� of �1 11

Vox Analytica Files

Key observations using legal analytics tools on the subject of Permanent Establishment with specific reference to the case:

MasterCard v/s Union of India.

All the insights in the report are based on data available in the public domain. The report is meant for informative purposes only and must not be construed as legal advice. Riverus bears no liability in case any individual or an organisation acts on the data and inferences given in the report.

2019/01

Copyright © 2019 Riverus Technology Solutions Pvt Ltd, All Rights Reserved.

Why Analytics A typical high stakes dispute, often has multiple senior counsels. If a matter is in appeal, the facts would have been finalised at the court of first instance. The legal points to be relied upon by either side will also be more or less known. The judge is required to weigh in favour of one counsel over other, and the arguments and precedents that resonate with the judge’s thoughts stand the maximum chance of success.

The question really is whether there is a way to find out, beforehand, what would persuade the judge.

Therein lies the case for analytics.

� of �2 11

India’s legal system closely follows the English legal system. Consequently, precedents play an important and critical part in the decision making by courts. • A court is bound by a precedent set by

a higher court, and in certain cases, considers precedents of other courts whose decisions are not strictly binding on the former.

• Both sides of a dispute bring forward several decisions to appeal to the judges. While the arguments can be ingenious or predictable, there is no turning away from citing precedents which support such arguments.

Helps counsel visualise trend and tailor arguments to draw leverage from the trend.

Provides opportunities to consider broadest set of relevant judgments.

Legal analytics focuses on large legal data set, uses machine learning to identify and extract data points and, combines these data points to represent visually, state of affairs about a legal issue and judges’ behaviour.

Helps counsel to meet the challenge of the opposition’s case with the help of data sets.

Creates a distinct advantage in favour of the user and can be the ‘key’ winning to the litigation.

Background The current case study aims to demonstrate indicative insights in relation to the Writ petition (10944/2018) filed by MasterCard Asia Pacific Pte Ltd’s against the decision of Authority for Advance Rulings (AAR).

In June 2018, the AAR ruled the following in the case of MasterCard:

• The setting up of Indian operations of MasterCard has resulted in formation of a fixed place PE, service PE and dependent agent PE in India under Article 5 of the India–Singapore Double Taxation Avoidance Agreement.

• The fees paid to MasterCard Singapore by Indian banks and financial institutions for payment processing services offered by MasterCard Singapore would be classified as royalty income.

Aggrieved, Mastercard filed a writ petition before the Delhi High Court and the matter is pending.

While we wait and watch to find out what transpires in the Delhi High Court, this report sets out certain insights from analytics from all the cases dealing with determination and taxation of Permanent Establishment.

� of �3 11

Volume of Litigation A rising trend in number of cases surrounding an issue signifies presence of developing jurisprudence and it puts parties and counsel on notice. A substantial number of precedents must be considered and their suitability and citation worthiness needs to be carefully evaluated.

The adjoining graphic displays a rise in PE related cases in the last few years. As you see, the trend line shows a steady rise. While we may be over the peak, the next few years would probably still see much litigation in this area.

The greater the number of precedents, easier it is to infer a judicial trend on a particular issue. Of course, analysis of a large number of precedents without machine learning techniques would be nearly impossible in the given timeframe of a

dispute. You wouldn’t want to miss a key case or rely on a decision, which may not squarely apply to your case.

Since the MasterCard writ petition is up for hearing in the Delhi High court, analysing data for PE cases in this court shows a trend similar to litigation at the national level.

� of �4 11

0

50

100

150

200

250

300

2013 2014 2015 2016 2017 2018

Rise in Cases

0

2

4

6

8

10

12

14

16

2011 2012 2013 2014 2015 2016 2017

PE Cases in Delhi High Court

PE Terrain in Delhi High Court Once a rising trend is noticed, it is important to identify the terrain of litigation with respect to specific points involved in the dispute.

