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TMI Blog2018 (6) TMI 618X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomers ) in APMEA region. The Applicant does not issue cards, extend credit to cardholders, set cardholder fees or determine interest rates or fees charged to cardholders using MasterCard products. 2.3 The services are provided by the Applicant to APMEA Customers pursuant to Master License Agreements ( MLA ), which the Applicant signs with each and every Customer in the APMEA region (including those based in India, pursuant to the proposed business operating mechanism to be adopted in India). Consequent to the terms of a MLA, the Applicant charges its Customers transaction processing fees relating to authorization, clearing and settlement of transactions. The Applicant also receives assessment fees for building and maintaining a processing network that serves the needs of customers globally, for setting up and maintaining a set of rules that govern the authorization, clearing and settlement process for every payment transaction, so as to maintain the integrity and reputation of its network and also for guaranteeing settlement between the member banks/Customers for payment transactions processed by MasterCard. Additionally, it receives miscellaneous revenue for the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urs successfully across the issuers and acquirers, the settlement bank account would typically end up with a NIL bank balance. Settlement is usually in USD. In some countries like India, alternative settlement options may be made available depending on the market demand and other factors. 4. The Issuer pays the Acquirer an amount equal to the value of the transaction, less interchange fees and posts the transaction to the Cardholder account. 5. The Issuer issues the Cardholder with a bill to collect the amount of the purchase. 2.6 The processing of electronic payment transactions involves significant steps such as initial level verification and validation of the transaction, authorization, and thereafter clearing and settlement. The two main processing centers of the MasterCard group are in the USA, owned by MasterCard Technologies LLC ( MCTLLC ), a wholly owned direct subsidiary of MCI. The other processing centers are in Belgium and Singapore. The Singapore processing centre is owned by the Applicant. 2.7 The Customer is provided with a MasterCard Interface Processor ( MIP ) that connects to MasterCard's Network and processing centers. A MIP is about the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporated 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 of transactions shall be undertaken by the Applicant entirely from outside India and no portion of the same shall be undertaken in India. The information for carrying out the processing activities shall be transmitted outside India by MIPs, which shall be owned by the Indian subsidiary. 4.2 As with Customers in other countries in the APMEA region, the Applicant will enter into new MLAs or assume the rights and/or obligations under existing MLAs via assignment of such agreements with its Indian Customers. The MLAs enable the Customers to use the MasterCard Network to process payment transactions that occur between the cardholders and merchants and to allow its Customers to display the MasterCard logo on their cards and other electronic payment platforms, so as to identify the MasterCard network used to process the payment transactions. No fee is charged to the Customers for displaying the MasterCard logo, since such use is merely incidental to the principal purpose of the MLA, which is to pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 issuer 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. 4.5 A given transaction is eventually authorized by the issuer bank and post authorization, the clearing and settlement takes place at the MasterCard Worldwide network outside India. In India, the settlement is intended to happen under either of the 3 following options: USD settlement, through settlement bank account outside India In this case, the settlement between the acquirer and the issuer banks shall happen in US dollars through the settlement bank account of MCI outside of India. Domestic INR settlement through settlement bank account in India In this case, the settlement between the acquirer and the issuer banks shall happen in Indian Rupees through the settlement bank account of MCI in India. Cross border settlement in INR through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 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 relations. Through these the Revenue has argued that we need to see actual conduct and for this we need to delineate the transactions. Once we do this we can find out if the payment is for transaction processing or for royalty or for both. This will also help in finding out if the work done in India is preparatory or auxiliary. This will further help us to identify who actually is the beneficiary of this service/use of intangibles and from whom this fee comes. Revenue also contended that the identification of risk is important to see who has the control over the risk and who has financial capacity to undertake the risk in connection with MIPs. This will help us decide who the actual owner of MIPs is and who has control over MIPs. Revenue also discussed that compensation should be based on economic activity carried out and value created in India. While the main economic activity is carried out in India and value is created in India, it is not adequately compensated for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 intangibles are shown to be owned by the Applicant and not by MISPL. Further, MISPL is shown to be performing only support services to transaction processing and not actual transaction processing. This also shows that actual control of MIPs is with the Applicant who owns the intangible inside MIPs, takes all decisions with respect to MIPs and controls all risks associated with MIPs. Thus MIPs are at its disposal. 5.4 With respect to clearing and settlement as well, the Revenue contended that these activities are happening in India and not overseas. The Revenue has relied on the reply from Yes Bank under section 133(6) of the Income-tax Act which has stated that flow of receivable/payable data is clearance. The Revenue has also relied on the Applicant s own reply that the clearing process establishes the settlement position. Revenue has contended that it has been accepted by the Applicant that in more than 90% of the transactions the customer is in India, the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned 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 remains with the overseas AEs who have licensed it to the Applicant. 