is this seat stay normal or is there a dent / damage here?
Hard to tell it's near the welding but the other side does not have this.
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I would scratch around the paint edges with a sharp pick or screwdriver. You're looking for rust, and that means flaking off loose paint.
Once you expose all the damage and poke at it to make sure there's metal behind, then decide if its a dent or a crack or a poor braze or bog/filler.
If you decide to keep the bike, then treat all the rust with rust-stopper as many times as it takes to remove. Then sand and prime, paint, sand, topcoat, sand, and clearcoat.
If you're not happy with what lies beneath, replace the bike frame. While "steel can be fixed by anyone" its rarely worth the cost.
I cannot tell you what you should do. Your tolerance for risk of a failed seat stay determines that. If concern about it means you are no longer enjoying riding the bike, further investigation is required.
It is hard to tell what has happened, I suspect it has been like that since new. Given the apparent age of the bike, and it is steel, there is nothing there that would stop me riding that bike. (Perhaps retire it from stunt riding and downhill mountain biking till you are sure it is not a problem)
I would probably add it to my regular inspections (and suspect it would drop off after a while if not changed). You could remove the paint and clean up the steel looking for signs of cracking, then repaint it, but I wouldn't do that immediately.