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January 26, 2021

Can AAR Rulings be challenged in the Supreme Court?

by CA Shivam Jaiswal in Income Tax

Can AAR Rulings be challenged in the Supreme Court?

With a view to avoiding dispute in respect of assessment of tax liability a Scheme of Advance Rulings was incorporated in the Income-tax Act. The Authority for Advance Rulings (AAR) pronounces rulings on the applications of the non-resident/residents and such rulings are binding both on the applicants and the Tax department. Thus, the applicant can avoid expensive and time-consuming litigation on any question of law or fact which might arise from normal assessment proceedings. The scheme of Advance Rulings allows eligible persons to seek clarity on tax liability before venturing into a particular taxable activity.

The Indian Constitution empowers the Supreme Court and the High Court, respectively, to issue writs for enforcement of any of the fundamental rights conferred by Part III of the Constitution of India (‘Constitution’) under Articles 32 and 226. Indian Tax law provides for a structured mechanism in the form of appeals, revisions, etc. However, in the case of certain grievances, there is no appeal, or any other recourse provided in the law. In such cases, the aggrieved party has no option but to seek relief through the remedies provided by the Constitution (i.e. writ petitions).

Let us refer to the case of Columbia Sportswear Company v. DIT (2012), where the issue under consideration was whether a ruling of AAR could directly be challenged before the Supreme Court under Article 136 of the Constitution or it had to be first challenged before the High Court under articles 226 and/or 227 of the Constitution.

Facts of the Case:

  • The Petitioner was a company incorporated in USA and was engaged in the business of designing, developing, marketing and distributing outdoor apparel.
  • The Petitioner, after obtaining approval from the RBI established a liaison office in Chennai for making purchases for its business.
  • The RBI granted the permission with the condition that the office of the petitioner would be purely for liaison activities and the liaison office would not undertake any other activity of trading, commercial or industrial nor shall it enter into any business contracts in its own name without the prior permission of the RBI.

Application to Authority for Advance Ruling (AAR)

  • The Petitioner filed an application before the AAR on the questions relating to its transactions in its liaison office in India.
  • The AAR gave its ruling in favour of the department and against the petitioner.
  • The Petitioner being aggrieved by the ruling of the AAR petitioned before the Supreme Court (SC).

Observations of the Supreme Court (SC)

  • AAR exercises judicial power and is a “tribunal” whose rulings could be challenged under Articles 136 and 227 of the Constitution.
  • Binding nature of the AAR ruling does not affect the jurisdiction of the Court to entertain a challenge to the ruling under Article 136 or under Articles 226 and 227 of the Constitution.
  • The ruling should in the first instance be challenged before the High Court.
  • Ordinarily, an aggrieved party should not be encouraged to appeal directly to the SC unless it appeared to the Court that the SLP raised substantial questions of general importance or a similar question was already pending before it for decision.
  • SC rejected the SLP and granted liberty to the Petitioner to approach the High Court under Article 226 and/or 227 of the Constitution by observing that AAR was a body exercising judicial power conferred on it by Chapter XIX-B of the Act and was a tribunal within the meaning of the expression in Articles 136 and 227 of the Constitution.
  • Section 245S(1) of the Income Tax Act, 1961 made the advance ruling pronounced by the AAR binding on the applicant, in respect of the transaction and on the Commissioner and the Income-tax Authorities subordinate to him in respect of the applicant.
  • However, this would not affect the jurisdiction of either Supreme Court under article 136 of the Constitution or of the High Court under articles 226 and 227 of the constitution to entertain a challenge to the advance ruling pronounced by the AAR.
  • Thus, it could not be said that an advance ruling of the AAR could only be challenged under article 136 of the Constitution before the SC and not under Articles 226 and/or 227 of the constitution before the High Court.

In simple words, AAR Rulings can be challenged but not directly in the Supreme Court

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