5.6 The Revenue further stated in its report that restructuring has been carried out in India with the main purpose of avoiding payment of tax in India. It has been submitted that till Dec 2014, the Applicant was working through Liaison Office in India which was shut down and all functions and employees were transferred to the Indian subsidiary. There was no change in business operations so far as customers are concerned, and for them the work continued like before. Thus, the tax liability in India should have been the same. It was submitted by the Revenue that by this restructuring the income offered in India has reduced from more than 50% of Revenue from India to about 2.5%. This has resulted in suppression of income in India of the tune of INR 300 to 400 crore every year. Before 1 Dec 2014, MasterCard admitted in its tax return (for 10 years) that there is a PE in India and 100% of incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating 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 MIP should be owned by the Applicant and for this reliance was placed on Note 4.1 and note 4.2 of OECD commentary on Article 5 of Model Tax Convention as well as the Hon ble Supreme Court decision in Formula One World Championship Limited vs CIT, 394 ITR 80 (Formula One or FPOWC). It was contended that automatic equipment like MIP or server could constitute a PE. Reliance was placed on the above mentioned judgment in FOWC, Swiss Server Case (quoted by Hon ble Delhi High Court in the case of Formula one World Championship Limited [2016] 76 taxmann 6), ATO Server case, German Server case, French Online Video Game case and Sweden Data Center case. Last four foreign cases were cited from the book of Mr. Ashish Karundia on Taxmann s Law and Practice relating to Permanent Establishment. It was also contended that there is no requirement that employees of the Applicant should operate MIPs to create a PE in India. 5.11 The Revenue submitted that real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 position, the actual debit and credit is passed by dedicated team of BOI. If there is any error, it is the Applicant which is responsible. Thus, the space in BOI where settlement activity is happening is at the disposal of the Applicant and hence constitutes a PE. Reliance was placed on a Swedish case (from the book of Mr. Ashish Karundia) where home office of a Norwegian person was held to be a PE. Based on this the Revenue has submitted that the Applicant is carrying out its activities through dedicated employees of BOI who are specifically assigned a space within BOI to carry out the activity of the Applicant. The BOI is an agent of the Applicant and the space where settlement activity is carried out is at the disposal of the Applicant, and hence constitutes a PE. The Revenue also quoted from Note 4 of Article 5 of OECD commentary to point out that for creating a PE it is not required that the space should be at the exclusive disposal of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue 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 PE of the Applicant. It has also claimed that Indian subsidiary is habitually concluding contracts or securing orders for the Applicant. The Indian Singapore treaty has a clause for securing orders also. 5.17 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 PE being created due to deputation of employees to Indian subsidiary. Revenue has pleaded that if new facts emerge in these years or in later years, the department would like to examine afresh on this issue as to whether it creates a PE. 6. The Revenue has also contended that payment of transaction processing fee and Master Card network installation/management fee and other fees paid by Indian clients to the Applicant is both Royalty and Fe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets 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. Based on above, the Revenue, in response to question 4, has contended that there is requirement of withholding tax before payment is made to the Applicant. 8. The Applicant has filed its rebuttal to the Revenue s report. It has denied various facts cited by the Revenue and has also pleaded that it neither has PE in India nor there is any payment which can be characterized as royalty or FTS. The rebuttal of the Applicant is summarized below: 8.1 The Applicant has submitted that there are serious and substantial factual errors in the way the Revenue has interpreted its business. The Applicant charges its customer transaction processing fees for the services rendered relating to the authorization, clearing and settlement of transactions. Additionally, it receives miscellaneous revenues for the provision of special services which are ancillary to the transaction processing service. The MasterCard network facilitates authoriz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 outside of India and MIPs on a standalone basis cannot undertake any significant processing activity other than preparatory and auxiliary edits/data validation and routing of transaction. 8.4 It has submitted that the Revenue has failed to appreciate that even though the transaction gets authorized by the issuer bank, the role of the Applicant s network is not limited to providing connectivity between the MIPs. The network validates the security of the transaction so that the risk of fraud is eliminated or minimized as much as possible. The network facilitates the authorization process to happen in an efficient, secured and expeditious manner. MasterCard has established operation command centers outside India, which monitors the working condition of MIPs all around the world on real time basis. This monitoring is critical to make sure that the transaction routing between the MIPs happens in an efficient manner. 8.5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 transactions. GCMS generates the settlement positions of the banks. It processes millions of transactions on a daily basis. 8.8 From GCMS, the transaction data is transferred to the Settlement Account Management System (SAM) also located outside India. SAM performs the necessary calculations to determine the final settlement amount for the acquirers by incorporating adjustment data such as charge back, fee etc.. SAM facilitates the transfer of funds for the purpose of financial settlement of cleared transactions and the transfer of funds between MasterCard and its acquirers and issuers. On the basis of net settlement position sent out by SAM, Bank of India merely posts the entries in the accounts of the customer banks for the settlement to get completed. This is a very simple and clerical work which only takes a few minutes of work of one employee of BOI. Due to this low skilled nature of job, BOI is paid service ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 said that MIPs are not at its disposal. The Applicant has also stated that since MIP has no role to play in clearing and settlement it can t create PE since there is no use in authorizing a payment transaction if the money is never moved because there is no clearing or settlement. 