Coram: Kapadia, CJ. , Patnaik, J. and
Swatanter Kumar, J.
Background
In the era of globalization and free
trade, each country wants to rule at the international stage. The race to attract
investment has made countries like India adopt various measures to ensure that
investment in done in a smooth and confident manner by investors. The tax laws
of any country can be complex and efforts are continuously made to simplify
them. The Authority for Advance Ruling (“AAR”)
is a step in this direction and was constituted by the Indian Government in
1993 with a view to help the foreign investors entering India determine and
plan their tax liabilities in advance. Chapter XIX-B of the Income Tax Act,
1961 (“the Act”) provides for the
AAR and it allows non-residents and certain category of residents to apply to
the AAR. In order to provide certainty in determining taxes, Section 245S was
enacted and it provides that the rulings of the AAR are binding on the income
tax department and the applicant for that transaction. However, it was seen
that a lot of cases were being filed before various courts against the ruling
of the AAR. It came up before the Supreme Court (“SC”) in this case and various important decisions were made by the
court regarding appeals from rulings of AAR and other incidental matters.
Decision of the Court
The petitioner company approached the SC
against the order of the AAR. On the preliminary inquiry, the court dwelled
into if the rulings of the AAR can be challenged under Articles 226,227 to the
High Court (“HC”) or under Article
136 to the SC. The court observed that the HC has powers under Article 226 to
control the proceedings of a body like tribunal acting judicially and issue
writs. Also, under Article 227 it has powers of superintendence over all courts
and tribunals within its jurisdiction. Similarly, the SC has powers under
Article 136 to grant special leave to appeal from orders of any court, tribunal
etc. The issue thus before the court was whether the AAR can be held to be a
tribunal within the meanings of the Articles. The test followed by the court in
this case was the following:
“Whether a body or tribunal has judicial power of the State by any law to
pronounce upon rights or liabilities arising out of some special law”.[1]
The court held that the AAR fulfilled
the above test and would come under the definition of tribunals within Articles
226,227,136. The conclusion with regard to this was reached by looking into
Section 245N (a) of the Act which provides the definition of “advance ruling”.
It was observed by the court that a plain reading of the provision makes it
clear that the authority makes a determination on a transaction and it is also
empowered to take decisions on queries of computation, facts and law. Also,
using Section 245S of the Act, the court held that the determination by the AAR
is binding and it acts in a judicial capacity while determining the tax
liabilities of parties. The court ruled that the fact that the rulings of the
AAR are binding does not ouster the jurisdiction of the court and a statute
cannot limit the powers vested to the courts under these Articles by the Constitution.
Therefore, it was laid down that Section 245S (1) does not bar the jurisdiction
of the HC and the SC under Articles 226,227,136 to admit an appeal against the
advance ruling by the AAR. Also, it was held that the limited binding nature of
the AAR rulings and for other transactions, a ruling would be only persuasive.
Rejecting the contention that the
rulings should be appealed directly to the SC due to possibility of delays in
the HC, the court observed that doing this would amount to violation of the
basic structure of the Constitution as the powers of HC to exert
superintendence over decisions of court and tribunals under its jurisdiction is
a part of the basic structure. Agreeing with the fact that the appeals to the
HC may suffer from delay, the court ruled that all challenges made against the
order of the AAR should be heard by a division bench of the HC and should be
decided expeditiously. Further, holding that the SC under Article 136 has wide
discretion to grant special leave, it was held that only in cases where
substantial questions of general importance arise or there are similar matters
pending, should the court allow for persons to approach the SC directly.
Therefore, the SLP was dismissed by the court and a liberty was given to the petitioners
to approach the HC.
Impact of the Judgment
This judgment has been hotly debated
in the recent times. There are allegations that the SC has defeated the very
purpose of the body by this interpretation. Before looking into the reasons for
supporting the judgment, it would be better to highlight some of the problems caused
by the judgment.
One of the major criticisms of the
judgment is that it is against the very object of AAR. Allowing appeals from
the rulings of the AAR will defeat the twin purposes of certainty and
expeditious decision. A person applying to the AAR will not be able to tell
certainly if the tax assessment by the AAR would be the final determination and
therefore it will be difficult for him to plan his taxes. Also, the right to
appeal to the HC or the SC would consume a lot of time and the purpose behind
the 6 month time bound decision making requirement would be lost. This
criticism relates directly to the core reason of instilling investor confidence.
An investor who is not sure about his taxes would not feel comfortable
approaching the AAR if he knows that the binding decision can be challenged
before the courts which could possibly take a huge amount of time. In the
present day world, it is impractical and inefficient. Therefore, it can be
assumed that this decision has far reaching impact on the policy of
streamlining processes by establishing AAR so as to promote investment in the
country.
Validity of the Judgment
Apart from the general concern over
the negative effects of the judgment, I believe that the judgment is well
established on legal principles, precedents and addresses an important point of
appeal in an appropriate manner.
The judgment has correctly held that
the AAR acts in a judicial nature when it decides on applications and gives a
ruling. As such, it falls within the definition of a tribunal which would be
under the scrutiny of the HC and SC. The provisions of the Chapter on AAR by
their plain meaning, purpose and effect stipulate a body that makes decisions
which are judicial in nature and therefore the court correctly applied the test
and came to the conclusion that AAR was a body dispensing judicial functions of
the state. By acknowledging the constitutionally given right to appeal to the
HC and the SC, the court in this case has provided a forum which would be able
to correct any infirmity in any orders of the AAR. There could be many cases
where such judicial determination might be defective and going to higher courts
against such order ensures that the process of law is followed and no injustice
is caused. Since the ruling by the AAR can include a ruling on an issue of law,
it is imperative that higher courts, who are the final interpreters of law,
have jurisdiction to accept appeals in disputed cases. Another practical use of
allowing appeals is that people who know that the decisions of the AAR are
final would be reluctant to be bound by such decisions and exhaust their right
to alternate remedies under other laws if they follow normal procedure[2].
Further, I think that the court
addressed the issue of the jurisdiction of the HC in the correct manner. The
inherent jurisdiction of the HC cannot be ousted. Although the court tried to
allay the fear of delay by holding that the appeals from the AAR should be
heard by a division bench, it could have given a time frame for such benches to
decide a case to ensure that the object of the AAR can be furthered in these
court processes.
Conclusion
This decision of the court has
certainly changed some schematics of the AAR. However, I feel that the change
is to ensure that justice is effectively done on every application. In the long
run, it is the sustainable method to determine the tax liability of people. One
of the pressing needs is to increase the number of the members of the AAR and
help them give better and quicker rulings. However, it needs to be seen how the
decision affects the AAR in practice.
Dev Chaudhary
[1]
Para 7
[2] Ranjan
Vohra, Should courts entertain appeals
against AAR Rulings?, Taxsutra.Com, April 3, 2012 at < http://www.taxsutra.com/node/282>
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