Background

In a controversial ruling of the Indian Authority for Advance Rulings (Income-tax) (AAR) in MasterCard Asia Pacific Pte. Ltd., In re [6 June 2018, AAR No. 1573 of 2014], the taxpayer company (hereafter, referred to as “MasterCard”) was tax resident of Singapore. It belonged to the MasterCard group, a leading global payments solution provider. MasterCard functioned as a regional headquarter for the group, and it performed the transaction processing and payment related services under a family of products including “MasterCard”, “Maestro”, and “Cirrus”. It did not issue the cards, extend credit to cardholders, set cardholder fees or determine interest rates/ fees chargeable to the cardholders.

A typical transaction processed over the network involved four entities, in addition to MasterCard: (i) cardholder, (ii) merchant, (iii) issuer (the cardholder’s bank) and acquirers (the merchant’s bank)

It is important to note that, inter alia, the customers (banks) were provided with a MasterCard Interface Processor ("MIP"), which connected to MasterCard's network and processing centers. An MIP was about the size of a standard personal computer and was placed at the customers' premises in India. It is also relevant to note that MasterCard had a subsidiary in India, which owned and maintained the MIPs placed at the premises of the customers (various banks) in India.

The AAR noted, inter alia, that MasterCard did not own or maintain any network or MIPs in India. It undertook all the processing activities from outside India.

The AAR opined that the MIPs as well as the use of the network in India gave rise to MasterCard’s fixed place permanent establishment in India.

For establishing that MasterCard had a fixed place PE in India, the Indian tax authorities extensively relied on the Delhi High Court’s decision in Formula One World Championship Ltd. v. CIT [30 November 2016, W.P.(C) No. 10307/2016] and the Indian Supreme Court’s decision upholding the Delhi High Court’s decision [24 April 2017, Civil Appeal No. 3849 of 2017]. The AAR accepted the Indian tax authorities’ reliance on those decisions.

For detailed discussion on the relevant facts and the AAR’s approach, see:

The Indian AAR’s ruling in MasterCard – A case note.

The reasons why Formula One decisions were distinguishable in MasterCard

In the author’s view,...