9.2 It is submitted that the software inside MIP is preparatory and auxiliary in nature. The software upgrade happens through data centers outside India. These upgrades are routine and involve negligible cost. Cost of maintaining and upgrading the MIPs forms part of the cost base of MISPL on which it receives an arm s length mark up from the Applicant and hence it has financial capacity to maintain MIPs. The Applicant has further submitted that considering that the maintenance and upgradation of MIPs has been outsourced, it is logical that MISPL need not have employees who have the technical knowledge about MIPs. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red 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 that use of MasterCard Connect and MasterCard File express is incidental to the main activity of transaction processing service and they perform preparatory and auxiliary services. The Applicant has objected to Revenue s reliance on decision of ITAT Delhi in the cases of Amadeus and Galileo (supra) as the facts are different. It has been stated that Applicant s network and infrastructure is located outside India. The Applicant has distinguished Swiss server case on the basis that MIPs are not owned by the Applicant while the Swiss server was owned by the German company. In French online video game case, ATO case and Sweden Data center case the Applicant has again raised the same objection that in its case, MIPs are performing only preparatory and auxiliary activities. The Applicant has also produced ruling by ATO in its own case where post restructuring, it was held by ATO that the Applicant doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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. The Applicant has raised a contention that MISPL was not incorporated when agreement with Andhra Bank was signed in 2013. The Applicant has given details of the process in the rebuttal. The Applicant also submitted that MCI had already entered into contracts with most of the banks prior to the takeover of the Indian leg of the business by the Applicant in 2014. Accordingly, the process of negotiation, concluding and securing contracts had already been completed during the period when MCI was in operation. In last three years new agreements have been entered only with 7 new banks. Thus, it cannot be said that the activity is being done by the Applicant habitually. The Applicant also relied o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. 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 Applicant has submitted that in Verizon case(supra) the private links were under the customers exclusive dominion and control. However, the control of equipments in this case is not with customer banks. The Applicant has relied upon the decisions of Hon ble Delhi High Court in the case of Nokia Networks OY (358 ITR 259) and New Skies Satellite NV (382 ITR 114) to plead that amendment to the tax treaty cannot be read into the domestic laws. It has relied on Hon ble Supreme Court decision in the case of Azadi Bachao Andolan (263 ITR 706) to claim that where provisions of tax treaty is more beneficial, then such provisions should be made applicable. The Applicant has relied on Hon ble Delhi High Court decision in the case of Asia Satellite Communication Co Ltd (322 ITR 340) to support its case that charges received are for rendering service and not for use of secret process. The Applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 royalty in this case. The Applicant also submitted that since make available test is not satisfied, it cannot be taxed as FTS under India Singapore DTAA. The Applicant has relied upon various case laws in support. 16. We have considered the issues before us and the submissions of both the Revenue and the Applicant. During these proceedings, Mr. S Ganesh argued on behalf of the Applicant and the Revenue was represented by Mr. Kamlesh C. Varshney, CIT (IT), New Delhi. After conclusion of these proceedings both the Applicant and the Revenue have also filed their written submissions, which have been duly considered by us. Let us take up each of the issues one by one. 16.1 The first issue is regarding creation or otherwise of a fixed place PE of the Applicant in India. 16.2 As per Article 5 of the India Singapore DTAA, the term permanent establishment means a fixed plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 objection of the Applicant is that MIPs are owned by the Indian subsidiary, MISPL, and not by it. The Revenue has contended that the fact of ownership is not important for creating PE and is relevant only when we come to the question of royalty. We agree with the view of the Revenue. 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. Although Revenue has also pleaded that MIPs are defacto owned by the Applicant, but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 as by MISPL in its TP audit report clearly reflect the actual and important functions performed by MIPs. The Applicant in its written submission, post hearing, submitted that the functions performed by MIP were briefly discussed in its application as it was not aware the PE issue would be discussed in such detail. Be that as it may, the quoted facts above are clear and unambiguous, and are not denied. It clearly says that the preliminary validation carried out by MIPs 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 then not authorized. This leaves no doubt about the important functions performed by MIPs. 16.2.7 The Applicant has again narrated the function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary 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, the messages are encrypted for transmission by MIP. The transmission happens through transmission tower, leased lines, fiber optic cable, nodes, internet (owned by third party service provider), and Master Connect and Master Card File express, Application software (owned by the Applicant). These are located in India as well as outside India. We say this as it was submitted before us that all transactions go to Singapore for processing, even when both the issuing bank and acquirer bank are the same entity. According to the Applicant, servers outside India perform functions of securing transaction flow, securing validation (to prevent hacking), fraud checks through algorithm and stand in services like back up facility. 16.2.8.1 The above mentioned authorization transaction(as per details given by the Applicant itself) shows the following: Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 authorization. These functions cannot be called preparatory or auxiliary. 16.2.10 Coming to the question whether the MIPs are at the disposal of the Applicant, we find that these are shown to be owned by Indian subsidiary MISPL. However, the FAR profile of MISPL only shows that it is performing support activity and not actual transaction processing. This clearly means that authorization part of the transaction processing activity, carried on by MIPs, is the activity of the Applicant and not of MISPL. Thus, this function performed by MIP, which is part of transaction processing, is the function of the Applicant and not the function of MISPL(which is only performing support functions). 