New dimension to the AAR
In a crucial ruling recently, the Supreme Court of India (“SC”) has held1 that the rulings of the Authority for Advance Rulings (“AAR”) can be subject to the writ jurisdiction of the High Court (“HC”) under Article 226 of the Constitution of India. The SC also held that the applicant should approach SC only when the matters involve a significant question of law and of great importance. It further said that it can decline its jurisdiction under Article 136 of the Constitution if the matter can be more appropriately dealt by the HC. In the present bulletin, we shall discuss this decision of the SC and understand if it has actually changed the face of law or is just a reiteration of established principles.
1. The AAR
The AAR was introduced under the Income-tax Act, 1961 to provide the facility of ascertaining the Income-tax liability of a non-resident, to plan their Income-tax affairs well in advance and to avoid long drawn and expensive litigation. This consists of a specialized tribunal that considers international tax issues arising from either any proposed or existing transactions. It has the advantage of providing clarity and certainty of the tax liability under the Central Excise, Customs and Service Tax laws in advance in relation to an activity to be undertaken by the applicant. The AAR ruling provides finality and, thereby, avoids any protracted litigation and assists in reaching speedy (rulings within a six month period and non-appealable in nature) but informed decisions. This process is inexpensive and transparent. For foreign investors the AAR rulings help them plan their affairs in advance and provide certainty. Though the rulings are non-appealable; however, parties tend to approach the SC by filing special leave petition or HC by filing a writ petition.
2. The Issue
The Columbia Sportswear Company approached the SC against an AAR ruling. The SC passed an order requiring the applicant to make arguments on the maintainability of the special leave petition, and also clubbed all the special leave petitions filed against the rulings of AAR to consider whether an advance ruling pronounced by the AAR can be challenged before a HC under Articles 226 and 227 of the Constitution prior to consideration by the SC under Article 136 of the Constitution.
3. The Decision
3.1 AAR is a Tribunal?
In light of the fact that AAR rulings are only binding on the parties involved, the first issue which was considered by the SC is whether the AAR would constitute a Tribunal for the purposes of Articles 227 and 136. Generally, a Tribunal is a body with judicial functions.
The test for determining this is to determine whether it has the power to pronounce upon the rights and liabilities arising out of some special law.2
Section 245N of the Income Tax Act (“Act”) provides that “Advance ruling” means:
- A determination by the AAR in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant and such determination shall include the determination of any question of law or of fact specified in the application;
- A decision by the AAR in relation to an assessment which is pending before any of the Income-tax authority or the Tribunal in case of an applicant who is a resident in India and such decision shall include the decision on question of law or fact arising out of the orders of assessment in respect of which an application has been made by a resident applicant.
Further, section 245S of the Act provides the applicability of advance ruling. It is binding on the applicant who has sought it, in respect of the transaction in relation to which the ruling has been sought and on the Income Tax authorities in respect of the applicant and the said transaction. The advance ruling is binding unless there is a change in law or facts on the basis of which the advance ruling has been pronounced.
The SC noted that with respect to other parties the ruling is of merely persuasive nature and this would not imply that the principle of law laid down in a case by the AAR is not to be followed in future. Accordingly, the SC held that the AAR is a body acting in judicial capacity exercising judicial power conferred on it by Chapter XIX-B of the Act and can thus, be regarded as a “Tribunal” and that the decision of an AAR is amendable to challenge under Article 226/227 and 136 of the Constitution.
3.2 Can AAR rulings be challenged?
The twin aspects that were analyzed by the SC here are: whether parties could file a writ in a situation where the AAR ruling was, by virtue of the Act, declared binding and whether an AAR ruling can only be challenged by way of an special leave petition under Article 136. By relying on the decision of Kihoto Hollohan v. Zachillhu and Others,3 the SC analyzed that the powers of the HC under 226 and 227 cannot be affected by a statute made by the legislature as these powers are granted to them under the Constitution. Further, the SC examined and agreed to the AAR ruling in Groupe Industrial Marcel Dassault In re4 that emphasized that the object of an advance ruling is expeditious justice and that permitting a challenge before the HC would be “counter productive since writ petitions are likely to be pending in HCs for years” and involve multiple levels of adjudication.
Based on the above analysis, the SC held as follows: “We have considered the aforesaid observations of the Authority but we do not think that we can hold that an advance ruling of the Authority
can only be challenged under Article 136 of the Constitution before this Court and not under Articles 226 and/or 227 of the Constitution before the High Court. In L. Chandra Kumar v. Union of India and Others, a Constitution Bench of this Court has held that the power vested in the High Courts to exercise judicial superintendence over the decisions of all courts and tribunals within their respective jurisdictions is part of the basic structure of the Constitution. Therefore, to hold that an advance ruling of the authority should not be permitted to be challenged before the High Court under Articles 226 and/or 227 of the Constitution would be to negate a part of the basic structure of the Constitution.”
The SC further held that when an advance ruling is challenged at the HC, it should be heard directly by the Division Bench and be dealt with in an expeditious manner. The SC would admit cases only where they involve questions of great importance.5
By this order the SC has tried to provide ample direction to party appealing AAR rulings, to only approach the SC in case of issues involving significant questions of law. This also provided impetus to the fact that AAR provides certainty on the payability of tax payable as expeditiously as possible. However, continuing the existing practice of approaching HC and SC, this order does not create any new rule but definitely limits the approachability of the applicants to the SC.
Authored by: Neeraj Dubey
1 Special Leave Petition (C) No. 31543 of 2011
2 Union of India v. R. Gandhi, President, Madras Bar Association (2010) 11 SCC 1
3 1992 Supp (2) SCC 651
4 In re 2012 340 ITR 353 (AAR)