Introduction:

Certainty in tax system is an overarching factor which influences decisions whether to proceed with indulging in trade with a country or not.  Certainty curtails discretion vested in taxpayers as well as Revenue Authorities.  This assumes utmost relevance since there is often a lag between the time a taxpayer being a non-resident, ascribes to certain tax positions and the assessment of such positions by the Revenue Authorities.  In this context, certainty bestows confidence in decision making and is in that view of the matter, key for operation of a system where resources are not unnecessarily required to be channelised to deal with unwarranted complexities.  Certainty, therefore, is instrumental in curtailing the dilemma that a business may encounter, by directing it to pursue the path that seems to offer the required benefit, comfortably and suitably.  Uncertainty, in a tax system, may be a result of the provisions in the statue, coupled with overlapping and contradicting judicial interpretations at the lower-level authorities or appellate courts.  Uncertainty paves way to an appeal by the person aggrieved, leading largely to waste of productive resources.

With the above background in mind, the present article is an attempt to analyse the Legislative intent behind the scheme of advance ruling in Chapter XIX-B of the Income-tax Act, 1961 (“Act”), amendment whereof, vide the Finance Act, 2021, in the opinion of the authors, is likely to perpetuate an environment of uncertainty, consequently, being counter-productive, when viewed against the Legislative intent with which this mechanism was introduced.

The Authority for Advance Rulings and Tax (Un)Certainty:

Given the Legislative intent that tax disputes should not be an impediment to investments, the Legislature in its wisdom, vide the Finance Act, 1993, had introduced scheme of advance ruling in Chapter XIX-B of the Act.  Pursuant to this scheme, the Authority for Advance Rulings (“AAR”) was set up, which was to pronounce its ruling on the taxability of the transaction undertaken or proposed to be undertaken by a non-resident.  Subsequently, vide the Finance Act, 1998, this scheme was expanded to cover applications filed by the residents as well.

As per section 245Q of the Act, an Applicant, desirous of obtaining an advance ruling, is required to make an application, stating the question on which such ruling is sought.  Prior to September 01, 2021, as per section 245R(2) of the Act, the AAR was required to first examine the application and related records received from the Revenue Authorities, to decide on the admissibility of the application.  For example, where the question raised in the application was already pending before any income-tax authority or Appellate Tribunal or any court or where such question related to a transaction, which was designed prima facie for avoidance of income-tax, the AAR was mandated to reject the admission of such application.  However, where there were no grounds for rejection of the application and the AAR had admitted the application, it was required to pronounce its ruling on the question(s) raised in the application under section 245R(4) of the Act.  Many a times, the AAR deferred the adjudication of the question as to whether the transaction in question was designed prima facie for avoidance of tax to the stage of pronouncing its ruling on merits under section 245R(4) of the Act.

As per section 245S of the Act, with the intention of reinforcing the “certainty”, a ruling pronounced by the AAR was specifically made binding on the Applicant and the Revenue Authorities qua the transaction in respect of which the ruling had been sought.  In view of the binding effect given to a ruling no remedy by way of statutory appeal, was provided for in the Act.  However, in spite of the absence of the statutory remedy, considerable litigation ensued before High Courts ^[1], challenging such rulings in writ jurisdiction.

The Board for Advance Rulings and Tax (Un)Certainty:

Vide Finance Act, 2021, given the non-functioning of the AAR as a result of consistent vacancies in the office of the presiding officers, the Legislature altered the scheme of advance ruling.  Pursuant thereto, the AAR ceased to exist as on September 01, 2021, and was replaced by the Board for Advance Rulings (“BAR”) for all purposes.  Following is the difference in the constitution of a Bench at the Authority and the BAR:

Pursuant to the amendments to the scheme of advance ruling, all the applications pending before the AAR as on September 01, 2021 stood transferred to the BAR.^[2]  However, at the same time, the Legislature expressly eliminated the binding effect of the ruling that would be pronounced by the BAR.^[3]  While this binding effect has been eliminated, the Legislature has provided for a statutory appeal to the High Court under section 245W of the Act, against a ruling pronounced by the BAR.  The appeal can be filed by an Applicant, who is aggrieved with the ruling or any other order of the BAR before the High Court.  The Assessing Officer of the Applicant, on the direction of the Principal Commissioner of Income-tax or Commissioner of Income-tax, can also file an appeal before the High Court against the ruling or any such order passed by the BAR.

As per the Memorandum to Finance Bill, 2021, the intent behind bringing the amendments, was to provide expeditious disposal of applications seeking such advance ruling.  The change in the constitution of the Bench from three members belonging to different gentry to two members, both of whom are income-tax authorities, seems to justify such an intent.  That said, the original intent of the Legislature, of providing tax certainty, while introducing the scheme of advance ruling in 1993, cannot be lost sight of.  As per section 245S of the Act, a ruling pronounced by the AAR (i.e., a ruling pronounced prior to September 01, 2021) was binding on the Applicant as well as the Revenue Authorities, in respect of the transaction in question.  As has already been stated, this binding effect seems to have been given to a ruling pronounced by the AAR, in order for the questions raised in the application to achieve finality.  Therefore, the Legislature had deemed it fit to not provide for a statutory appeal against such ruling.  The Supreme Court, in Columbia Sportswear (supra), had taken note of this binding nature of a ruling and had held in view thereof, that the AAR acted in a judicial capacity, which would make its ruling susceptible to a challenge before High Courts in a writ jurisdiction.  This conclusion of the Supreme Court was also influenced by an absence of a statutory appeal against a ruling under the provisions of the Act.