16.2.10.1 It is also brought to our notice that the Applicant is controlling MIP through licensing agreement and MasterCard rules, which it enters i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nters 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, however, the upgrades are routine and involve negligible cost. Further, it is also admitted in the TP report of MISPL that all intangibles are owned by the Applicant and not by MISPL. Thus, the software inside MIP is also admitted to be owned by the Applicant and which is also upgraded by third parties on behalf of the Applicant. 16.2.10.4 In its written submission, the Applicant has also provided details of MasterCard-one time license fee referred to in the billing manual. This fee is charged to an affiliate member as a one-time on-boarding fee for availing transaction processing services. One time on-boarding fee is paid for the cost of MIP installation, for establishing connectivity and set-up of processors. This is an additional evidence to prove that MIPs are at disposal of the Applicant as the Applicant is charging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es/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 transfer which was happening outside and only supporting work was done in India which was found to be of no or very little significance. In this case the work of authorization, including validation of customer in the form of checking PIN, checking card codes, names and address verification, etc. are a significant activity, aligned to the other stages. The remaining process cannot go forward without this initial verification. 16.3.1 The Applicant s argument of the cost of MIPs being fractional to the cost of infrastructure that is outside India, is of no significance. We just need to look at the tests for creating PE which have been found to be satisfied in this case. Even otherwise, the infrastructure outside India is catering to many countries and is also used for activities other than transaction processi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the provision of the services. However, A co. enters into separate agreements with B Co. and C co., so that it is B co. and C co. that perform the services. The picture that emerges is as under: Applicant does not own MIP and the company that owns MIP is providing transaction processing service and not the Applicant. MIP is shown to be doing transaction processing service and not any preparatory or auxiliary service. It is clearly stated that transaction processing service is rendered through MIP and processing center. The company owning MIPs (C) gets compensation for transaction processing service. Australian subsidiary is also providing transaction processing services. Transaction processing services are provided by Australian company (B) and another group company (C) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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 internet (owned by third party service provider), and Application software - Master Connect and Master Card File express (owned by the Applicant), which are in India as well as outside India. It is also admitted that MCT LLC is responsible for management and maintenance of MasterCard Worldwide Network remotely from the USA. The Revenue s contention is that this creates a PE of the Applicant. 17.3 MasterCard Network is helpful in authorization (through MIP and other part of network) which we have already discussed. MasterCard Network is also helpful in clearance and settlement. The Revenue has submitted that the Applicant has admitted in its reply dated 4th October 2017 that clearing process establishes a settlement position, and settlement is movement of the fund from issuer bank to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (owned by the Applicant), which is also part of MasterCard Network. Thus the activity of transmission of information between various banks in India and uploading of raw data and receipt of final data using application software are preformed in India. The Applicant has contended that actual calculation of final position happens outside India. The Revenue has contended that this position is already known to banks in India and that is why the final data sent by Applicant to various banks is subject to confirmation by these banks in India. Thus, the Revenue has contended that clearing happens in India since the banks in India already know the final settlement position of each day. In the written submission post hearing, the Applicant has again stated that each Bank/NBFC issues mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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 that even without those functions performed, Banks in India know their individual settlement position against each other. GCMS and SAM consolidate that position and prepare a final picture for all banks which helps in settlement. It is also true that actual settlement is movement of fund between two banks and that happens in India through Bank of India. Thus we hold that significant activities relating to clearance and settlement take place in India. Now we need to examine whether this creates a PE for Applicant in India or not. 17.5.1 MasterCard Network in India consists of MIP owned by MISPL, transmission tower, leased lines, fiber optic cable, nodes and internet- owned by third party service provider, and Application software - Master Connect and Master Card File expres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alled 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/FIs etc.) in India. The application software (Master Connect and Master Card file, owned by the Applicant) is installed at the computers of Banks/FIs. The connectivity to MIP and Banks computers is provided by various service providers through cables as well as internet. Similar was the position in the cases of Amadeus and Galileo as well. 17.5.3 However, before coming to any conclusion, let us examine whether the activities can be classified as preparatory or auxiliary in character. Revenue has relied upon the commentary by Klaus Vogel book on Double Taxation Conventions, Third Edition, page no 321 and 322 (copy placed on record during the course of hearing). According to it: As to whether or not a specific activity is of a preparatory or auxiliary character, ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idation/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 authorization and encryption of data), network in India (transmission of data), application software (sending and receiving data) are significant activities when seen in the context of