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2018 (6) TMI 618

s in India - DTAA with Singapore - functions performed by MIPs as significant functions - payment card programs are programs of Licensee (i.e. of Banks and FIs) or MasterCard - consideration for use of intangibles in India - Withholding of tax - Held that:- Applicant is carrying out its business of facilitation of authorization of transaction through fixed place, ie. MIPs, since MIPs situated in India are at its disposal. The functions performed by MIPs in facilitation of authorization transaction are not preparatory or auxiliary in character and are significant functions. Hence, MIPs create a PE of the Applicant in India. - It is clearly laid down in Note 4.1 of OECD commentary on Article 5 of Model Convention that the mere fact that an enterprise has a certain amount of space at its disposal which is used for business activities is sufficient to constitute a place of business. No formal legal right to own or use that place is therefore required. It is sufficient if it is placed at the disposal of the foreign entity. Thus, the fact that MIPs may not be owned by the Applicant is not relevant, if other tests are satisfied. - Applicability of Australian Ruling in India - Held .....

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ssing activities. Thus, there are some functions and risk related to transaction processing which were earlier carried out by MCI in India and are still carried out by MISPL(as MISPL had taken over everything) but not shown in the FAR of the MISPL. Therefore, the subsidiary company MISPL creates a PE of Applicant in India. - Creation of a PE through the Applicant’s visiting employees and employees of Bank of India - Held that:- Revenue has incorrectly understood the role of the bank employees in coming to the conclusion that these bank employees working in the bank premises for the settlement function also constitute a service PE of the Applicant in India. Disagreeing with the Revenue, we hold that the employees of the Bank of India, in India, do not constitute a service PE of the Applicant in India. - Creation of PE through marketing support service - Held that:- When the business is trading and there are hundreds of orders, the term will have a different meaning from that as in our case, where there are only 7 new agreements in three years, as we mentioned in the para above. In our case, if the above process is followed in all the new agreements, even though only 2 or thr .....

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, which is not royalty, is business income which is taxable under Article 7 and not under Article 12 of India Singapore DTAA. Since we have already held that there is PE in India, the fee paid will get taxed as business income arising through the PE. - Process royalty - whether it is a secret process. - Held that:- The fact that only three patents are granted so far in India, would not have an impact on the inference that technology is patented and hence secret. Quite clearly, they are patented and hence cannot be known to and be used by the public. Thus these are secret process. - Thus, there is use of a secret process and hence, we hold a part of the fee paid to the Applicant is also for use of secret process and hence royalty. It is not necessary that this secret technology is licensed to customer banks. It is sufficient if secret process is used, as the definition of royalty in India Singapore DTAA classifies use of secret process as royalty. This royalty is also effectively connected to the PE created on account of MasterCard Network as well as other PEs. - Ruling:- (1)The Applicant has a PE in India under the provisions of Article 5 of the India Singapore DTAA in re .....

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financial institutions, businesses, merchants, cardholders and governments worldwide to use electronic forms of payment instead of cash and cheques. The Applicant is a wholly owned indirect subsidiary of MasterCard s wholly owned direct Delaware incorporated subsidiary, MasterCard International Incorporated ( MCI ). The Applicant is the regional headquarter for the Asia Pacific, Middle East and Africa ( APMEA ) region and carries out the MasterCard group s principal business of transaction processing and payment related services under a family of products including MasterCard . Maestro and Cirrus in the APMEA region. 2.2 The MasterCard Business is structured as an open bankcard association, in which the cardholder and merchant relationships are managed principally by the Applicant s customers which are primarily banks and financial institutions ( Customers ) in APMEA region. The Applicant does not issue cards, extend credit to cardholders, set cardholder fees or determine interest rates or 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 .....

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uthorized by the Issuer, the Merchant is paid by the Acquirer (and typically the Merchant would be required to pay a "merchant service fee" to the Acquirer). MasterCard facilitates authorization, clearing and settlement of the transaction between the Cardholder and the Merchant via the Issuer and the Acquirer. 3. The settlement process between the issuer and the acquirer bank typically occurs through a settlement bank appointed by MCI. MCI is usually the entity which owns the settlement bank accounts as it is the entity within the MasterCard group which provides settlement services to other group companies. These bank accounts are used primarily for the purpose of ensuring that payment for transactions that have occurred between the merchant and cardholder are settled via the acquirer bank and issuer bank. If settlement occurs successfully across the issuers and acquirers, the settlement bank account would typically end up with a NIL bank balance. Settlement is usually in USD. 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 t .....

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mers (comprising transaction processing fees, assessment fees and transaction related miscellaneous fees) would be chargeable to tax in India as royalty or fee for technical services within the meaning of the term in Article 12 of the India- Singapore DTAA? (4) Based on the answers to the above questions, and in view of the facts as stated in the subsequent part of the Applicant, whether any tax withholding at source would be required on the amounts to be received by the Applicant? 4. It is the Applicant s contention that the fees received from the customers are neither taxable as Royalty, nor as FTS. Further, since there is no PE it is also not taxable as business income. The Applicant s contentions in support of its claim, as contained in the application, are as under: 4.1 The Applicant is an entity incorporated in Singapore and does not have any presence in India. The Applicant does not own or maintain any Network or MIPs in India. The processing activities such as clearing and settlement 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 activit .....

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a with the help of MIPs which shall be owned by the Indian subsidiary of the Applicant and shall be placed at the Customers' locations in India. MIPs are special purpose equipment with software embedded therein and consist of Central Processing Unit, Monitor, Router and Multi-protocol label switching unit. MIPs are used for undertaking preliminary examination / validation of information at the point of authorization. The preliminary validation generally involves activities such as PIN processing, validation of card codes, name and address verification etc.. In the case of errors, the MIP would alert the acquirer bank / financial institution on the need for a correction and the data is not authorized. If the initial validation is successful, the MIP located at the acquirer bank would transfer the data to the issuer bank's MIP, which performs certain other functions, edits and processes. The MIP at the issuer bank will then direct the data to the issuer bank for further processing 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 acquire .....

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rvices to other MasterCard group entities such as Access Prepaid UK; and Provision of technology related liaison and coordination services to MasterCard group entities such as MasterCard Technologies LLC. In consideration thereof, the Indian subsidiary shall earn service fees from the Applicant and the respective parties. 4.7 The facts for which questions are asked in this ruling came into effect on 1st Dec 2014. Before that the transaction processing activity was carried out by MCI and it had a liaison office in India. From 1st Dec 2014, all the functions, risks and assets of this liaison office were transferred to Indian subsidiary MISPL and the transaction processing activity was now being carried out by the Applicant from Singapore. 5. The Revenue has submitted detailed reports, as under: 5.1 The Revenue submitted a detailed note from OECD Transfer Pricing Guidelines (accepted by India) with regard to contractual terms of the transaction and analysis of risks in commercial or financial 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 transa .....

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es to be entered by overseas AEs with the third party vendors, on their own account. The vendors carry out risk mitigation functions of maintenance of MIPs on behalf of overseas AEs and not on behalf of MISPL. It is only the cost of that maintenance that is allocated to MISPL. MISPL further allocates this cost to Applicant with mark-up, without any of its own value addition. This was demonstrated through actual figures. This clearly demonstrates that MISPL neither has financial capacity to undertake maintenance of MIPs nor technical qualification. It also does not undertake risk mitigation functions which involve taking decisions with regard to MIPs maintenance like taking decision to respond to technical changes, whom to contract for maintenance, when and how to upgrade the software inside MIPs. These decisions are taken by the Applicant and final cost is charged to the Applicant. The software inside MIP is also shown to be owned by the Applicant in the TP audit report of MISPL as all 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. Th .....

