AAR : 65 Key observations from AAR MasterCard ruling on PE constitution, Royalty & FTS taxation

AAR rules that the Applicant (a Singaporean MasterCard group company) has a fixed place PE, service PE and dependent agent PE in India under Article 5 of the India Singapore DTAA in respect of the services with regard to use of a global network and infrastructure to process card payment transactions for Customers in India; AAR notes that the transaction processing activity consists of electronic processing of payments between banks of merchants and cardholders through the use of MasterCard Worldwide Network (‘the Network’) and the MlPs (MasterCard Interface Processor) are located at the Customers' locations in India that connects to MasterCard's Network and processing centers; Holds that MIPs and MasterCard Network create a fixed place PE of the Applicant in India, even if MIPs are automatic equipment placed at the site of customer banks in India, holds that they pass the test of permanency and they are at the disposal of the Applicant despite not being owned by Applicant; Holds that MIPs in India carried out significant functions of preliminary verification/validation of PIN, card codes, names and address in India which  facilitate authorization part of the transaction processing and cannot be said to be preparatory or auxiliary; Notes that though MIPs are owned by Indian subsidiary (‘MISPL’), but considering the FAR profile of MISPL which shows that it is performing support activity and not actual transaction processing, AAR holds that “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.”, further notes that the software inside MIP is owned by the Applicant; Further, holds that MasterCard Network also creates a fixed place PE considering significant activities relating to clearance and settlement taking place in India through the MasterCard Network; Likewise, AAR observes that the India subsidiary (‘MISPL’) constitutes Applicant's PE in India , finds force in Revenue’s submission that while erstwhile LO (the activities of which are now taken over by subsidiary) was doing transaction processing activity accepting 100% income attribution, MISPL is shown doing only support activities, resulting in drastic reduction of income returned in India; Holds that since transaction processing activities carried out in India through MIP and MasterCard Network are not reflected in FAR analysis of MISPL, to that extent it constitutes fixed place PE for the Applicant;  Also upholds constitution of service PE on account of Applicant’s employees visiting India and constitution of Dependent agent PE for MISPL securing orders for the Applicant; Extensively relies upon Formula one, e-Funds, Morgan Stanley rulings, subsidiary’s TP report, also relies on Amedeus and Galileo rulings; On royalty taxation, AAR holds that “licensing of various IPs in the form of brand/trade name/mark etc. are not incidental to the activity of transaction processing and the payment made by various customer banks in India to the Applicant is also for the use of these IPs and hence is royalty.”, also upholds royalty taxation for use of equipment, software and secret process; However, AAR clarifies that since the payment is effectively connected with various types of PEs held as above, “it would get taxed with the PE under Article 7 and not under Article 12.”; Lastly, AAR clarifies that 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:AAR