overall functions of transaction processing rendered to a third party. The above citation from Klaus Vogel talks about an important aspect that work of R D and advertisement, if done for the enterprise may be preparatory or auxiliary but when done for third party it would not be preparatory or auxiliary. In this case the part of transaction processing performed by MasterCard Network is for third parties and therefore cannot be called preparatory or auxiliary. Thus, transmission of data when done for the third party (as is the case here) is not preparatory or auxiliary, since the overall activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 if the travel agent s computer was a mere communication device which merely sent a signal to a foreign operator or data processing center requesting for hotel reservation or an air travel confirmation. Further, the Applicant has submitted that, it is not as if that communication sent by the travel agent was then processed abroad, and the reservation or confirmation was then communicated or intimated from abroad by the foreign operator/processing center to the Indian travel agent. On the contrary, as per the Applicant, the processing of the request for hotel reservation/air travel confirmation took place and was finally completed in the travel agent s computer in India itself and an intimation of that final transaction was then fed into the worldwide da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 cases are provided by the appellant. The booking takes place in India on the basis of the presence of such seamless CRS system. On the basis of booking made by the travel agent in India, the income generates to the appellant. But for the booking no income accrues to the appellant. Time and again it is contended that the whole of the processing work is carried out at host computer situated at Denver in Colorado, USA and only the display of information is in India for the proposition that there is no business connection in India. We are unable to agree with such proposition. The CRS extends to Indian territory also in the form of connectivity in India. But for the request generated from the subscriber s computer s situate in India, the booking is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 or an invitation to an offer is not a deciding factor. What we find is that part of the Galileo system exists in India in the form of configuration and connectivity of such system through which booking activities can be performed in India. The decision of ITAT, Bangalore Bench in the case of Wipro Ltd. (supra) is also misplaced as in that case no part of the data processing facility was performed in India but wholly outside India. In the present case, the appellant operates the Galileo system which is the source of Revenue and part of such system exists in India. Thus there is a direct business connection established in India and hence in terms of section 9(1)(i) of the Act, the income in respect of the booking whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by the appellant. Using part of the CRS System, the subscribers are capable of reserving and booking a ticket. Thus it cannot be considered as solely for the purpose of advertising of such CRS system. Similarly it is not in the nature of preparatory or auxiliary character. It is difficult to distinguish between the activities which are preparatory or auxiliary character and those which are not. The decisive criteria is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole. Since part of the function is operated in India which directly contributes to the earning of Revenue, the activities as narrated abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 facility, etc..and that too on the basis of neutral display real time on line takes place outside India. The computers at the desk of travel agent in India are merely connected or configured to the extent that it can perform a booking function but are not capable of processing the data of all the airlines together at one place. Such function requires huge investment and huge capacity, which is not available to the computers installed at the desk of subscriber in India. The major part of the work or to say a lion s share of such activity, are processed at the host computer in Denver in USA. The activities in India are only minuscule portion. The appellant s computer in Germany is also responsible for all o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stomer 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 creation of a PE. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 to the server used for storing the information that was supplied by D Co to its customers in Switzerland. Thus, it is clear that even automatic equipment like server can also create PE and there is no requirement of human intervention. 17.5.6 The Applicant has stated that use of MasterCard Connect and MasterCard File express is incidental to the main activity of transaction processing service and they perform preparatory and auxiliary services. We have already discussed how the role of these two application software is similar to what CRS was doing in Amadeus and Galileo cases in India. Thus, the objection of the Applicant is not valid. In addition, when we talk about MasterCard net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 any error it is the Applicant who is responsible. For constituting space at Bank of India as fixed place PE of the Applicant it is necessary that the functions of the Applicant are carried out through that space. There is no doubt that settlement activity is happening in the premises of Bank of India. This settlement activity is the function of the Applicant, carried out by BOI on its behalf and with all responsibility of error on the Applicant. The process of movement of fund between two banks (which is actual settlement) happens only when Bank of India passes the debit and credit entries. The Applicant has also admitted in Annexure III of its application that Domestic INR sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the low remuneration from MasterCard to Bank of India would not determine whether the work of settlement carried out by Bank of India is significant or not. The Applicant itself has admitted in its AAR application at Annexure III that settlement is happening in India. 