Eight years and nine benches later, Delhi High Court begins hearing Mastercard tax dispute afresh

Nearly eight years after Mastercard Asia Pacific approached the Delhi High Court, a Division Bench on Tuesday began hearing afresh its challenge to a tax ruling which held that the Singapore-based company had a permanent establishment in India [Mastercard Asia Pacific Vs Union of India]

While acknowledging the prolonged history of the case, a Bench of Justices Dinesh Mehta and Aditi Choudhary indicated that it would like to render a decision in the case.

“We were told on the last occasion that it was heard and then released, so let us decide,” the Bench remarked.

When Senior Advocate Harish Salve, appearing for Mastercard, referred to the arguments made by him previously, the Bench pointed out that it was considering the dispute for the first time.

“We just want to remind you that we are, for the first time, hearing this case,” it said.

Since the petition was filed in 2018, it has been listed before various benches led by Justices S Ravindra Bhat, S Muralidhar, Vipin Sanghi, Manmohan, Rajiv Shakdher, Yashwant Varma, Prathiba M Singh, V Kameswar Rao and Dinesh Mehta.

A majority of these judges have retired or are no longer posted at Delhi.

Mastercard is challenging a 2018 ruling of the Authority for Advance Rulings (AAR), which held that the company has multiple permanent establishments in India and consequently, the sum received by it from its customer banks located in India is liable to tax in India.

The dispute concerns whether Mastercard Interface Processors (MIPs) - installed at Indian banks, its telecommunications network and the activities of its Indian subsidiary, creates a taxable presence under the India-Singapore Double Taxation Avoidance Agreement.

The AAR had held that the MIPs performed significant functions connected with the processing of card transactions and were not engaged merely in preparatory or auxiliary activities. It had also found that part of the fees received by Mastercard from Indian customers qualified as royalty.

When the ruling was challenged before the High Court, the tax authorities were restrained from passing final assessment orders pursuant to the AAR ruling. In September 2021, the High Court continued that protection for assessment years 2018-19, 2019-20 and 2020-21, noting that Mastercard was depositing the applicable tax.

At today's hearing, Salve submitted that a tax amounting to 16.75 percent of Mastercard’s gross revenue was already being deposited with the authorities.

He said that under an arrangement with the tax authorities, banks deduct 6 percent while Mastercard deposits another 10.75 per cent as advance tax. In this backdrop, Salve said Mastercard has no financial interest in delaying either the assessments or the writ petition.

If the company succeeds in establishing that it had no permanent establishment in India, the deposited amount would be refunded, he submitted, adding that if it fails, the money is already with the tax authorities.

On the merits of the matter, Salve argued that the processors perform only preliminary validation and routing. The principal revenue-generating work is undertaken through servers outside India, he said.

“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,” he said.

He added that even an essential function could remain preparatory or auxiliary and, therefore, fall outside the definition of a permanent establishment.

“Essentiality is not the test. The test is the nature of the act,” Salve said.

The hearing is expected to go on for the rest of the week.

Salve was briefed by a team from DMD Advocates.