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The Delhi High Court, on Tuesday, disposed-off a plea by Mastercard after the Income Tax Department conceded that no equalisation levy will be paid in case of Permanent Establishment (PE).
This ruling gathers significance, considering the ongoing legal debate on equalisation levy. The ruling has also re-emphasised the need for issuing Frequently Asked Questions (FAQs), which the Finance Ministry is reluctant to release on grounds that the law is very clear.
Mastercard is a global payment and technology company. It moved Delhi High Court, seeking a stay on equalisation levy. In its petition before the court, Mastercard cited the Authority of Advance Rulings (AAR) for the Income Tax decision of June 2018.
The ruling said: “The applicant (Mastercard) has a PE in India under the provisions of Article 5 of the India-Singapore DTAA, in respect of the services rendered/to be rendered with regard to the use of a global network and infrastructure to process card payment transactions for customers in India. There is fixed place PE, service PE and dependent agent PE.”
Double taxation
PE here means paying income tax and complying with other tax regulations. Accordingly, the company argued that since income tax is being paid, seeking equalisation levy would lead to double taxation. Hence, this should be stayed. In its response, the tax department conceded that it is bound by the AAR ruling, stating the company has PE here, so no equalisation levy is payable. The matter was then disposed by the court.
Google Tax
Introduced in 2016, Equalisation Levy, also known as ‘Google Tax’, initially was applicable to payments for digital advertisement services received by non-resident companies without a permanent establishment here if the services exceeded ₹1 lakh a year. The rate of tax was 6 per cent. The companies using these services are required to withhold the tax amount. In the 2020-21 Budget, the government widened the ambit of the levy by including e-commerce companies. The applicable tax rate is two per cent (plus a surcharge) on amount of consideration received/receivable by an e-commerce operator. This has come into effect from April 1.
According to Sandeep Jhunjhunwala, Partner, Nangia Andersen LLP, tax authorities closely monitor the activities of foreign companies to check exposure of having a permanent establishment in India. Where it is held that a permanent establishment has been created in India, the domestic tax laws prescribe multiple obligations that need to be complied with, but equalisation levy does not apply in such a scenario. “The ruling emphasises that foreign companies that are currently under the radar for creation of a permanent establishment in India and where this issue is pending for disposal, the income tax authorities should not subject them to equalisation levy, in parallel, as the law is clear on this aspect,” he said.
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