risks of the Applicant performed/undertaken by it. (3) A part of the fees received/to be received by the Applicant from Indian Customers (comprising transaction processing fees, assessment fees and transaction related miscellaneous fees) would be classified as royalty within the meaning of the term in Article 12 of the India- Singapore DTAA. However, since it is effectively connected to PE, it would be taxed under Article 7 and not under Article 12. The fee cannot be classified as FTS under Article 12 of India-Singapore DTAA. (4) The Applicant is required to withhold tax at source on amount attributed to the PE in India at the full applicable rate at which the non-resident is subjected to tax in India.
Issues Involved:
1. Permanent Establishment (PE) in India. 2. Attribution of global profits to PE. 3. Taxability of fees as royalty or Fee for Technical Services (FTS). 4. Tax withholding at source. Detailed Analysis: 1. Permanent Establishment (PE) in India: - The Applicant, MasterCard Asia Pacific Pte Limited (MAPL), sought an advance ruling on whether it has a PE in India under Article 5 of the India-Singapore DTAA. - The Revenue contended that the Applicant has a fixed place PE through MasterCard Interface Processors (MIPs) in India. MIPs perform significant functions such as preliminary validation of transactions, which are not preparatory or auxiliary. - The Applicant argued that MIPs are owned by its Indian subsidiary and perform only preparatory functions. - The ruling determined that MIPs are at the disposal of the Applicant, perform significant functions in transaction processing, and thus create a fixed place PE. - The MasterCard Network, which includes MIPs, transmission towers, leased lines, and application software, also creates a fixed place PE as it performs significant activities in India. - The Bank of India’s premises, where settlement activities are conducted, constitutes a fixed place PE as the Applicant carries out its functions through Bank of India’s dedicated team. - The Indian subsidiary, MISPL, constitutes a PE as it performs functions and undertakes risks related to transaction processing, which are not fully captured in its FAR profile. - The Applicant’s employees visiting India and employees of Bank of India do not create a service PE. However, the Indian subsidiary, MISPL, constitutes a dependent agent PE as it habitually secures orders for the Applicant. 2. Attribution of Global Profits to PE: - The Applicant argued that if a PE is found in the form of its Indian subsidiary, provision of arm’s length remuneration to such PE would absolve any further attribution of global profits. - The ruling held that arm’s length remuneration to the Indian subsidiary does not absolve further attribution of global profits as the FAR profile of MISPL does not reflect all functions and risks of the Applicant. 3. Taxability of Fees as Royalty or FTS: - The Revenue contended that fees received by the Applicant from Indian customers constitute royalty for the use of trademarks, patents, and other intellectual property. - The Applicant argued that fees are for transaction processing services and not for the use of intellectual property. - The ruling determined that a part of the fees constitutes royalty as the licensing of trademarks and other intellectual property is the dominant purpose of the agreements with Indian customers. - The fees are effectively connected to the PE and thus taxed under Article 7 of the DTAA, not under Article 12. - The fees cannot be classified as FTS under Article 12 of the India-Singapore DTAA as the services provided are standard facilities and do not make available technical knowledge, experience, skill, or know-how. 4. Tax Withholding at Source: - The ruling held that the Applicant is required to withhold tax at source on the amount attributed to the PE in India at the full applicable rate at which the non-resident is subjected to tax in India. Conclusion: - The Applicant has a PE in India under Article 5 of the India-Singapore DTAA. - Arm’s length remuneration to the Indian subsidiary does not absolve further attribution of global profits. - A part of the fees received from Indian customers constitutes royalty and is taxed under Article 7 of the DTAA. - The Applicant is required to withhold tax at source on the amount attributed to the PE in India.
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