Therefore, given that in any case, since the rulings were amenable to challenge in writ jurisdiction, the Legislature in its wisdom, in the revised scheme, has thought it prudent to provide for a statutory appeal before High Courts.  Needless to state, once a ruling becomes amenable to an appellate jurisdiction, there cannot be a binding force for the ruling per se, as was the position under the unamended provisions.  The effect of the revised scheme, seems to be that the ruling, which is a subject matter of appeal before the High Court, would not conclude the determination of tax liability, as was the objective of introducing this mechanism in the first place.  The determination of tax liability is likely to stand concluded after the ruling is subjected to the scrutiny by the High Court concerned.  This of course, seems to be the reasonable interpretation of the amended scheme.

However, the could it be argued that when the underlying order passed by BAR is not binding on the parties inter se, the judgment of the High Court considering the correctness of such order of BAR, in appeal, would also not be binding?

The Supreme Court, in Daryao & Ors. v. State of U.P. & Ors.,^[4] observed that a judgment pronounced by a court of competent jurisdiction is binding between the parties, unless it is reversed or modified in appeal, revision or by any other procedure.  It could be argued that the BAR, as constituted post September 01, 2021, in terms of the provisions of the Act (or the AAR as it existed prior to the said date), is neither a court^[5] nor is the ruling pronounced by it binding, as per the express intent of the Legislature.  In fact, in Columbia Sportswear Company (supra), for the purposes of determining whether the AAR (as it existed prior to September 01, 2021) could be characterised as a “tribunal”, the Supreme Court was persuaded by the binding effect of the Advance Ruling, as provided for in section 245S of the Act.  The following passage from the book “Constitutional Law of India” by H.M. Seervai, was quoted by the Supreme Court to come to the conclusion that the AAR was exercising a judicial power:

“an authority acts in a judicial capacity when, after investigation and deliberation, it performs an act or makes a decision that is binding and collusive and imposes obligation upon or affects the rights of individuals.”

Therefore, one could argue that post September 2021, because the rulings to be pronounced by the BAR lack binding effect, the BAR does not act in a judicial capacity.  Therefore, it is arguable that even if a ruling is reversed and modified by the concerned High Court in appeal, such that the ruling merges with the decision of the High Court, there would be no binding effect of the decision rendered by the High Court in appeal either, since the underlying impugned ruling, which merged, was not binding.  This is more so, because the decision of the High Court in appeal has not been given a binding effect by the Legislature, as it existed for a ruling of the AAR prior to September 01, 2021 (which was not susceptible to an appeal before High Court).

It is trite that High Courts exercise judicial and administrative superintendence over all subordinate courts/ tribunals in the territory where they exercise jurisdiction, and such power is derived from the Constitution.  However, when sitting in an appeal, the High Court exercises its powers as derived from the statute, which provides for the appeal.  While it cannot be doubted that, as a matter of general rule of law, an appeal before the High Court, being the court of competent jurisdiction, would be a judicial act, thereby making decision rendered thereunder per se binding on the litigants, given the absence of an express statutory binding effect under section 245W of the Act, the risk of this being questioned is perhaps imminent.

Conclusion – Paradox for Investment Decisions?

It may be concluded in light of the above, that the replacing of the AAR with the BAR has unintentionally, however unavoidably, perpetuated uncertainty, by virtue of, inter-alia, needlessly disrupting the provision providing for binding effect to pronouncements vis-a-vis taxability of transactions undertaken or proposed to be undertaken.  This is likely to culminate in a situation where a taxpayer, more specifically, a non-resident, is not in a position to effectively plan his or her or its affairs.  Therefore, in the absence of acceptable level of certainty presently, there may be a diminished confidence in the domestic administration, which in turn, may result in discouraging investments in India.

Footnotes:
[1]       Columbia Sportswear Company v. DIT, [2012] 346 ITR 161 (Supreme Court).

[2]       As per section 245Q(4) of the Act, where an application for a ruling was made before September 01, 2021 and in respect of which no order under section 245R(2) or section 245R(4) of the Act has been passed before such date, such application would stand transferred from the AAR to the BAR.  As per section 245R(2), the AAR was required to pass an order, allowing or rejecting the admission of an application and where such application was allowed, the AAR was required to pass an order under section 245R(4) of the Act, on the questions raised in the application.

[3]        Section 245S(3) of the Act read with the Memorandum to Finance Bill, 2021 which provides at para 2 at page 43 – “It is proposed that the Central Government shall constitute one or more Board for Advance Rulings for giving advance rulings under the said Chapter on and after the notified date. Every such Board shall consist of two members, each being an officer not below the rank of Chief Commissioner. Advance rulings of such Board shall not be binding on the applicant or the Department and if aggrieved, the applicant or the Department may appeal against the ruling or order passed by the Board before the High Court.”

[4]       AIR 1961 SC 1457 (Supreme Court).

[5]       Columbia Sportswear Company (supra) and Hari Nagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala, AIR 1961 SC 1669 (Supreme Court).