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is settlement happens every day after getting instructions from the MCI. BOI carried out this work, on behalf of the Applicant. Revenue has also quoted from the settlement agreement between the Applicant and Bank of India to contend that it is the Applicant who is responsible for any error in settlement. Thus, the Revenue has contended that both clearance and settlement also happen in India. 5.5 The Revenue has also contended that though on paper MIPs are owned by MISPL but the de facto ownership lies with the Applicant. For this it has relied upon the fact that there is no agreement of MISPL with the banks with regard to use of MIPs and their use is governed by the agreement between the Applicant and the banks. Revenue also contended that MIPs were originally owned by the AEs of the Applicant and were subsequently transferred to MISPL. However, no VAT/GST has been paid on such sale till now even after three years. Thus there is no sale in the eyes of law. Thus the ownership of MIPs 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 payme .....

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ted that the Applicant has a fixed place PE under Articles 5(1) and 5(2) of India Singapore DTAA in the form of MIPs, MasterCard Networks, Bank of India premises as well as Indian subsidiary. It has also submitted that there is a service PE under Article 5(6) of India Singapore DTAA. It has also submitted that there is a dependent agent PE in terms of Articles 5(8) and 5(9) of India Singapore DTAA. Revenue has submitted that any one form of PE would give taxation right to India, though there exist more than one form of PEs in this case. 5.10 The Revenue submits that the Applicant is carrying out its business of authorization (which is part of transaction processing) through MIPs in India which are at its disposal. It has been submitted that for creating fixed place PE it is not necessary that MIP should be fixed on the ground and for this reliance was placed on Note 5 of OECD commentary on Article 5 of Model Tax Convention. Further, it was submitted that there is no requirement that 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 Fo .....

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licant. Reliance was placed on judgments of the ITAT Delhi in the cases of Amadeus Global Travel Distribution SA vs DCIT [2008] 113 TTJ (ITAT Delhi) 767 and Galileo International Inc. [2008] 19 SOT 257 (Delhi) to support the case of MasterCard network creating a PE in India. The Revenue also relied upon a case from Austria (from the book of Mr. Ashish Karundia) where a mile long cable route used by the company for data transmission was held to constitute a PE. 5.13 Revenue also contended that the Bank of India space where more than 90% settlement activity takes place through employees of BOI also creates a fixed place PE as the Applicant is carrying out its work of settlement through it. Settlement position transaction wise is captured in India and is already known to respective banks. MCI, on behalf of the Applicant, only compiles that information into a consolidated settlement position, which incidentally is also known to banks in India beforehand. Based on this settlement 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 .....

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ere is service PE through employees of Bank of India as through them service is being rendered. Details of visit of employees of the Applicant to India have been provided that which shows that in a year (FY 16-17), the threshold of 90 days of India Singapore treaty was crossed. The Revenue has relied upon Bangalore ITAT judgment in the case of ABB FZ LLC (ITA no 1103 of 2013) and Hon ble Supreme Court judgment in E*Funds IT Solution Inc (86 Taxmann 240). The Revenue has also discussed the purpose of meetings, submitted by the Applicant, to support its case that the employees of the Applicant have visited India to render service to its clients. With respect to service PE through Bank of India s employees it has been submitted by the Revenue that for service PE the service could be provided through other personnel as well which in this case is Bank of India. 5.16 The Revenue has also claimed that MISPL is legally and economically dependent on the Applicant and is dependent Agent 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 .....

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urt judgment in the case of Skycell Communications Limited (251 ITR 53) and ITAT Delhi judgment in the case of Asia Satellite Telecommunications Co. Limited [2003] 78 TTJ 489. Various arguments put forward by the Revenue in support are discussed later. 7. In respect of question no 2, the Revenue has submitted that the Applicant has raised this question only on account of the Indian subsidiary creating a PE and not for other types of PEs. For other types of PEs, thus, there is no doubt that PE is to be remunerated and the remuneration given to MSIPL is not enough. With respect to the subsidiary PE as well, the Revenue has submitted that since the FAR profile of MISPL does not capture the full functions performed, assets employed and risks undertaken by erstwhile PE, the functions/assets/risks not captured are the one which belong to MISPL as PE of the Applicant. Thus for these functions/assets/risks there is need for separate compensation to MISPL as PE of the Applicant. 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 re .....

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IPs route all transactions to the data center(s) outside India for further processing. From there an authorization request is sent to the issuer bank that approves or declines the transaction and sends the authorization message through the issuer MIP to the acquirer bank on the same route which the authorization message travelled. 8.3 According to the Applicant, the network consisting of computers located outside India carry out fraud checks on the transactions to prevent any kind of security breach. The Applicant, over the years, has developed detailed algorithms and also a computerized database that enable fraud detection and prevention. The Applicant, in certain situations, provides additional services like authorization of transaction using pre-established rules when there is technical glitch. It also provides certain value added services through data centers based outside India. Thus, the Applicant contended that significant authorization processes take place 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 Rev .....

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that are needed to facilitate and complete authorization, clearing and settlement. The Applicant s server, processing centers and other related machinery, which are located outside India, are valued at almost USD 248 million while value of MIPs located in India are only USD 300,000. 8.7 The Applicant has submitted that after authorization, the acquirer bank prepares a batch of the transactions undertaken for a certain period in a given day. Once the batch is closed, the acquirer bank uploads batch files (containing monetary transactions from their merchants) on the Applicant s network located outside India. At this stage, the files are in raw form. After this, GCMS processes the raw data. For each transaction, GCMS performs data validation and data integrity to ensure that the transaction data can be processed. GCMS calculates various fees and sends out a file confirmation to the acquirer bank, containing the total count of transactions and any rejected 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 l .....

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compliance. It has further submitted that customer banks have entered into an agreement with the Applicant for availing transaction processing services and the Applicant in turn has entered into an agreement with MISPL for provision of MIPs to the banks. Therefore, there is no need for MISPL to enter into any agreement with customer banks. The maintenance is done by third party specialized entity. 9.1 With respect to the Revenue s claim of MIPs and MasterCard network constituting fixed place PE of the Applicant in India, the Applicant has contended that its network is located outside India which consists of server and related machinery and equipment. The Applicant has said that it does not own MIP, routers, cables and wires. The Applicant has also submitted that it does not carry out its business through MIPs and related network that do not belong to it. It has further submitted that MIP and related network do not perform core functions. The Applicant has also 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 .....

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turing it was submitted that the Applicant admitted LO of MCI as PE only under MAP settlement under the DTAA. It is submitted that MAP based settlements were made only in order to obviate protracted litigation with the Indian tax authorities and also because the amounts involved in those years were relatively negligible and did not at all justify such litigation. Reliance was placed on the Hon ble Supreme Court decision in the case of E*Funds IT Solution Inc (supra) wherein it has been held that, a MAP agreement or settlement is in the nature of a concession made by the Applicant which is not binding on the Applicant for assessment years other than those specifically covered by the MAP settlement. 11. The Applicant has relied upon the ruling of the Hon ble Delhi High Court in the case of UAE Exchange Center Limited vs UOI (313 ITR 94) to support its point that it is only carrying out preparatory and auxiliary activities in India. The Applicant has stated 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 o .....

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nloading and dispatch activity performed in that case. 11.2 With respect to the Revenue s claim of Indian subsidiary MISPL constituting fixed place PE of the Applicant in India, the Applicant has submitted that LO of MCI was not a PE as it was doing only preparatory and auxiliary services and the fact of there being a PE has not been upheld by any court in India. It has quoted the Hon ble decision in E*Funds (supra) to contend that MAP settlement does not lay down principle and tax paid prior to Dec 2014 was to buy peace and because the amount involved was not significant. 12. With respect to the Revenue s claim of MISPL constituting a Dependent Agent PE of the Applicant in India, the Applicant has contended that merely because MISPL is rendering Marketing support service does not mean that it is dependent agent PE. The Applicant has relied upon replies of Yes Bank, Central Bank, South Bank who has stated that they are not aware of role played by MISPL 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 cont .....