18.5 The Applicant has contended that BOI cannot be taken as agent of the Applicant since it is an independent entity and can provide similar services to other companies as well. It is clarified that BOI is not being treated as dependent agent. It is independent, but is still agent. It has been admitted by the Applicant that BOI works as per the instruction of the Applicant and all the responsibility for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 were placed in the premises of the Indian Customers. MCI had entered into licensing agreement with various Indian customers. Employees of Liaison office were found to be performing more than preparatory and auxiliary services. In fact, for ten years prior to Dec 2014, the Applicant disclosed income from transaction processing service rendered in India at full 100% attribution at global net profit rate. From Dec 2014, the Applicant had shut down the Liaison office and had transferred that work to the Indian Subsidiary MISPL. The employees of Liaison office were taken over by the Indian subsidiary and they continued to perform the same functions. Similarly the wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision in the case of Sanofi Pasteur Holding SA (supra) to plead that there is no power to review the decision. It has further provided commercial reasoning as to why the APMEA operations were given to the Applicant. The proposed restructuring plan had approval of the Board and evidences were produced in support. It also submitted that this was also accepted by US IRS. Thus the business restructuring was not done with an intention to avoid tax. It further submitted that pursuant to this decision to effect business reorganization, the workforce of the Applicant was substantially increased by more than three times from about 115 (prior to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the fact of there being PE has not been upheld by any court in India. It has quoted the E*Funds case (supra) to contend that MAP settlement does not lay down any principle and tax paid prior to Dec 2014 was to buy peace and because the amount involved were not significant. The Applicant has again submitted the commercial reasoning behind restructuring to support that restructuring was not for avoidance of tax. The Applicant has quoted from the reply of various banks that there has been no change in the operation because of restructuring. This does not lead to conclusion that the restructuring was done for avoidance of tax. The 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 It is submitted by the Revenue that the assessing officer also has passed an assessment order assessing the income with a finding that there is PE and attributed 100% income from transaction processing activity to that PE, and the same has been accepted by MCI. We would take it that it is carrying on transaction processing activities in India through a PE. The argument that the PE was accepted as the amount was small has also been opposed by the Revenue, as in last four years income disclosed is more than ₹ 100 crore, whereas there was a reduction of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The impugned ruling is correct in principle insofar as an associated enterprise, that also constitutes a PE, has been remunerated on an arm's length basis taking into account all the risk- taking functions of the enterprise. In such cases nothing further would be left to be attributed to the PE. The situation would be different if transfer pricing analysis does not adequately reflect the functions performed and the risks assumed by the enterprise. In such a situation, there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Therefore, in each case the data placed by the 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 be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the work lies with the Applicant. Thus, a part of transaction processing function of the Applicant is being carried out through other personnel (Bank of India) in India and it creates a service PE. 20.2 The Applicant has not accepted the Revenue s above referred contention regarding service PE. It is submitted that the Revenue has not submitted any evidence to support the contention that visiting employees are rendering services to customer banks. It has been pleaded that the Applicant s system and processes are automated and do not require constant interaction with the customers. Hence, it does not have employees in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted machine without going to a bank branch. But that does not mean that there are no humans associated with this rendering service. Even if the main task of disbursing cash is done by an automatic machine, there are human beings who are needed to facilitate that service, such as the guard, the person who checks the functioning of ATM, the person who puts cash in the box and tallies the withdrawal etc. Same is the situation in this case. Even if a part of the process is automated, employees are needed to check if the process is working alright; to interact with clients, to meet clients and take feedback etc..These 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not constitute a service PE of the Applicant in India. 21. The Revenue has also claimed that MISPL is legally and economically dependent on the Applicant, being 100% subsidiary, and is a dependent agent PE of the Applicant. It gets instructions from and caters only to the Applicant, and has no business other than related party business, and it is compensated through cost plus remuneration model with no risk being undertaken. The Revenue has quoted from the replies received from various banks (obtained under section 133(6) of the Income-tax Act) about their dealing with employees of the Indian company. The Revenue 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 rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of paragraphs 1 and 2, where a person - other than an agent of an independent status to whom paragraph 9 applies - is acting in a Contracting State on behalf of an enterprise of the other Contracting State that enterprise shall be deemed to have a permanent establishment in the first-mentioned State, if- (a) he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for the enterprise; (b) he has no such authority, but habitually maintains in the first-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would ultimately get accepted by the customer banks in India when MISPL brings that proposal or counter proposal to it. 21.2.2.2 In our view, the above position may not satisfy the requirement of concluding contract but it certainly satisfies the requirement of securing order . We have taken support from Delhi ITAT and Hon ble Delhi High Court judgment in the case of Rolls Royce Plc v DIT [(2008) 19 SOT 42 (ITAT Delhi) affirmed by Hon ble Delhi High Court(2011) 339 ITR 147 (Del)] to arrive at this conclusion. This case is useful since the provisions of agency PE on account of securing order 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 habi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are hundreds of orders, the term will have a different meaning from that as in our case, where there are only 7 new agreements in three years, as we mentioned in the para above. In our case, if the above process is followed in all the new agreements, even though only 2 or three new contracts are entered into in a year, the requirement of habitually would be satisfied. Thus, we have no hesitation in holding that MISPL constitutes a dependent agent PE under Article 5(8) of India Singapore DTAA on account of habitually securing orders wholly for the Applicant. 