Until the Delhi High Court decides on whether Mastercard Asia Pacific Limited has a permanent establishment in India, the company will continue to pay royalty to the Income Tax department, and not equalisation levy, the Delhi High Court noted after the IT Department’s submission on August 18. Mastercard had sought a stay on payment of equalisation levy until its status as a permanent establishment could be determined by the Court.
The IT Department, in its submission, said that as per the Authority for Advance Rulings (AAR) — a body under the Central Board of Indirect Taxes & Customs — Mastercard is a permanent establishment and thus exempt from equalisation levy on “any income which is effectively connected to their Indian PE”.
Mastercard says it doesn’t have a PE, Authority of Advance Rulings says it does
A contested ruling by the AAR lies at the heart of Mastercard’s appeal. In June 2018, the AAR had ruled that Mastercard Asia Pacific has multiple permanent establishments in India and thus, is liable to pay taxes in India. That ruling was in response to a Mastercard Asia Pacific application filed in January 2014.
Mastercard, however, has argued that it does not have any permanent establishments in India and thus filed a petition in the Delhi High Court, contesting the AAR. After the second equalisation levy was imposed on e-commerce activities under the Finance Act 2020, which exempts foreign entities with permanent establishments in India from the levy, Mastercard filed another application asking for a stay on payment of equalisation levy because else the company runs the risk of double taxation — income tax and equalisation levy — as per its counsel, Senior Advocate Harish Salve.
The IT Department submitted to the Court that it “has no desire or authority of collecting the EL from the Applicant in respect of the income on which income tax has been paid by the applicant either as advance tax or as TDS made by its customer banks in India during the pendency of this writ petition”.
Mastercard had also expressed fears of being subjected to penalty for non-payment of equalisation levy. The IT Department submitted that if the court rules that Mastercard is not a PE and thus liable to pay the levy, the company “would be eligible to receive a refund of income tax along with statutory interest” and the company would “pay EL with statutory interest for the period of delay in payment of EL”.
The government of India imposed a 2% equalisation levy on any sale of goods or services by a “non-resident” e-commerce operator in India, with effect from April 1, 2020. Foreign companies that have permanent establishment in India to handle all e-commerce operations are exempted from it. It had earlier imposed a 6% equalisation levy on online advertising in 2016.