Nearly eight years after Mastercard Asia Pacific moved the Delhi High Court, a Division Bench Tuesday began hearing afresh its challenge to a 2018 tax ruling that held the Singapore-based company had multiple permanent establishments in India, making payments received from Indian customer banks taxable in the country.
A bench of Justices Dinesh Mehta and Aditi Choudhary acknowledged the unusually long history of the litigation and indicated that it intended to decide the matter. When senior advocate Harish Salve, appearing for Mastercard, referred to arguments made during earlier hearings, the bench pointed out that it was considering the dispute for the first time.
Nine benches since 2018
Since Mastercard filed the petition in 2018, the matter has been listed before benches led by nine judges — Justices S Ravindra Bhat, S Muralidhar, Vipin Sanghi, Manmohan, Rajiv Shakdher, Yashwant Varma, Prathiba M Singh, V Kameswar Rao and Dinesh Mehta. Most of them have either retired or are no longer serving at the Delhi High Court.
The dispute arose from a 2018 ruling of the Authority for Advance Rulings (AAR), which held that Mastercard Asia Pacific had multiple permanent establishments in India and that income received from its Indian customer banks was consequently liable to tax here.
At the heart of the case is whether Mastercard Interface Processors (MIPs) installed at Indian banks, its telecommunications network and the activities of its Indian subsidiary together create a taxable presence in India under the India-Singapore Double Taxation Avoidance Agreement.
The AAR had concluded that the processors performed significant functions connected with card transactions and could not be treated as carrying out merely preparatory or auxiliary activities. It had also held that a portion of the fees Mastercard received from its Indian customers constituted royalty.
Mastercard disputes taxable presence
Mastercard challenged the ruling before the Delhi High Court, which restrained tax authorities from passing final assessment orders based on the AAR decision. In September 2021, the court continued the protection for assessment years 2018-19, 2019-20 and 2020-21 after noting that Mastercard was depositing the applicable tax.
During Tuesday’s hearing, Salve told the court that Mastercard was already depositing an amount equivalent to 16.75 per cent of its gross revenue with the tax authorities. Under the arrangement, Indian banks deduct 6 per cent, while Mastercard deposits another 10.75 per cent as advance tax.
He argued that the arrangement meant Mastercard had no financial incentive to delay either the assessment proceedings or the High Court case. If the company ultimately establishes that it did not have a permanent establishment in India, the amount deposited would be refunded, while if it loses the case, the tax authorities already hold the money, he submitted.
On the central tax question, Mastercard argued that the processors installed in India undertake only preliminary validation and routing of transactions, while the principal revenue-generating processing takes place through servers located outside the country.
Salve contended that the relevant test was not whether a particular function was essential to Mastercard’s business but the nature of the activity itself. An essential function, he argued, could still qualify as preparatory or auxiliary and therefore fall outside the definition of a permanent establishment.
The dispute could have implications for how the Indian operations and technology infrastructure of overseas digital and payment companies are assessed for tax purposes, particularly where parts of a transaction-processing network are located in India while core processing takes place overseas.
The bench is expected to continue hearing arguments in the matter through the remainder of the week.