| India first mooted the idea of establishing an Authority of Advance Ruling (AAR) in 1993 based on recommendations of the Wanchoo Committee. The committee's recommendations were accepted in most aspects with respect to the AAR's constitution by an independent adjudicatory body headed by a retired Supreme Court Judge and two senior officials drawn from the revenue and legal hierarchy. The Indian AAR is a quasi-judicial body, empowered with powers of a civil court, to adjudicate on matters of specific question of law or fact. The rulings granted by AAR are binding on the applicant and the revenue authorities. |
| Though, initially, the scheme covered non-resident tax payers, the concept was subsequently extended to residents seeking ruling with respect to specified transactions with non-residents and to public sector undertakings. Besides certainty, the other advantage for foreign investors was to avoid protracted litigation in Indian courts which could possibly extend up to 25 years, should the matter reach finality. |
| Though the rulings of AAR are binding on the applicant, tax payers with similar facts have come under pressure from the tax administrators in the recent past. Revenue officials claim that the decisions of the AAR have persuasive impact on tax payers with similar facts. This is particularly true in cases where the findings of the AAR have gone against the tax-payer and in favour of the revenue department. Ironically, principles established by the AAR in favour of tax-payers, are not adhered to in a number of cases. Besides causing anxiety and uncertainty in the minds of non-resident tax payers, it is certainly not keeping in spirit of the legislation, supposedly meant to bolster the confidence of foreign investors. |
| In a recent decision by the Mumbai tribunal in the case of Green Emirates Shipping, the appellate tribunal, while examining the binding nature and persuasive impact of the AAR decision, held that a ruling was not binding on the revenue authorities, except in the case of that very tax-payer in whose case the ruling was sought and even in that case, it was binding in respect of only the transaction in respect of which the ruling was sought. |
| Besides articulating the intent of the advance ruling scheme, keeping in mind the spirit of the law, the tribunal as further made bold observations: |
| "Since AAR is not part of the judiciary hierarchy, it cannot lay down a binding precedent for anyone "� the Revenue, the assessee or the appellate authorities and by no stretch of logic, a ruling given by AAR has any precedent value in general." |
| I am not very sure how pleased (or rather displeased) would the judiciary manning the AAR be in light of the tribunal's observations. The tax-payers' woes do not end here. The principles established by the tribunal decisions are being re-examined by the AAR in specific cases. For instance, the Bangalore tribunal held in a case of Samsung that income from sale of packaged software was to be classified as business income and not royalties. This principle is being followed by other tribunals. However, in a recent case, the AAR has held otherwise. The AAR's rational seems to be that since the revenue department has appealed to the high court, the principles articulated by tribunal are not binding on them. This clearly is double whammy for tax-payers. Absence of legislative clarity would continue to play in the minds of potential advance ruling aspirants, given the face-off between the AAR and tribunal. |
| Another recently debated issue has been the Union government's decision to file a special leave petition in the Supreme Court against the decision of the AAR in the case of Morgan Stanley. The applicant, Morgan Stanley, US, approached the AAR in relation to the question of determination or otherwise of its permanent establishment with respect to business process operations undertaken by its wholly owned subsidiary in India. The authority held that the applicant did not have a permanent establishment in India based on interpretation of a board circular. The Morgan Stanley decision came as sigh of relief to the entire IT/ITeS industry. This was short-lived as the revenue department decided to file an SLP under Article 136 of the Constitution. Reacting to the SLP, Morgan Stanley has filed a counter, contesting the issues decided against them by the AAR. This case has attracted maximum attention of international tax community and the proceedings later this month would be closely observed. Whilst the matter on Morgan Stanley is subjudice, two interesting aspects have arisen: What internal debate would the government have gone through before deciding to appeal against an order of the authority, constituted by the same wing of the government, that is, the Ministry of Finance; and the second aspect being the binding nature of an AAR decision. |
| Whilst the judiciary and legal luminaries would continue to grapple with the Morgan Stanley case, an interesting twist is the recent decision of the Supreme Court in the case of Ishikawajima-Harima Heavy Industries, Japan (IHI). IHI is the first decided case wherein a tax payer (IHI) filed an SLP against the decision of the AAR on the issue of taxability of offshore supplies. Though a final copy of the order is not available, the court last week has set aside the AAR order. |
| To what extent would the principles established by IHI's case impact Morgan Stanley is yet to be seen. Whilst the Morgan Stanley decision will be keenly awaited, the issues that have recently come to forefront are of significance to foreign investors and non-resident taxpayers. The need of the hour is (re)-articulation of the advance ruling scheme and principles, its scope, validity, and binding nature of its decisions. If we fail to address them, it would be another case of lack of implementation of a well intended legislation "� authorities make note of it. |
| The author is a partner at BMR & Associates |
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