I-T authorities win permanent establishment battle against MasterCard

Case won similar to those pursued by European countries in cases with Google, Facebook

Indian tax authorities have won a key legal battle against a multinational company in the electronic commerce space, and the case is similar to those pursued by European countries in their tax cases with Google and Facebook.

In a case against MasterCard’s Singapore-based arm, the income-tax department has been able to convince the Authority for Advance Rulings (AAR) that a company is taxable in India like any other domestic company if it secures business through a permanent establishment, whether it employs people or software to do the job. 
 

The case in its essentials was straightforward. But it was keenly contested because of the stakes involved. Does MasterCard Asia Pacific Pte Ltd (MAPL) need to pay tax on the fees it generates every time a MasterCard or its family of products, including “Maestro” and “Cirrus”, is swiped in India? The company said since its global network and infrastructure were located outside India to process card payment transactions for customers in India, the service was not taxable here. However, the income-tax department claimed the only way this sort of a business could be done was by creating a permanent establishment in India, hence it was taxable.  

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Till 2014-15, MAPL had a liaison office, through which it ran its business in India. The next year, as part of its global changeover, it created an India subsidiary, MasterCard India Services Private Ltd. The subsidiary would own and maintain the swipe machines but would bill their cost, including upgrades and other functions, to MAPL. The latter holds 99 per cent in the Indian company. The remaining one per cent is held by MasterCard Singapore Holding Pte Ltd the holding company of the Singapore firm.

MAPL made the changes in 2015-16. In its arguments before the AAR, the income-tax department said MAPL’s tax liability had dipped by about Rs 1 billion annually as a result of the rejig.

Without getting into the specifics of the case, Akhilesh Ranjan, principal chief commissioner, income tax, international taxation, said it was significant that the judicial authorities in India had begun to appreciate the difference in the method of delivery of customer service by business entities that straddled the globe. 

The income-tax department has been able to convince the Authority for Advance Rulings that a company is taxable in India like any other domestic company if it secures business through a permanent establishment 

The company said since its global network and infrastructure were located outside India to process card payment transactions for customers in India, the service was not taxable here

 

The AAR in its ruling quoted the decisions handed down by the Bangalore tax tribunal on Google, and the Madras High Court in the case of Verizon Communications, Singapore, to make the larger point about taxability. In its argument, the income-tax department liberally quoted OECD (Organisation for Economic Co-operation and Development) principles on taxing internet-based companies. Google, for instance, was asked by Ireland to pay Euro 163.8 million as tax on the plea that the company did have a permanent establishment in the country based on OECD guidelines. 

Emails Business Standard sent MAPL remained unanswered at the time of going to press. However, income-tax experts said the company could appeal the AAR decision in a high court.

The Centre set up the AAR, headed by a retired Supreme Court judge, to give an opportunity to companies to do business in India to secure an authoritative decision on their possible tax liability. For the department, the ruling is binding when it issues income-tax notices to companies. 

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When a MasterCard customer swipes the card to pay for a transaction, the banks of the merchant and the customer net out the transactions and settle the differences. MasterCard claimed before the AAR that even though it installed a card-swiping machine at the shops and offices that accepted the card, this did not establish any permanency to its business in India, nor did the machines perform any more than auxiliary functions. The income-tax department disputed both the assertions.

MAPL, through its advocate S Ganesh, said before the AAR the fees it generated from its customers were neither taxable as royalty, nor as fees for technical services. “Further, since there is no PE it is also not taxable as business income.”

Rebutting the argument, Kamlesh Varshney, commissioner, income tax (international taxation), deposed that the effective control of the Indian business rested with MAPL because the Indian subsidiary had an exclusive arrangement to deal only with it, even at arm’s length. “Revenue has contended that the Applicant is carrying on business in India through its permanent establishment … in terms of Article 12(6) of the India and Singapore DTAA.” 

The AAR agreed with the tax department: “In view of above discussion, we hold that MasterCard Network also creates fixed place PE of the Applicant in India.”