“Very Dangerous Proposition”: Delhi HC On AAR View Treating Mastercard's Interface Processor In India As Permanent Establishment

The Delhi High Court on Friday orally observed that treating a network or towers as a permanent establishment (PE) of a foreign enterprise could be a “very dangerous proposition," warning that such an approach could be misused across jurisdictions.

“AAR's view that towers and network itself constitute a PE is a very dangerous proposition ... it can be misused anywhere,” a Division Bench comprising Justice Dinesh Mehta and Justice Aditi Choudhary observed while hearing afresh Mastercard Asia Pacific Pte. Ltd.'s challenge to a 2018 ruling of the Authority for Advance Rulings (AAR) at Delhi.

The court indicated that merely conducting business through a network, including leased lines or infrastructure operated by another entity, should not by itself result in a fixed-place PE.

At the same time, it indicated that the network could be examined along with Mastercard Interface Processors (MIPs) and other elements of its operations as part of a holistic assessment.

The bench also flagged the wider international implications of the AAR's approach. It observed that affirming such a finding could give “a very bad picture of the country” internationally and said the implications for business and the economy would also have to be considered.

The fresh hearing in the nearly eight-year-old dispute commenced on September 22. Mastercard is challenging the AAR's 2018 ruling, which held that the Singapore-based company had multiple permanent establishments in India under the India-Singapore Double Taxation Avoidance Agreement (DTAA).

The case concerns Mastercard's business of facilitating electronic payment transactions between issuer and acquirer banks through its global network. Under the arrangement examined by the AAR, Mastercard Interface Processors (MIPs) were installed at the premises of customer banks in India.

The MIPs performed preliminary verification and validation, including PIN processing, card-code validation and name and address verification. They also processed transaction data for transmission through Mastercard's network.

The AAR held that the MIPs constituted a fixed-place PE. It found that their role in facilitating the authorisation process was significant and could not be regarded as merely preparatory or auxiliary.

The AAR separately held that the MasterCard Network in India constituted a fixed-place PE. It considered the network as comprising MIPs, transmission towers, leased lines, fibre-optic cables, nodes, the internet, and application software, including Master Connect and MasterCard File Express.

The AAR also held that significant activities relating to clearance and settlement took place in India. It acknowledged that the Global Clearing Management System (GCMS) and Settlement Account Management System (SAM) performed significant functions outside India.

However, it found that domestic settlement involving the movement of funds between banks took place in India through Bank of India. The AAR further held that the Bank of India premises used for settlement constituted a fixed-place PE.

During today's hearing, the revenue defended the significance of the functions performed in India. It argued that the MIPs were not merely communication devices but performed preliminary verification and validation necessary for transaction authorisation.

The Revenue relied on the AAR's finding that without the initial verification through the MIPs, the authorisation would not happen. It therefore argued that the Indian functions could not be treated as merely preparatory or auxiliary.

The Revenue further argued that the Indian activities had to be examined in the context of Mastercard's business as a whole. It submitted that the MIPs performed functions integral to transaction authorisation and therefore could not be characterised as preparatory or auxiliary merely because other parts of the transaction processing took place outside India.

On the scope of the preparatory and auxiliary exclusion, the revenue argued that the question would arise only after determining whether a permanent establishment existed under Article 5(1) of the India-Singapore DTAA.

The Revenue will continue its arguments on the next date of hearing, which is expected to be in the second week of October

For the Petitioner: Anuradha Dutt

For the Respondent: Himanshu Shekhar Sinha