Delhi HC by far has the highest number of PE tax cases at the High Court level (Bombay HC is a distant second) and as a result it is an important forum to follow.

The outcome of most of the cases are in favour of the Assessee, and while this may be similar to income tax in general, and PE litigation across the country as well, it

does signify that revenue is actively chasing this area. Tax payers, and the professionals helping them, need to be aware of the outcomes in great detail.

The following cases are currently the most cited cases for PE disputes before Delhi HC.

Case Name Mentions

Issue PE Type Evaluated

Nokia Networks OY (2012)

56 • Does Indian subsidiary form a PE in India? • Is tribunal is correct in attributing only

20% of global profits to subsidiary?

• Fixed place • Installation • Dependent

• SubsidiaryEricsson A.B (2011)

52 Whether in law the Tribunal was justified that the assessee did not have a business connection in India? Whether in law, the learned Delhi Tribunal was justified that the assessee did not have a PE in India?

Dependent

Centrica India Offshore (2014)

13 Whether presence of seconded employees created a PE in India? 

Service

� of �5 11

73% 8%2%

15%

PE Cases outcome distribution in Delhi HC

AssesseeRevenue

Partial

Remand

Delhi HC, 88

Bombay HC, 38

Madaras HC, 19

Gujarat HC, 16

Others, 16

The Right Argument The decision of the AAR heavily relies upon OECD principles; given that these principles are part of foreign jurisprudence, it is important for counsel to examine the treatment given by Indian courts to these. Legal analytics helps to quickly present the trend of these cases.

The adjoining figure provides information on unique case ratios and the number of cases dealing with OECD commentaries with reference to the MasterCard writ petition.

The benefit of legal analytics can be further understood when one seeks to narrow down a legal issue within all cases that have dealt with a larger legal issue. Cases dealing with Fixed Place and Auxiliary & Preparatory PE will allow counsel to focus on the specific legal principles applicable to these types of PE.

Recent decisions by tribunals and courts indicate that the term ‘Permanent Establishment’ has been given a wide meaning (Google India, Dun & Bradstreet Espana).

The evolving business environment has led to many hypotheses over what constitutes a fixed place PE resulting in many conclusions. Thus, in order to determine the business connection the facts of each particular case need to be analysed.

� of �6 11

PE related judgments 1248

Unique Case ratios 93

Cases referring OECD 355

PE related judgments 1248

Fixed Place PE 239

Prep & Auxiliary PE 272

A Library of Factors Given the complex judicial terrain, in order to test the core question of business connection, it’s important that a library of all relevant factors which have been deemed to have established a business connection is prepared.

Precedents analytics is an important part of legal analytics. Precedent analytics involves two important tasks. The first is to examine the frequency and relevance of each precedent cited by rival counsel so that points of similarity / distinction can be put forth robustly. The second purpose of precedent analytics is to find out unique strengths in the precedents that should be brought to the notice of the court.

Finding relevant cases and precedents is an important step towards putting together the right arguments. Technology and data processing is able to provide an entirely new dimension for this well understood component of research.

� of �7 11

Know cases with similar situations where the arguments have been accepted or denied

An exhaustive compilation will help counsels feel more confident and be better prepared with their arguments.

Advantages of a Library

Merely because there are certain transactions between the Indian subsidiary and the foreign parent company, it does not mean that the Indian subsidiary constitutes a PE for such foreign company in India.

Netapp B.V. [2017] ITAT Delhi

If an Indian subsidiary conducts its own business with the help and guidance of a foreign company or parent company in India, it cannot be a PE of the foreign company in the country .

When a local subsidiary engages in back office work in India for its overseas parent, it does not qualify to constitute a PE in the country, since no business activity of foreign company was undertaken in India.

EPCOS AG [2009] ITAT Pune

Morgan Stanley [2007] SC

Not accepted by AAR

Not cited

Not cited

Relevant Business Connection Cases wrt MasterCard

Judge Analytics Judge Analytics lies at the heart of our specialised research service. In judge analytics, the focus is to analyse past judicial data of judges hearing a case so as to help counsel to make tailor made arguments.

