Fee Received by MasterCard from Indian Customers Taxable as ‘Royalty’ not FTS as per Indo-Singapore DTAA: AAR [Read Order]

The Authority of Advance Rulings, New Delhi in the application filed by the applicant Mastercard Asia Pacific Pte. Ltd. constituting of Mr. R.S. Shukla as the Chairman and Mr. Ashutosh Chandra as the Member held that fees received by the services of MasterCard from Indian customers are taxable as “Royalty” and not “Fees from Technical Services”.

The applicant is a wholly owned subsidiary of Delaware which is a subsidiary of the MasterCard Incorporated (MCI) group of companies providing global payment solutions to financial institutions, businesses, merchants, cardholders and governments worldwide. The services are provided by the applicant to customers pursuant to Master License Agreements (MLA) which the applicant signs with each and every customer. The applicant charges its customers transaction processing fees relating to authorization, clearing, and settlement of transactions. The two main processing centres of the MasterCard group are in the USA. The applicant has a subsidiary in India in which it owns 99% of the shareholding.

In the application, an advance ruling has been applied for on the taxability of fees received in respect of services rendered with regard to the use of a global network and infrastructure to process card payment transactions for customers in India.

The major issues emerged before authority was whether the applicant has a permanent establishment (PE) in India under Article 5 of the India-Singapore DTAA and whether the fees received by the applicant from Indian customers comprising transaction processing fees, assessment fees, and miscellaneous fees would be chargeable to tax in India as royalty or Fee for Technical Services (FTS) within the meaning of the term in Article 12 of the India-Singapore DTAA.

The applicant contended that the fees received from the customers are neither taxable as Royalty, nor as FTS. Further, since there is no PE it is also not taxable as business income. The applicant contended that the applicant is an entity incorporated in Singapore and does not have any presence in India and does not own or maintain any Network of MIPs in India. The processing activities such as clearing and settlement of transactions shall be undertaken by the Applicant entirely from outside India and no portion of the same shall be undertaken in India.

The Revenue in reply has objected to the Applicant’s contention that no part of transaction processing activity happens in India. It relied on the factual details contained in the AAR application which states that MIPs are doing preliminary examination/validation of information at the point of authorization which involves PIN processing, validation of card codes, names and address verification etc. Revenue has contended that it has been accepted by the Applicant that in more than 90% of the transactions the customer is in India, the issuer banks and acquirer banks both are in India. In these over 90% transactions, both issuer banks and acquirer banks know all the transactions that have happened between them. It has been submitted that for creating fixed place PE it is not necessary that MIP should be fixed on the ground and for this reliance was placed on Note 5 of OECD commentary on Article 5 of Model Tax Convention. Further, it was submitted that there is no requirement that MIP should be owned by the Applicant and for this reliance was placed on Note 4.1 and note 4.2 of OECD commentary on Article 5 of Model Tax Convention.

The Authority after hearing both the parties agreed with the revenue’s contentions and held that an automatic equipment can also create PE. Furthermore, to create a PE, the fixed place does not mean that the equipment should be fixed to the ground. It further held that the transaction processing constituted important functions performed by MIPs.

With respect to the issue relating to the determination of the nature of the fees, it was observed that MCI has granted Licensee right to use various trademarks and marks owned by it, solely in connection with License’s payment card programs. Thus, it is clear that the dominant purpose of the agreement is to allow the use of intangibles for the payment card programs of licensees, i.e. of the banks and Financial Institutions. The license authorized the applicant to only promote and sell the services for which the applicant is paying the royalty to MCI.

Hence, the Authority ruled against the applicant’s contention that the license was incidental to the major activity of transaction processing. The payment was hence held to be ‘royalty’ and would get taxed with the PE under Article 7 and not under Article 12. As already adjudged, that the fees arising out of PE and hence, will be taxed as business income through the PE.