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hence it cannot be for use of brand name, logo etc.. The Applicant has also contended that it is not at all necessary that the Acquirer Bank should be a bank who has issued MasterCard cards bearing MasterCard logo. It could be a bank who has not issued any credit or debit cards or it would be a bank who has issued non Master Card cards. Even then he has to pay fees to MasterCard. This shows that the fee is for the services and not for royalty. 14.1 With respect to the Revenue s claim of use of equipment/ process to constitute royalty, the Applicant has submitted that customers pay service fee to the Applicant and use of MIP is preparatory and auxiliary. The Applicant has also stated that MIP is not owned by the Applicant. The Applicant has contended that application software do not serve any purpose on standalone basis. The Applicant has submitted that the facts of Verizon Communication case (supra)are different from the facts of this case. The 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 deci .....

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ied on Hon ble Supreme Court decision in Kotak Securities Limited (383 ITR 1) in support of its claim that what it provides is standard facility and not services. The Applicant has also relied upon Hon ble Madras High Court Judgment in the case of Skycell Communications Limited (251 ITR 53) where it was held that the provision of facility for use of an electronic exchange, which had mobile communication network with a switching center did not constitute technical services. The Applicant has also contended that make available requirement is not fulfilled. The Applicant has given examples where use of technical equipment may not be use of technical service, like airline passenger paying for travelling in aircraft, consumer getting electricity, etc.. The Applicant has also contended that even if these are technical or consultancy services they are not in relation to the application/enjoyment of property for which royalty is received since there is no 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 t .....

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first issue when it has said that in the cases of Amadeus and Galileo (supra) the assessee was feeding the entry through manual operation, while MIPs are automatic equipment and hence the facts of two cases are different. We shall deal with this objection later. 16.2.3 There is also no dispute that MIPs also pass the test of permanency. They are placed on the site of customer banks throughout the year. Thus, this issue is not in dispute. In fact in the FOWC case, the Hon ble Apex Court said that it would be sufficient if the fixed place is at the disposal of the foreign entity till the time required by the business. It does not mean forever. The main issues that are required to be discussed are whether there is a requirement that MIPs should be owned by the Applicant, and whether they are at the disposal of the Applicant, and also whether they are performing activities which are of preparatory or auxiliary in character. 16.2.4 The first 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 .....

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information the point of authorization. The preliminary validation generally involves activities such as PIN processing, validation of card codes, names and address verification etc.. In the case of errors, the MIP would alert the acquirer bank/financial institution on the need for a correction and the data is not authorized. If the initial validation is successful, the MIP located at the acquirer bank would transfer the data to the issuer bank s MIP, which performs certain other functions, edits and processes. The MIP at the issuer bank will then direct the data to the issuer bank for further processing and verification. The issuing bank will then send a response (generally an approval message) through the MIP at the issuer bank to the MIP at the acquirer bank, which is then passed on to the acquirer bank for transaction approval. (emphasis added). 16.2.6 The above facts, submitted by the Applicant in its application as well 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 no .....

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er bank. However, it is also an admitted fact that preliminary verification/validation of PIN, card codes, names and address is done by MIPs (either at the premise of acquire bank or at the premise of issuer bank). The fact of MIPs raising an alert in case of error has also not be disputed by the Applicant. 16.2.8 Let us also have a look at as to how the authorization activity takes place. When a card holder sweeps his card, it is necessary to verify that he is the right person. For this, first there is a preliminary examination done by the merchant, which happens in India. Then the preliminary validation is done by MIPs located in acquirer bank premises, which involve preliminary verification of PIN, checking card codes, names and address verification. The actual part of authorization is played by the issuing bank that does the balance checking, PIN checking and final validation which authorizes the transaction. In between, 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 softw .....

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as securing of the transaction, prevention of fraud and add on functions performed by server outside India are also significant functions, but these would be important for attribution and apportionment purposes, which is not the issue under discussion. 16.2.9.1 It is an accepted fact that actual authorization is done by the issuer bank and the Applicant facilitates customer banks in doing that work. The work of facilitation involves preliminary validation/verification (performed by MIP in India), security/fraud detection/add on service (preformed by the Applicant in Singapore) and transmission of data which is crucial to authorization (this happens both in India and outside through MIP and MasterCard network). Thus, the initial verification/validation of PIN, card codes, names and address, and encryption and communication of data is important and crucial function in the context of overall functions performed by the Applicant to facilitate 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 .....

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to undertake the maintenance work. This example doesn t help, since in the present case the owner, ie. MISPL does not exercise any of the rights of an owner, such as deciding whether and when to repair the instrument or buy a new one; agreeing to the terms and conditions of repair; whom to engage for repair and at what cost, and so on. In the present case, all these risk mitigation decisions are taken by the Applicant or its overseas AEs on its behalf. They enter into the agreement with third party service providers on their own behalf and not on behalf of the MISPL. The Applicant enters into agreement with banks. Thus all decisions with respect to MIPs are taken by the Applicant. All costs get charged to the Applicant. These facts, as brought out by the Revenue in its report, are not disputed by the Applicant. Further, the Applicant itself has admitted in the rebuttal that the software upgrade happens through data centers outside India, 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 th .....

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ion are not preparatory or auxiliary in character and are significant functions. Hence, MIPs create a PE of the Applicant in India. 16.3 Let us see some of the arguments of the Applicant, other than the functioning and role of MIPs. Its reliance on the decision of the Hon ble Delhi High Court in the case of UAE Exchange Center Limited (supra) appears to be misplaced, as the facts of this case are different. In that case the LO in India was like a post office company which used to download the remittance particulars through electronic media and then print the cheques/drafts for delivery. These were held to be subsidiary activities, as the main activity of fund transfer had already happened overseas and only supporting activity was happening in India, subsequently. In our case an important component ie. transaction processing and authorization is happening in India though MIPs. In the case of UAE Exchange, the work performed was of fund 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 car .....

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d entity which owns MIPs and is resident in some third state, other than Singapore and Australia). These facts are confirmed by the applicant. Applying these to our case, we have A as our Applicant, B is the MasterCard subsidiary in Australia, and C is MasterCard group entity outside Australia/Singapore, owning the MIPs. The ruling says that the computer processor (MIP) which performs the automated processing services is owned by C co. and is located at each customer s premises. Through the computer processors (i.e MIPs) and through the processing centers that C co. owns and operates in country B (this is some third country where C Company has a processing centre), C co. provides the processing services to A co. and receives fees. Some processing services are performed at the processing center in Australia which is owned by B co. As between A Co. and the customers, it is A co. that is responsible for 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 pr .....

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, clearance and settlement. Thus, this would be relevant for the assessing officer for attribution purposes. 17.1 The Applicant has submitted that MasterCard Network lies outside India and no part of it is in India. However, the Revenue has quoted the following from the TP report of MISPL for FY 14-15: MCT LLC is responsible for management and maintenance of MasterCard Worldwide Network remotely from the USA. For the same, MCT LLC has entered into various agreements with third party service providers for the maintenance of the MasterCard Worldwide Network (this includes the MIPs owned by MISPL). The direct and indirect cost of maintaining the MIPs are allocated by MCT LLC to MISPL which forms part of the cost base of processing support services . 17.2 Thus, it is admitted that MIP is part of MasterCard Network and so are the transmission tower, leased lines, fiber optic cable, nodes and 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 Netwo .....

