The Delhi High Court has commenced a fresh hearing on a tax dispute involving Mastercard Asia Pacific, a case that has lingered for nearly eight years. This renewed attention comes as a Division Bench, comprising Justices Dinesh Mehta and Aditi Choudhary, deliberates on the Singapore-based company’s challenge to a tax ruling that declared it had a permanent establishment in India. The case is officially cited as Mastercard Asia Pacific Vs Union of India.
Case Background and Initial Proceedings
In 2018, Mastercard contested a ruling by the Authority for Advance Rulings (AAR), which determined that the company possessed multiple permanent establishments in India. This decision rendered the sums received from its Indian customer banks taxable under Indian law. The core issue revolves around whether Mastercard Interface Processors (MIPs), which are integrated into Indian banks, along with its telecommunications network and subsidiary activities, constitute a taxable presence under the India-Singapore Double Taxation Avoidance Agreement.
The AAR had concluded that MIPs executed substantial functions tied to card transaction processing, beyond mere preparatory or auxiliary activities. Furthermore, it classified part of the fees from Indian customers as royalty. When this ruling was challenged, the tax authorities were temporarily barred from issuing final assessment orders based on the AAR’s conclusions. In a subsequent development in September 2021, the court sustained this protection for the fiscal years 2018-19 through 2020-21, acknowledging Mastercard’s compliance with tax deposits.
Arguments Presented in Court
Senior Advocate Harish Salve, representing Mastercard, addressed the court, explaining that the company is already depositing a tax equivalent to 16.75% of its gross revenue with Indian authorities. This arrangement involves a 6% deduction by banks and an additional 10.75% paid by Mastercard as advance tax. Salve emphasized that Mastercard has no vested interest in delaying the assessments or the writ petition since any determination of no permanent establishment would lead to a refund of the deposited amount.
On the substantive issues, Salve contended that the processors’ functions are limited to preliminary validation and routing, with the primary revenue-generating activities being conducted via servers located outside India. “What are you paying me for? You are paying me for processing these transactions at my headquarters. That is what the money is for. Not for giving you a MIP so that you can connect to me,” Salve asserted. He further argued that even essential functions could remain preparatory or auxiliary, thus not meeting the criteria for a permanent establishment. “Essentiality is not the test. The test is the nature of the act,” he concluded.
The ongoing hearing is expected to continue throughout the week, with Salve being advised by a team from DMD Advocates.