In carrying out judge analysis, Riverus uses multiple tools, two of which are mentioned below:

The litigation in tax is becoming increasingly complex. It is therefore

essential today that counsel has the benefit of best information, as well as judicial trend so as to make the strongest case on behalf of client. Using legal analytics, the consultants, the in-house tax teams and outside counsel will be much better equipped to find the right precedent, right argument, predict how long a case may take, what damages might be expected, what strategy their opponent might employ, what strategy is likely to be successful, etc.

� of �8 11

A. All relevant cases decided by a judge and their outcome trend.

B. Outcome trend on specific issues C. Frequently used precedents by

the judge frequently in a particular area.

D. Precedents with which a judge has previously disagreed.

E. Specific tolerance level of a judge in respect of an argument.

F. Approach to penalty, where relevant.

A typical Riverus Judge Analytics report contains:

Case Ratios: The rationale used by the judge to arrive at the decision.

Black Letter Law: Statements made by a judge on the basis that the judge believes those statements to be the absolute position of law.

Judge Analytics for PE @ HC Delhi

You may not need much help from analytics to guess that many HC judges would be well aware of PE related issues. This can be logically deduced from

the high volume of PE judgments at HC Delhi,

But unless you have easy access to the details, you may still be making guesses. It would be immensely helpful to know the awareness levels and opinions of a judge with respect to an issue. Here are some Insights.

Justice Ravindra Bhat

Justice Bhat has dealt with the most cases in HC Delhi related to Permanent Establishment in India and is well versed with the topic. He is also a very experienced judge on taxation, having disposed of over 1500 cases of the same.

� of �9 11

S Ravindra Bhat, 24

S Muralidhar, 22

Vibhu Bakhru, 17

Sanjiv Khanna, 16

A K Sikri, 14

Judges with most PE cases @ HC Delhi

Sample Case Ratios from over 430 mentioned by Justice Ravindra Bhat

Justice Prateek Jalan

Justice Jalan, who was elevated to the bench in October 2018, has only a few tax judgments to his name.

� of �10 11

• Delhi High Court benches tend to reshuffle very quickly. In 2018 the roster was reshuffled 9 times. Also, over the past 5 years, there has always been a roster reshuffle immediately after the winter break.

• However, for the past 2 years, all taxation matters have been listed before a bench presided over by either Justice Bhat, Justice S. Muralidhar or Justice Sanjiv Khanna, who are all experienced in taxation.

• Justice Muralidhar has dealt with almost 2000 cases on taxation, including Adobe Systems Incorporated & Ors. Vs. ADIT which lays down the court’s view on existence of a PE in India

• Justice Khanna has disposed of about 1000 cases on taxation, including DIT vs. E Funds It Solution, a ruling on PE which was affirmed by the SC recently.

• Both Justice Khanna and Justice Bhat are being considered for positions in other courts, and if they are transferred before March 2019, there is a likelihood that the case could be passed on to Justice Muralidhar

Roster Reshuffle at Delhi HC

Sample BLLs from over 300 mentioned by Justice Ravindra Bhat

� of �11 11

Prudence is a Lit Trodden Path

Litigating in court, today, may not be very different from conducting a science experiment. You take a hypothesis, conduct an experiment and derive a conclusion.

Conducting experiments where you don’t know the conclusion, while dangerous, may lead to glory in the pursuit of knowledge. With respect to law, conducting experiments in court is dangerous, and even if there is glory it could come at a cost.

So, the next best thing to do is to learn from other experiments. There are over 2.5 lakh experiments in the area of income tax that you can certainly take a cue from. And with technology-enable assistance from Riverus, it is extremely simple to find curated insights from the most relevant ones.

Want to know what legal analytics can do for you?

Reach us at hello@riverus.in

Copyright © 2019 Riverus Technology Solutions Pvt Ltd, All Rights Reserved.