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% of transactions both acquirer banks and issuer banks are in India. In a day, thousands of transactions happen amongst all these issuer banks and acquirer banks. Each transaction would make one bank liable to pay another bank. A sum total of all the transactions between two banks, on a given day, establish settlement position between those two banks. This is clearance. Now the question that arises, from our perspective, is as to whether this is happening in India or outside. There is no doubt that the data relating to transaction between two banks is transferred within India and outside India through transmission towers, leased lines, fiber optic cable, nodes and internet (owned by third party service provider) which is part of MasterCard Network. 17.4.1 The raw data is transferred outside by various banks using the two application software Master Connect and Master Card File express (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 .....

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Settlement Function consists of the preparation of the settlement statement by SAM abroad. We do not agree to this, for the reason that the Applicant itself has agreed that the movement of funds between issuer banks and acquirer bank is settlement. The preparation of settlement position is incomplete unless the Bank of India actually moves the fund from one bank to another bank. Thus, settlement happens when Bank of India carries out this movement and this happens in India for more than 90% of the transactions. The Applicant in its application before us has also admitted that settlement happens in India for domestic settlement. 17.5 We are of the view that the Revenue is justified in taking a position that clearance and settlement happen in India. We do accept that there are functions performed by GCMS and SAM outside India which are also significant functions. However, it is true 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 .....

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India which did the processing to throw up the best possible results for hotels and airlines, matching the customers preferences. On these facts it was held that CRS constitutes PE of the nonresident enterprise in India. What was CRS in the Amadeus and Galileo cases is MIP and application software (Master Connect and Master Card file) in the present case. It is this important instrument and software which conducts the business of the Applicant in India and it is installed in India. In the case of Amadeus and Galileo, it is installed inside the computers of travel agents (which could be computers of travel agent modified after including CRS or computer itself provided by assessee or its agent). In our case, the software and process technology (which is part of MIPs and is owned by the Applicant or licensed to it by the owner) is installed in the premises of the Customers (banks/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 .....

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hus, in order to decide whether a particular activity is preparatory or auxiliary we need to look at the work performed by the enterprise as a whole which is of transaction processing. In the context of transaction processing the work performed by MasterCard Network as outlined above cannot be termed as one of very little significance. Main authorization is done by issuer bank in India. The actual settlement by passing debit or credit entry is done by Bank of India in India. MIPs do preliminary validation/examination. Then the MasterCard Network helps in transmission of information amongst various entities. The Server in Singapore also does significant work of securing the transaction. Applicant also carries out maintenance of MIP and MasterCard Network. GCMS and SAM consolidate the data and give it final shape. In this background, the task performed by MIP (preliminary verification/validation part of 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 .....

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ent was an integral part of the assessee s worldwide CRS which was seamlessly integrated and inter-connected with the rest of the system operating elsewhere all over the world. As a result, the worldwide CRS database became instantly and continuously a part of the database which was continuously available to and at the disposal of the Indian travel agent at all times. This is what enabled the Indian Travel Agent to instantly give a confirmed reservation to a customer in India in respect of a hotel room or an airline seat anywhere in the world. Further, as per the Applicant, it was a fact that a part of the CRS was actually installed in the travel agent s office which enabled the travel agent to instantly issue a confirmed air ticket to a customer in respect of any particular flight of any particular airline. The Applicant believes that it is of utmost importance to understand that it is not as 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 t .....

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lines for display at one place but also enables the subscribers to book tickets in a way which is a seamless system originating from the desk of the subscriber s computer which may or may not be provided by the appellant but which in all cases are configured and connected to such an extent that such computers can initiate or generate a request for reservation and also receive the information in this regard so as to enable the subscriber to book the airlines seat or hotel room. The request which originated from the subscriber s computer ended at the subscriber s computer and on the basis of information made available to the subscriber, reservations were also possible. It is to be noted that all the subscribers in respect of which income is held taxable are situated in India. The equipment, i.e., computer in some cases and the connectivity as well as configuration of the computer in all the 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 i .....

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that they can use the CRS for making the bookings which generate charge on the airlines; (c) Assessee hires from SITA and maintains and operates telecommunication network in India so that travel agents could make the bookings. All these activities are integral part of the core business carried on by the assessee and these are not auxiliary or preparatory in nature. The contention of Shri Vyas regarding reliance on the decision in the case of Fisher (supra ) in this case is misplaced. Whether the contract for sale of ticket is completed in India or outside is irrelevant for the purpose of present discussion as we are not to determine the taxability of income of various airlines accruing as a result of sale of tickets through the CRS in India. Thus, the availability of the tickets displayed through the CRS at the desk of travel agents in India is whether offer for sale 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 .....

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rovided in paragraph 3 of Article 5 applies so as to hold that there is no permanent establishment in India. The case of the appellant is that the existence of such computers are merely for the purpose of advertising and the activities are preparatory or auxiliary in character and hence there is no fixed place PE in India in view of the Exception provided in paragraph 3 of Article 5. We are unable to accept such a contention. The function of the PE in India is not to advertise its products. The activity of the appellant is developing and maintaining a fully automatic reservation and distribution system with the ability to perform comprehensive information, communication, reservation, ticketing, distribution and related function on a worldwide basis. The computers installed at the premises of the subscribers are connected to the global CRS owned and operated 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 a .....

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ess deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India. Thus in a given case if all the operations are not carried out in India, the income has to be apportioned between the income accruing in India and income accruing outside India. In the present case, we find that only part of CRS system operates or functions in India. The extent of work in India is only to the extent of generating request and receiving end- result of the process in India. The major functions like collecting the database of various airlines and hotels, which have entered into PCA with the appellant takes place outside India. The computer at Denver in USA processes various data like schedule of flights, timings, pricing, the availability, connection, meal preference, special 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 fu .....

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one overseas and results were sent to the computer in India. Even then, this was found to be enough to create PE. What CRS is doing in Galileo case (supra) is the same what is being done by the application software (Master Connect and MasterCard File) in our case, i.e. sending the request and receiving the result. Like Galileo, the final customer is also in India. The customer swipes a card in India, data flows between two banks in India, and the money too moves in India. Due to these activities income is generated for the Applicant. Thus like Galileo, Revenue generating activity is happening in India. Thus, till this point of time, the facts are quite the same, and relying on Delhi ITAT decisions of Galileo and Amadeus (supra) there is strong case for PE. 17.5.5.5 Further to the above, we are of the view that facts of this case are stronger for the 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 Ap .....

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had to be operated by human beings (i.e. employees of D Co, a contractor or any other enterprise). The Court pointed out that any equipment could amount to a fixed place permanent establishment even if it functioned fully automatically without human intervention. In so holding the Court also took into account Art. 5(3)(a) of the Germany-Switzerland tax treaty (which was similar to Art. 5(4)(a) of the OECD MC 2010). As per that provision, the term permanent establishment did not include facilities used solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise. In that respect, the Court expressed that only the assets that could be itemized on the enterprise's balance sheet could be regarded as goods and merchandise. Therefore, in the Court's view, Art. 5(3)(a) of the tax treaty did not apply 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 .....

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nt has objected to this claim of Revenue. 18.2 We have already discussed that more than 90% of transaction involve domestic INR settlement for which Bank of India passes necessary entries. The Applicant himself has stated that settlement process is essentially the movement of funds between the issuer bank and the acquirer bank. This task (for more than 90% of settlement) is done by BOI in India on behalf of the Applicant through a dedicated team. As discussed earlier, settlement position transaction wise is captured in India and is already known to respective banks. MCI, on behalf of the Applicant, only compiles that information into a consolidated settlement position, which incidentally is also known to banks in India already. Based on this settlement position the actual debit and credit is done by a dedicated team in BOI. If there is 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 A .....