22. The other possible PE could 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 categoricall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out the reply of the Applicant that this payment of royalty is for right to carry on business in India, but no agreement has been produced to support that contention. The agreement produced clearly states that the royalty paid by the Applicant to MCI is for use of IP in India. Hence, a part of the fee collected by the Applicant from Indian clients is also for use of IP in India. 23.1.1 The Revenue has also produced a list of patents for transaction processing technology which are registered in India in the name of MCI, and MCI has granted a license to the Applicant for using such patents. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentally, both the Applicant and the Revenue have relied upon this judgment. Although the Hon ble Delhi High Court decided that on facts the payment is not royalty, the Revenue has relied on this judgment since it is of the view that if we examine the five reasons for which Hon ble Delhi High Court decided in favour of the assessee, and apply these five reasons to the facts of our case, the payment would be classified as royalty in our case. 23.4.1 In brief, FOWC entered into a Race Promotion Contract (RPC) with Jaypee Sports through which it granted Jaypee sports the right to host, stage and 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the FOWC to Jaypee is merely incidental to the hosting and staging of the event by Jaypee. Unlike RPC and ALA in FOWC, there is no indication in our case that license is granted as incidental to some other rights. 23.4.1.3 At this point we may refer to the MasterCard Electronic License Agreement between MCI (AE of the Applicant) and the Indian customer banks (who pay fees to the Applicant), which were later assigned to the Applicant, and here we find an important clause: 2. Grant of License. MCI grants to Licensee, and Licensee accepts (as granted), a non-exclusive license to use the 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 ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... access to a safe and secured transaction processing system. Accordingly, the Applicant will enable its Customers to enhance their businesses by providing a credible and efficient network. Thus, we are of the view that unlike in the case of FOWC, in MasterCard License Agreement, granting of license of trademarks/marks is the main purpose. MCI has granted Licensee right to use various trademarks and marks owned by it solely in connection with License s payment card programs. The payment card programs are programs of Licensee (i.e. of Banks and FIs) and not of MasterCard. 23.4.1.4 It 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised as part of payment for transaction processing fee, and hence our case is different. We also find that the main activity in Sheraton case was provision of hotel rooms and use of trademark was incidental to that. Hence the facts are different in the two cases. 23.4.3 Thus, we do find that the facts of FOWC case are different from the facts of our case and the judgment of Hon ble Delhi High Court is not applicable on the facts of our case. In fact, in our case the licensing of trademark/mark/logo etc. (IP) is the dominant purpose as can be seen from the license agreement between MCI 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 subsidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ications, continuations in part, reissues, renewals, reexaminations, and extensions thereof), as set forth on Schedule C, which may be amended from time to time. 1.13 Processing Services shall mean and include the transaction processing services that facilitate payments between Cardholders and Merchants. 1.14 Territory shall mean and include all of the geographic areas that constitute the Asia Pacific and Middle East and Africa regions under the MasterCard Bylaws and Rules, as may be modified from time-to-time. A list of the countries in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule D attached hereto. 23.4.3.1 Hence, through this License agreement, MCI US has granted to the Applicant a non exclusive license, with the right to grant sublicenses, to use the Intellectual Property in the Territory (India in our case) solely in connection with the promotion and sale of services. And for these rights and licenses granted by MCI US to the Applicant, the Applicant is paying royalty to MCI US. 23.4.4 Intellectual property is defined in para1.3 of the above agreement and what constitute marks and patents are 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever to the present case, for the simple reason that MCI is not rendering any transaction processing services or any other services to the Applicant. The objection of the Applicant does not address the real issue. The Applicant has not disputed that it is paying royalty to MCI for use of IPs in India. Whether MCI is rendering transaction processing service or not does not matter. What matters is that these IPs for which the Applicant is paying royalty to MCI, is further sublicensed by the Applicant to various Banks and are used by these 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is royalty. We also hold that this is effectively connected with various types of PEs that we have discussed. Thus it would get taxed with the PE under Article 7 and not under Article 12. How much of the transaction processing fees would constitute royalty and how much would be in the nature of business income are issues that are not in the domain of the AAR. However, once we have held that it would be taxable under Article 7, the bifurcation may not be material, as the entire amount will get taxed under Article 7 of India Singapore DTAA, after appropriate 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d hence they cannot be royalty. We have noted from the billing manual, produced by the Applicant and reproduced in the Revenue s report, that payment of fee is also for license fee which are not based on value and volume of transactions and are one time. To illustrate, the licensing agreement clearly talks about MasterCard one time licensing fee and Maestro/Cirrus one time licensing fee. In addition, there are other fees like minimum Revenue fee, warning bulletin fees etc. which are not based on value and volume of transaction. Even otherwise royalty payment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llite, cable, optic fibre or any other similar technology and it need not be secret. It also held that there is use of equipment and cable in the transmission of the data/voice from one end to the other and it is difficult to accept the case of the assessee that the nature of transaction is only that of service. 