The judicial system in India is generally very time consuming and finality in high demand cases is attained only after a long-drawn litigation till Supreme Court. Flow of foreign investment is extremely sensitive to prolonged uncertainty in tax related matters. Therefore, the provisions relating to the Authority for Advance Rulings (AAR) were introduced by the Finance Act 1993. The intent was to create an independent adjudicatory body and to ensure further that the procedure is simple, inexpensive, expeditious and authoritative. The main advantage of seeking the ruling of AAR was that the non-resident investor can be sure of its liability towards income-tax even before the start of investment in India.
In order to make sure that the rulings of AAR are obeyed by the department, as well as by the person seeking the rulings, it was provided that the ruling shall be binding on the applicant and on the income tax authorities. Another significant advantage is provision for delivery of rulings in a time-bound schedule. Section 245R provides that the ruling shall be pronounced in writing within six months of receipt of application.
The AAR has undoubtedly made an outstanding contribution by giving time-bound rulings in line with the objective of its creation. However, with the passage of time of almost two decades and as a result of complex income-tax law in India, several conflicting rulings have been pronounced by the AAR. It is unfortunate that the number of conflicting decisions is showing an upward trend.
In these columns it has been pointed out several times (see Article dated 22.08.2011 and 26.07.2010) that when conflicting decisions are given by the AAR, foreign companies referring the matter to AAR suffer immensely. Is it not unfortunate that despite a large number of decisions by different Benches, it is still not clear whether payment for software is taxable in India or not, nor one is sure about the meaning of the term
“royalty”. Similarly, the fate of consortium agreements is not clear- whether they form an AOP or not. These issues assume importance because a large number of foreign companies are involved in such transactions in India.
In the above background, it is really interesting to note that the AAR itself has also taken cognizance of conflicting decisions delivered by it. In a recent case of Citrix Systems Asia Pacific Pty Limited (AAR no 822 of 2009), the AAR while pronouncing ruling on 06.02.2012 observed as under:
“Even then, there is the aspect of judicial discipline and consistency involved. We have already noticed what we consider to be the divergence in views in this Authority. We are inclined to take the view that the sale or licensing for use of a copyrighted software amounts to or amounts also to the grant of a right to use a copyright. Differing views by this Authority can be got resolved and the matter set at rest only by a decision of the Supreme Court, laying down the law finally, to be followed by all the Courts and Tribunals including this Authority. Only an authoritative pronouncement by the Supreme Court can settle this controversy“
It is really commendable on the part of the AAR that they themselves have taken cognizance of the conflicting decisions. However, if the suggestion of the AAR is to be accepted that controversies can be got resolved only by a decision of the Supreme Court, then the objective of expeditious and inexpensive disposal of the cases will be defeated because in case of controversies, a foreign company will have to spend considerable time and money in obtaining an order from the Supreme Court.
Therefore, it appears to be more preferable that whenever any such case comes up before the AAR in respect of which a dissenting view is unavoidable, the AAR should follow the healthy practice of constituting a larger Bench on the lines of the practice followed by the Appellate Tribunals, High Courts and the Supreme Court. Moreover, in appropriate cases, if the AAR feels that the matter involved is of substantial or national importance, the AAR should be empowered to approach the Supreme Court to obtain guidelines/ instructions to decide the issue.
The author is a Sr. Partner in S.S. Kothari Mehta & Co. e-mail: hp.agrawal@sskmin.com