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d out by Bank of India is significant or not. This is more so for the reason that Bank of India gets other benefit in the form of floating money from all the banks at its disposal without any interest expense. All banks that use MasterCard have to maintain floating money with Bank of India. This interest free floating money which is at the disposal of Bank of India is sufficient remuneration for Bank of India to carry out the work at low remuneration from MasterCard. Similar example is the case of advance tax payment in India. Banks compete with each other to collect advance tax from taxpayers in India, though they do not get any collection fee from Government of India. This is for the reason that they get to use the floating money in the form of tax collected for some time before remitting it to the Consolidated Fund of India. Thus, 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 s .....

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e already dealt with this issue earlier when we discussed preparatory and auxiliary activity. This is to be seen in the context of the overall functions performed by the enterprise. Downloading and dispatching may be auxiliary activity on the facts of one case but not when moving funds between two banks. We have already discussed as to how movement of fund between two banks by passing debit and credit entry is a major settlement activity and that is performed by BOI. Thus UAE Exchange Control case does not appear to be applicable on the facts of our case. 19. Next is the role played by the Applicant s subsidiary MISPL in India and whether that can constitute a fixed place PE of the Applicant. 19.1 The Revenue has submitted that till Dec 2014, MCI had a liaison office in India, and it (through its overseas AE) owned MIPs which 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 .....

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t there was no business purpose to restructure the transaction in India other than to reduce tax liability in India. 19.3 To illustrate the above contention, the following details are given for the period prior to 1stDec 2014: - Assessment Year Income shown in the tax return by the assessee (MCI) GNOP rate declared by the assessee (MCI) GNOP rate agreed under MAP 2005-06 5.17 crore 14.64% 18.14% 2006-07 9.17 crore 16.55% No MAP in this case 2007-08 22.85 crore 22.85% 23.85% 2008-09 34.91 crore 30.76% 30.76% 2009-10 58.62 crore 40.16% MAP pending 2010-11 83.62 crore 45.82% MAP Pending 2011-12 105.05 crore 50.47% No MAP request 2012-13 128.99 crore 52.32% No MAP request 2013-14 171.16 crore No MAP request 2014-15 224.24 crore 55.43% No MAP request 19.4 For the first ten months of AY 15-16 (Till 30 Nov 2014), MCI has filed return of income declaring income of ₹ 157.51 crore. However, for the next four months (post 1 Dec 2014) MISPL has filed return of income declaring income of only ₹ 98.12 lakh. After 1st Dec 2014, MISPL has shown the following income in their return (MCI and the Applicant have shown nil return) Assessment Year Total Revenue from India Income disclosed by .....

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y other countries in that region. Thus it claimed that business reorganization was carried out purely on grounds of business efficiency and commercial expediency. The Applicant relied on SC decision in the case of Vodafone International Holdings B.V. (supra) to support that it is conventional to incorporate a separate company in each country for carrying on the business operations in that country. It also contended that it cannot be treaty shopping exercise as both India-US and India-Singapore DTAA are similar. 19.6.1 With regard to difference in tax liability, pre and post restructuring, it was submitted that the Applicant admitted LO of MCI as PE only under MAP settlement under the DTAA. It submitted that MAP based settlements were made only in order to obviate protracted litigation with the Indian tax authorities and also because the amounts involved in those years were relatively negligible. Reliance was placed on Hon ble Supreme Court decision in the case of E*Funds IT Solution Inc (supra)wherein it has been held that, a MAP agreement or settlement is in the nature of a concession made by the Applicant which is not binding on the Applicant for assessment years other than those .....

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re at the disposal of the Applicant. The Applicant has submitted that under Article 5(10) of DTAA, subsidiary cannot be regarded as the PE, as held in the case of Morgan Stanley (supra). 19.7 We have gone through both the submissions of the Applicant and the Revenue. With regard to the reasons for restructuring/reorganization, we agree with the Applicant that there were reasons of business efficiency and commercial expediency for the operations to move from USA to Singapore. Board meeting minutes, conversation with US IRS, increase in employee strength, catering to entire APMEA region etc. necessitated such a move. Even otherwise, it is not for the Revenue to decide for the Applicant as to what structure is most suitable to it and where the facilities should be set up. Such business decisions can only be taken by the business itself keeping its business interests in mind, in terms of profitability, efficiency and expediency. Unless a reorganization serves no other purpose except bypassing tax laws, no adverse inference can be drawn by the Revenue. In the instant case we cannot say that the restructuring was a case of tax avoidance or a colourable device to that end. 19.7.1 However, .....

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in its FAR. Thus, there are some functions and risks related to transaction processing which were earlier carried out by MCI in India and are still carried out by MISPL(as MISPL had taken over everything) but not shown in the FAR of the MISPL. Therefore, the subsidiary company MISPL creates PE of Applicant in India. The fact that MISPL is carrying on work of the Applicant, to that extent facility, service, personnel and premise of MISPL are at the disposal of the Applicant. This is for the reason that it is through these facility, service, personnel and premise, the Applicant is carrying on transaction processing activity and undertaking risks which are not reflected in the FAR of MISPL. 19.7.3 We will also like to consider that even if we go by Applicant s argument that past returns of MCI should not be relied upon to decide what work was being carried out in India, we will find that there is transaction processing work that is being carried out through MIPs and MasterCard network in India but not reflected in the FAR profile of MISPL. The Indian subsidiary MISPL is only shown to be carrying out support activity in its FAR and it is not carrying out actual transaction processing .....

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l and factual analysis to be undertaken in each case. Lastly, it may be added that taxing corporates on the basis of the concept of Economic Nexus is an important feature of Attributable Profits (profits attributable to the PE). This ruling actually supports the case of MISPL being PE of the Applicant. Since in our case we find that there are functions being carried out by MISPL on behalf of the Applicant, which are not reflected in the FAR profile of MISPL, hence an attribution on this score could be considered by the assessing officer. However, since the valuation or TP issues are not dealt with by the AAR and are beyond its scope, we shall not deal with this issue any further. 19.7.5 The Revenue has also quoted Spanish Roche Vitamins case and Borax case from the book of Ashish Karundia, to support the claim that MISPL constitutes a PE of the Applicant. While the Revenue gave some details on the case, the Applicant in its submission, post hearing, stated that the full text of these cases were not provided and hence it could not respond. We agree that unless the full text is available and the entire context of the case is not examined, we cannot rely upon or respond to, much less .....

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n the case of Morgan Stanley (supra) it is submitted that such activities should be categorized as stewardship in nature. The settlement activity is happening outside India. BOI is an independent entity which is carrying on minimal and clerical work for which it is getting compensation at arm s length. 20.2.1 We have considered the submission of both Revenue and the Applicant. The India Singapore DTAA under Article 5(6) states that: 6. An enterprise shall be deemed to have a permanent establishment in a Contracting State if it furnishes services, other than services referred to in paragraphs 4 and 5 of this Article and technical services as defined in Article 12, within a Contracting State through employees or other personnel, but only if : (i) activities of that nature continue within that Contracting State for a period or periods aggregating more than 90 days in any fiscal year; or (ii) activities are performed for a related enterprise (within the meaning of Article 9 of this Agreement) for a period or periods aggregating more than 30 days in any fiscal year. 20.2.2 The Revenue states that it is not in dispute that the threshold of 90 days in a fiscal year is met. We only need to .....