23.5.2 Revenue has pleaded that the facts of the Verizon case (supra) are similar to the present case. In the Verizon case it was DCE/CPE which was installed at the premises of customers, and in this case MIP is installed at the premises of the customers. 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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licant has further contended that the payment made by customer banks is for availing of service and not for the use of a process. The Applicant has also contended that the process is not secret. It has relied upon Delhi ITAT decision in the case of Panamsat International Systems Inc. (supra) to support its contention. The Applicant has also contended that the Revenue s reliance on decision of Bangalore ITAT in the case of Google India (supra) is erroneous, as in that case Google India was using brand name, logo, and right in IPs. Further they were related party. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Madras High Court in this case, has held that after the amendment introduced in the year 2012, with effect from 01.06.1976, irrespective of possession, control with the payer or use by the payer or the location in India, the consideration would nevertheless be treated as 'royalty . The Hon ble Madras High Court relied on the AAR ruling in the case of Cargo Community Network Pte Ltd (supra) as well as Dishnet Wireless Limited (supra) where AAR had remarked that Expln. 5 and 6 to Sec. 9(1)(vi) of the Act made it clear that the payment was against a right to use 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 physica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty for use of or right to use of secret process in the operation of MIP, which is not in public domain. The Revenue has relied on the agreement between MCI and the Applicant to plead that process technology is intellectual property licensed to the Applicant who in turn has sublicensed it to Indian customers (Banks/FIs). On the other hand the Applicant has contended that the process is not secret. It has relied upon Delhi ITAT decision in the case of Panamsat International Systems Inc. (supra). We find that this decision too was not on India Singapore treaty. Verizon Communication 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 proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cret process and hence, we hold a part of the fee paid to the Applicant is also for use of secret process and hence royalty. It is not necessary that this secret technology is licensed to customer banks. It is sufficient if secret process is used, as the definition of royalty in India Singapore DTAA classifies use of secret process as royalty. This royalty is also effectively connected to the PE created on account of MasterCard Network as well as other PEs. 23.8.3 We do not agree with the Applicant s contention that reliance should not be placed on the ITAT Bangalore decision 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that classification as done by the Applicant is not important. The fact is that there is use of software, and the legal position is that use of software would amount to royalty. Hence, it needs to be held as royalty. There is nothing like standalone provision of MIP and application software. The use of software inside MIP, and cards in the application software are essential part of the transaction without which no transaction can be completed. The Applicant has relied upon the Hon ble Delhi High Court ruling in the case of Infrasoft Limited in its support. However, the AAR decision 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 bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be an element of human intervention. It has been contended that in his case it is automated process and there is no human intervention. The Applicant has also relied on the decision in Kotak Securities Limited (SC) (supra) in support of its claim that what he provides is standard facility and not services. The Applicant has also relied upon the judgment in the case of Skycell Communications Limited (Madras) (supra) where it was held that the provision of facility for use of an electronic exchange, which had mobile communication network with a switching center, did not constitute technical 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 no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation between the cable operators and the public is that of use of 'facility', whereas the first relation between the TV channels and the assessee is for the use of the 'process', as a result of which the programmes uplinked by TV channels become fit for being relayed. 25.3.1.1 Delhi ITAT further observed that the decision of the Hon ble Madras High Court was in the context of the third relation in the context of their facts, namely, the cable operators and the public. It was explained at p. 58 of the Madras judgment that satellite television has become ubiquitous and when a person 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the PE of the Applicant as fixed place as well as dependent agent. The Applicant has relied on the decision of the Hon ble Supreme Court in the case of Morgan Stanley (supra), to contend that no further attribution can be made to the PE even if there is a PE. 26.2 The judgment cited by the Applicant is with respect to agency PE and not with respect to fixed place PE. Thus, where a subsidiary is a fixed place PE, the above cited rulings would not apply. More so because, the functions performed and risks undertaken by a nonresident enterprise through the subsidiary is not fully captured in the FAR profile of 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribution which is required to be done by the assessing officer. On such attribution of income to the PE, the tax is required to be withheld at full applicable rate at which the nonresident is subjected to tax in India. 28. During course of these proceedings, the Revenue had raised certain issues regarding possibility of change of facts and laws and had requested that ruling should not apply to the new facts and the changed position of law. Examples were cited, such as that (i) the Applicant has not produced details of import of MIPs even though these were mostly imported in 2013 and 2014; (ii) the Applicant has not produced Customer Business Agreement; (iii) the server of the Applicant may have to be relocated to India due to the latest RBI instructions in this regard; and (iv) the tax treaty between India and Singapore may get amended due to Multi Lateral Instrument. We may clarify that the ruling is given on facts brought before us and as per the law/treaty existing today. 29. On the basis of the above detailed discussion, the questions posed to us seeking a Ruling, are answered as under: (1) The Applicant has a PE in India under the provisions of Article 5 of the India ..... X X X X Extracts X X X X X X X X Extracts X X X X
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