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Indian Authority for Advance Rulings rules on PE and income characterisation

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Litigation in respect of when a non-resident has a permanent establishment (PE) in India has always been a contentious issue.

Despite several years of jurisprudence on the subject, the gap between the taxpayers' and the revenue authority's position on this subject is still quite wide. This is reflected in a recent ruling of the Authority on Advance Rulings (AAR) on certain questions raised by MasterCard Asia Pacific (MAPL).

MasterCard Asia Pacific (a Singapore resident) carried out transaction processing and payment-related activities across several countries for its global customers through a worldwide network. It inter alia entered into agreements with banks and financial institutions in India (customers) under which it received transaction processing fees, and assessment fees for building and maintaining a network and other ancillary revenues. It also had a subsidiary in India called MasterCard India Services (MISPL).

The key factors considered in the ruling, and the conclusions drawn by the AAR based on such factors are summarised in Table 1.

Table 1

Factors

Conclusions

Fixed place PE

• MasterCard interface processors (MIPs) owned by MISPL were placed at the customer’s location;

• The processing of transactions took place through the MasterCard Worldwide Network, which comprises MIPs, transmission towers, leased lines, cables, nodes, internet and application software;

• The preliminary functions were undertaken by the Bank of India, whereas the processing and settlement was carried out outside India; and

• Functions and risks that were earlier conducted overseas were now conducted by MISPL.

• MAPL has a fixed place PE in India because of the presence of MIPs;

• The AAR also ruled that the use of the MasterCard network for substantial transaction processing functions like authorisation, clearance and settlement would constitute a fixed place PE because it was secured, maintained and managed by MAPL. Further, the application software embedded in the network was owned and controlled by MAPL. Again, MIPs that are part of the network were at the disposal of MAPL. Thus, the MasterCard network constitutes a fixed place PE for MAPL in India;

• The premises of the banks constitute a fixed place PE for MAPL in India; and

• MISPL also constitutes a PE for MAPL in India.

Service PE

• MAPL’s employees visited India from time to time for obtaining customer feedback, etc.

• Employees of MAPL visiting India for business meetings constitutes a service PE in India.

Dependent agent PE (DAPE)

• Marketing support activities were performed by MISPL for MAPL.

• MISPL constitutes a DAPE of MAPL in India on account of ‘habitually securing orders’ wholly for MAPL.

Income classification

• A licence to use trade marks and marks was granted by MAPL to its customers in India. Customers were also using software as well as intellectual property in MIPs and the network.

• A portion of the fees received by MAPL would be classified as royalty under the India-Singapore tax treaty.


The AAR also held that functions performed, assets deployed, and risks undertaken (FAR) by MISPL were not fully captured in its FAR profile and hence a further profit attribution could be considered.

While determination of a PE is a factual exercise, the ruling throws light on critical aspects to be considered for evaluating the existence of a PE. This ruling may have far reaching implications for business models/arrangements where a substantial part of business is carried through digital/e-commerce platforms without any significant human intervention. One may also expect this ruling to be taken in further appeal to the High Court. While the ruling of the AAR is binding only on the applicant, nonetheless, the taxpayers would need to critically assess the impact of this ruling on their business models/arrangements.

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