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o the customer. When employees visit India to inform clients about new products, this is also part of service that would be provided by the Applicant to these clients. In the context of transaction processing service that the Applicant is providing, this is an integral part of the Applicant s profession to provide new avenues of service to clients. Thus, we are of the view that the employees of the Applicant visiting India are providing services to Indian clients and hence, once they cross the threshold of 90 days in a year, a service PE is created. 20.2.5 The Applicant has relied upon the judgment in the case of Morgan Stanley (supra) to plead that stewardship activities cannot create service PE. The facts of the case are different here. In the Morgan Stanley case, the Indian subsidiary was providing service to foreign parent and the employees of foreign parent were visiting India to check if services are meeting the requirements that it had set. It is in this context, the activities were called stewardship activities. Here it is not a case where visiting employees are checking the service provided by MISPL to see if it meets their requirement. They are meeting clients in India to .....

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dependent agent PE even though the terms of the contracts are finalized by the Applicant. 21.1 The Applicant has opposed the above view of the Revenue. It is contended that merely because MISPL is rendering Marketing support service does not mean that it is dependent agent PE. The Applicant has relied upon the replies received from Yes Bank, Central Bank and South Bank who have stated that they are not aware of the role played by MISPL at the time of contract renewal. The Applicant has also relied on the statements of First Rand Bank, Canara Bank and Andhra Bank to contend that they have categorically said that MISPL is not involved. It is submitted that MISPL was not even incorporated when agreement with Andhra Bank was signed in 2013. The Applicant states that MISPL provides the proposals to the Indian banks that are prepared, validated and approved by the Applicant. The proposals contain the rates at which the Applicant proposes to provide services to the customer banks. In case the customer does not agree with the proposed terms and makes a counter proposal, the same is uploaded on the portal of the Applicant outside India by the employees of MISPL. Thereafter, it is completely .....

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ises controlling, controlled by, or subject to the same common control, as that enterprise. 21.2.1 Clauses (a) and (c) may of relevance to us. Clause (a) talks about an agent habitually concluding contracts, on behalf of the non-resident enterprise. We agree with the Applicant that Revenue has produced no evidence to invoke this clause. The replies received from the banks in response to the information called for by the Revenue under section 133(6) of the Act, and discussed by the Applicant, clearly suggest that MISPL is not habitually concluding contracts. Almost all the banks have denied MISPL s role in this regard or have expressed lack of any information on the same. We do not have before us any evidence placed on record by the Revenue that even indicates that MISPL habitually concludes contracts on behalf of the Applicant. 21.2.2 With respect to clause (c), the requirement is that MISPL should habitually secure orders in India wholly or almost wholly for the Applicant. It is not in dispute that MISPL works only for the Applicant. Although it was envisaged that MISPL would also be rendering services to third parties but it has been accepted that as of now there is no service to .....

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ovided services such as procuring orders, organization of events and conferences in India, media relations and administrative support. The UK incorporated subsidiary being a dependent agent was not disputed by the taxpayer. The ITAT, Delhi observed that the UK incorporated subsidiary habitually secures orders in India for the taxpayer, and as a practice no customer in India sends its order directly to the taxpayer. They are required to be routed only through the subsidiary. Accordingly, it was held that an Agency PE is created. In our case, there are very few orders. 21.2.2.3 The case before us is not a case where there are several orders. There would be only a few agreements with new banks during the year and some renewals. The Applicant itself has accepted that since 1 Dec 2014, there have been only seven new agreements with Tamilnadu Mercantile Bank, Bandhan Bank, Lakshmi Vilas Bank, Airtel Payment Bank, Kerala Gramin Bank, Oriental Bank of Commerce and IDFC Bank. From the narration given by the Applicant, it is clear that the proposal for these agreements, though finalized by the Applicant, are taken to the banks by MISPL before it gets accepted by the banks. Thus, all agreemen .....

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a PE being created due to deputation of employees to Indian subsidiary. Revenue has pleaded that if new facts emerge later, the department would like to examine afresh on this issue as to whether it creates PE. Since the Applicant has categorically stated that none of its employee has ever been deputed to MISPL, we would like to consider that there is no PE on this account at present, unless subsequent facts are suggestive of a different picture. In that case, of course, this Ruling on this issue would become inapplicable. 23. We now come to question number 3, ie. whether, the fees to be received by the Applicant from Indian Customers, such as transaction processing fees, assessment fees and transaction related miscellaneous fees, would be chargeable to tax in India as royalty or fee for technical services ( FTS ) within the meaning of the term in Article 12 of the India- Singapore DTAA. 23.1 The Revenue has relied on Hon ble Delhi High Court judgment in the case of Formula One World Championship Limited (FOWC), (supra), though in that case it was held that use of brand/trademark was incidental. However, Revenue has shown how the facts of this case are different from FOWC and how .....

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ontended that all banks in their reply have submitted that the fees are for transaction processing service and not royalty. It is further contended by the Applicant that customer banks are not concerned with the machinery, equipment and the intangibles that are used for rendering transaction processing services. The banks only want their transactions to get authorized, cleared and settled in an efficient manner. They pay for the services and not for the intangibles. The Applicant has of course been contending that no portion of settlement functions happen in India. The Applicant has relied on Hon ble Delhi High Court judgment in the case of Formula One World Championship Limited (supra) to support its case that use of brand name, logo etc. is only incidental. The Applicant has further contended that service charges are based with reference to the value and volume of transactions which are processed and hence it cannot be for use of brand name, logo etc.. The Applicant has also contended that it is not at all necessary that the Acquirer Bank should be a bank which has issued MasterCard cards bearing MasterCard logo. It could be a bank which has not issued any credit or debit cards o .....

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o for the use of marks and IP and hence royalty. AAR concluded that it was royalty. However, in appeal Hon ble Delhi High Court held that the payment is not royalty as the use of logo, trademark etc. is only incidental. With this background, let us examine the reasoning of Hon ble Delhi High Court in FOWC and examine whether it applies to the facts of our case. 23.4.1.1 The Hon ble Delhi High Court had relied upon the Note 10.1 of OECD commentary on Article 12 of the Model Convention. According to this Note, payments solely made in consideration for obtaining the exclusive distribution rights of a product or service in a given territory are not royalty, since the resident distributor does not pay for the right to use the trade name or trade mark under which the products are sold but merely obtains the exclusive right to sell in his state of residence, the product that he is agreeing to buy from the manufacturer; such payments will be characterized as business income. This Note is not applicable on the facts of our case. In our case there is no distribution right for any product or service involved. What the banks/FIs want to do is to issue their own cards and on that they want to u .....

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ectors, and other directives adopted, modified, supplemented, changed or rescinded, from time to time in connection with such Marks (each, a "Rule"). Upon application by Licensee, and approval by MCI, MCI may, from time to time, amend Schedule A by adding new trademarks/service marks or by modification of existing Marks, in which event, such added or modified trademark/service marks shall be included in the defined term Marks for purposes of this License Agreement. Licensee may use a particular Mark only in the manner authorized in Schedule A and only after the date indicated on Schedule A for such Mark. From this it can be seen that MCI has granted Licensee right to use various trademarks and marks owned by it, solely in connection with License s payment card programs. Thus, it is clear that the dominant purpose of the agreement is to allow use of intangibles for the payment card programs of licensees, ie. of the banks and FIs. There is no mention of any transaction processing service in this agreement or any other agreement. From nowhere in the License agreement can it be inferred that the licensing of the trademark was not the main purpose and was only incidental to al .....

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s is a finding of facts. It was also observed that Jaypee s permitted use, as it were, was for a limited duration and of an extremely restricted manner; as event promoter and the host Jaypee had to publicize the F1 Grand Prix Championship. Therefore, it was bound to use the F1 marks, logos and devices. 23.4.1.5 Unlike RPC and ALA in FOWC, there is clear indication in our case that the parties intend to license the trademark. In fact the agreement between the Applicant and customer banks is quite clear that the dominant purpose is to license the trademark/mark. The Agreement has no reference to transaction processing. Further, unlike FOWC, the use of trademark/mark is not for a limited period and also not for use in a restricted manner. 23.4.2 We have also perused the licensing agreement between the Applicant and MCI US, who is the real owner of the Intellectual Property (IP). Under this agreement, the Applicant is paying royalty to MCI for use of IP in various countries, including India. This is discussed in detail in the subsequent part of this ruling. This licensing agreement and payment of royalty for use of IPs in India further establishes that a part of payment made by the cus .....

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s defined in Section 1.3 below) relating to the design, development, marketing, distribution and license of global payment solutions; WHEREAS, LICENSEE is a wholly owned indirect subsidiary of LICENSOR; and WHEREAS, LICENSEE desires to acquire, and LICENSOR desires to grant to LICENSEE, certain rights to use and sublicense the Intellectual Property in conjunction with the promotion, performance and sublicensing of the Services. 1.3 "Intellectual mean and include any and all inventions, Patents (as defined in Section 1.11), works of authorship, copyrights, Mark (as defined in Section 1.4), trade secrets, computer programs (in source code and object code form), flow charts, formulae, enhancements, updates, modifications, translation adaptations, information, specifications, designs, process technology, manufacturing requirements, quality control standards, information and supply chain information systems, Confidential Information, know-how and any other intellectual and industrial property rights intangible property rights, and proprietary acquired by LICENSOR prior to or after the Effective Date, and any and all additions, modifications, improvements, enhancements, updates, ren .....

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the promotion and sale of the Services (the "License"). 2.2 Sublicensing Rights. LICENSOR hereby grants to LICENSEE the right to grant sublicenses of the rights granted in the License solely to Member Banks and MCI Affiliates. LICENSEE shall be responsible for enforcing the terms and conditions in the MLAs and shall provide regular reports to LICENSOR on the Member Banks' compliance with the MLAs and the MCI Affiliates' compliance the MCI Affiliate License Agreements. 2.3 Assignment of MLAs. LICENSOR hereby assigns to LICENSEE all of its rights and obligations under the MLAs, and LICENSEE hereby accepts such assignment and assumes such obligations. LICENSOR shall give notice of this assignment to the other parties to the MLAs and direct those parties to remit payments under the MLAs to LICENSEE. 4.1 Quality of Services. LICENSEE agrees that in its conduct of business Services and the Intellectual Property, LICENSEE shall observe and art s: standards LICENSOR issues from time to time. LICENSEE further agrees that it shall use the Intellectual Property only in conjunction with Services that are of high quality and that it will preserve the goodwill and outstanding r .....

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for promotion and sale of goods or services, and in this case the agreement clearly establishes that royalty paid is for use of these intangibles in India. The Applicant has further licensed these IPs to banks so that banks can use them for selling their cards which in turn would increase the transaction processing activity of the Applicant. By using these IPs, banks/FIs were issuing cards to its customers. These customers of banks/FIs see the MasterCard logo, marks etc. and buy these cads for the trust, brand name and reliability associated with such logo, marks etc.. This in turn helps Master Card to increase the transactions on its network and hence more Revenue from Banks/FIs. Thus, the agreement is clearly for use of IP in Asia Pacific region including in India. 23.4.4.1 The Applicant submitted that the royalty payment made by it to MCI US is for the right to carry on business, and licensing of IP is only incidental. We do not agree with this contention. There is nothing in the licensing agreement which says that the royalty paid by Applicant to MCI US is for the right to carry on the business. The agreement clearly says that royalty paid by the Applicant to MCI is for use of .....

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able part of the package of services rendered by the Applicant to its Indian customers. In other words, there is no grant of any license to use the trademark/logos independently from the card transaction processing services availed of by the said customers from the Applicant. We have already discussed this issue earlier when we discussed that the license agreement between the Applicant and customer banks (earlier between MCI and customer banks which got assigned to the Applicant post restructuring) clearly states that banks are allowed to use these trademarks/logos solely in connection with bank s payment card programs. Thus it is clear that the dominant purpose of the agreement is to allow use of intangibles for the payment card programs of banks and FIs. There is no mention of any transaction processing service in this agreement or any other agreement. From nowhere in this License agreement can it be inferred that the licensing of the trademark was not the main purpose and was only incidental to allow use of trade mark for transaction processing. We have also discussed how transaction processing service is rendered by the Applicant to banks that are recipients of service and not .....

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licensing of IPs which they have taken on license from the Applicant for selling their cards. This licensing of IPs is not incidental to the transaction processing service because that service is provided by the Applicant, and IPs are used by the banks for selling their cards (and not Applicant s cards). In fact, the use of IPs is actually by the final consumers who buy MasterCard debit/credit card based on its brand, logo, reputation, reliability, trust, etc.. It is these final consumers (the holder of credit/debit card) who are ultimately making the payment for the services. It may appear that it is banks that are making payment to the Applicant, but in reality the incidence of this payment falls on final consumers as merchants price their products keeping in mind the fee that they have to pay to MasterCard. Thus, the person who swipes his MasterCard to make plastic payment is the one who bears the actual fees paid by banks to the Applicant. This person uses MasterCard for its brand, logo, reputation, reliability, trust, etc.. The Applicant contended that the fee is paid by acquirer bank even in cases where the Applicant has not licensed the IPs to this bank. The Applicant thus c .....

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eipt under such an arrangement could be in the nature of Royalty, irrespective of the mode of payment. In fact, in the FOWC case (supra) the fact of lump sum payment went against its characterization as royalty. 23.5 Another issue raised by the Revenue is with regard to the use of equipment, and whether allowing the use of the same would constitute royalty. It is contended that the use of MIP along with MasterCard network and processing technology constitute equipment/process royalty. The Revenue has contended that the Applicant is the real owner or licensee of MIP though on paper it is shown to be owned by MISPL. MIPs continue to be owned by overseas AEs even after 1st Dec 2014 and are licensed to the Applicant. The Process technology is part of IP licensed by MCI to the Applicant who in turn has a right to sub-license it to Indian customers. Thus process technology which is part of the MIP and MasterCard Network is owned by the Applicant or is licensed to it. The application software (Master Connect and MasterCard File express) are admitted to be owned by the Applicant or licensed to it. Thus the fees represent money paid by Indian customers to the Applicant for use of equipment .....

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nt to the extent of the dedicated network hired by the customer, which enable it to carry out its functions. Revenue has also pleaded that Note 9.1 of OECD commentary on Article 12 only requires physical possession with the customer to constitute equipment royalty for cases where in the equipment royalty provision is there, and there is no condition of control being with the customer. Thus, requirement of control is not a Treaty requirement and it can always be clarified through clarificatory amendment in domestic law. The insertion of Explanation 5, so far as it gives clarification on control , does not amount to overriding the DTAA as there is no requirement of control in the DTAA. Revenue has also pleaded that the Hon ble Madras High Court judgment in Verizon involves India Singapore DTAA and hence is of greater significance. In any case, in our case even the requirement of possession with the customer is satisfied. 23.5.3 In response to the Revenue s contentions mentioned above, the Applicant has submitted that the customers pay service fee to the Applicant and use of MIP is preparatory and auxiliary. The Applicant has also stated that MIP is not owned by the Applicant. The App .....

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MIP is owned by the Applicant. This is based on the submission that MIPs are under the control of the Applicant, a stand that we have accepted earlier, and that ownership of MIPs were not transferred under ST/VAT as no invoices were issued and these taxes were not paid. The Applicant has claimed that the seller of MIPs has paid capital gains tax and has been allowed depreciation by the assessing officer under section 143(3) of the Act. There is no dispute on these facts. But we are of the view that the main purpose of Income- tax Act is only to determine taxable income. For a transfer of ownership, a sale must be effected and sales tax/VAT paid. Only then it is complete. Hence, the latter is a better determinant of a transfer taking place. Since, there is no compliance of sales tax at the time of transfer of ownership in Dec 2014, in fact even till today, there is no transfer of ownership under the eyes of law, and hence, the MIPs continue to be owned by the overseas AEs of the Applicant (as before reorganization) and that AEs have given the MIPs to the Applicant under a license. 23.6.1 In this connection it may also be highlighted that in the written submission, filed post hearing .....

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lied upon as it is on the India Singapore DTAA. Revenue has also pleaded that Note 9.1 of OECD commentary on Article 12 only requires physical possession with the customer to constitute equipment royalty for cases where, in Treaty, equipment royalty provision is there, and there is no condition of control being with the customer. Thus, requirement of control is not a treaty requirement and it can always be clarified through a clarificatory amendment in domestic law. 23.7.1 We are of the view that the Hon ble Madras High Court decision in Verizon Communication (supra) has more persuasive value than Hon ble Delhi High Court decision since Verizon case is on India Singapore DTAA, which is relevant to our case. Further, the AAR has also relied on explanation 5 in its rulings in the cases of Cargo Community Network Pte Ltd (supra) as well as Dishnet wireless Limited (supra). Thus we hold that in view of Explanation 5, there is no requirement of control with the user. We are also of the view that, as submitted by the Revenue, there is no Treaty requirement of control with the user, and hence domestic law can always be amended to clarify this. There is no doubt that possession of MIPs is .....

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as an annexure to license agreement between the Applicant and MCI US) we can see that there are a number of patents related to process used for transaction processing. Some examples are: a system and method for secure telephone and computer transaction, customer authentication in e-commerce transaction, a system for authenticating card holder transaction with a merchant on an electronic network, method and system for authorizing a transaction using a dynamic authorization code, system and method for generating collision free identifiers for financial transaction cards, method and system for using contactless payment cards, method and system for conducting contact less payment cards, reference equipment for testing contactless payment devices, payment card signal characterization methods and circuits, contact less payment card reader, collision detection and avoidance scheme, method and system using a bitmap, techniques for authorization of usage of a payment device, apparatus and method for bill payment card enrolment, methods and systems for paying a bill using a transaction card account. The Applicant, in its written submission filed post hearing, has stated that only three pate .....

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TAT held the payment as royalty in the Google case are similar to facts in our case. Like in the Google case, in our case as well, right in intellectual property of master card is allowed to be used by Indian customers. Indian customers are allowed to use trademark of MasterCard to sell the cards owned by them. Further, intellectual property in the MIP and in the Master Card network (in the form of software and process technology) is used for authorization, clearance and settlement. This process works only with the help of patented tools, software and process technology owned by MCI and licensed to the Applicant. Without the use of these intangibles, the entire process of authorization, clearance and settlement would not happen. The intellectual property in MIPs and Master Card Network vest with the MCI which has licensed it to the Applicant. These activities also use a secret process which is not in public domain. Thus use of brand name, intellectual property and secret process of Master Card by the Indian customers clearly falls under the definition of royalty, both under the Act as well as under the DTAA. Hence, the facts being the same, reliance can also be placed on Bangalore .....

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a license granted by the owner to make copies of the said software for use on the purchaser s hardware. On the basis of said grant of license, it was successfully contended by the Revenue that payments were in the nature of royalty. There is no such provision of software, either in a sale or license basis, by the Applicant to any of its customers. We do not agree with this submission of the Applicant. In these two cases there was no license to copy and sell the software. What was allowed under license was only to copy the software on the computer enabling the user to use the software. We find similar facts in the case before us. Customer banks have to copy the application software on their computer and then only they can use it. Thus, the objection of the Applicant is not acceptable. 25. We shall now consider as to whether the fee payable to the Applicant is taxable as FTS under India Singapore DTAA. 25.1 The Revenue has also contended that a part of the payment may represent service fee which is taxable as FTS. It is technical service (as it involves use of MIP, process technology and network) and is in connection with application/enjoyment of property for which royalty is paid. I .....

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nce there is no royalty in this case. The Applicant also submitted that since make available test is not satisfied, it cannot be taxed as FTS under the India Singapore DTAA. Various case laws have been relied upon. 25.3 Before we examine the question of applicability of FTS provision in the India Singapore DTAA, we need to see whether the service is a facility as laid down by various courts. Hon ble Supreme Court in Kotak Securities Limited (supra) has stated that fees paid in connection with standard facility cannot be classified as FTS. Although the Applicant has relied upon Bharti Cellular Limited (SC) (supra) as well, however, in Kotak Securities subsequently it was held that modern day scientific and technological developments may tend to blur the specific human element in an otherwise fully automated process by which such services may be provided. The Hon ble Supreme Court thus held that human intervention is not the right test and the right test is whether the service provided is standard facility. Thus, relying on the Kotak Securities case, we need to first ascertain whether there is standard facility or not. 25.3.1 The Applicant has relied upon the case of Skycell Communic .....

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for the use of the process provided to them. Thus, the Revenue has pleaded that the relation between the banks and the Applicant is for the use of process, though the relation between final user of cards and the Applicant may be of use of a facility. 25.3.2 We are unable to agree with the stand taken by the Revenue on the above issue. We have already held that ultimately the beneficiary is the final consumer who is using the card. Whether a particular payment is royalty or service or facility needs to be seen from his perspective. Banks are only a medium for payment of fee to the Applicant. Hence, we hold that the relation between final consumer and the Applicant is of use of a standard facility and hence, transaction processing service rendered by the Applicant cannot be taxed under the Article concerning Fees for Technical Services in India Singapore DTAA. 25.4 We have also noted that there are services other than transaction processing services. They are in the nature of warning bulletin fees for listing invalid or fraudulent accounts either electronically or in paper form, cardholder service fees, program management services (e.g. Foreign exchange margin, commissions, load fees .....

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ssing Officer may consider a further attribution to this PE on this score. 26.3 Coming to agency PE, we have already discussed the decision in Morgan Stanley (supra) earlier. Even in the case of dependent agent PE, the FAR profile of the Applicant AE is different from FAR of the dependent agent (Indian subsidiary). It is only when the two FAR are the same that one can say that there cannot be any further attribution. We have already held earlier that in this case the PE of the Applicant created through Indian subsidiary (agency PE) is entering into contract with Indian Customers by securing orders. This function performed and risks undertaken are not reflected in the FAR profile of the Indian subsidiary and hence the remuneration to subsidiary would not extinguish attribution to the PE for those extra functions and risks. We had earlier discussed that in Morgan Stanley it was held that no further attribution to PE would hold good only when the AE has been remunerated on an arm s length basis taking into account all risk taking functions of the nonresident enterprise. If TP analysis does not adequately reflect the functions performed and the risks assumed by the nonresident enterpri .....

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E in India under the provisions of Article 5 of the India Singapore DTAA in respect of the services rendered/to be rendered with regard to use of a global network and infrastructure to process card payment transactions for Customers in India. There is fixed place PE, service PE and dependent agent PE. (2) Arm s length remuneration to PE on account of Indian Subsidiary for the activities performed / to be performed in India, would not absolve the Applicant from any further attribution of its global profits in India since the FAR of the Indian Subsidiary does not reflect the functions/risks of the Applicant performed/undertaken by it. (3) A part of the fees received/to be received by the Applicant from Indian Customers (comprising transaction processing fees, assessment fees and transaction related miscellaneous fees) would be classified as royalty within the meaning of the term in Article 12 of the India- Singapore DTAA. However, since it is effectively connected to PE, it would be taxed under Article 7 and not under Article 12. The fee cannot be classified as FTS under Article 12 of India-Singapore DTAA. (4) The Applicant is required to withhold tax at source on amount attributed t .....

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