FEBRUARY 05, 2019

By Brijesh Kothary

THE concept of advance ruling was introduced for the first time under the Indian indirect tax laws in the year 1999, drawn on the lines of the Authority for Advance Rulings ('AAR' for brevity) for direct taxes. AAR was primarily set up to provide binding rulings on important issues relating to classification, valuation, etc, so that intending investors have a clear-cut indication of their duty liability in advance. One important reason for setting up the AAR was to avoid litigation.

The concept of AAR has been grandfathered into the Goods and Services Tax ('GST' for brevity) regime as well. The scope of advance ruling under the GST laws is a broader one and an improvement over the advance ruling concept under Customs and Central Excise Laws. Under the earlier dispensation, advance rulings could be sought only for proposed transactions whereas under GST, advance rulings can also be obtained for a transaction being undertaken by the applicant.

Another significant departure under the GST laws is the constitution of the authority. The AAR under the Income Tax and Customs laws consist of a combination of judicial and technical members, while the AAR under the GST laws consist of a combination of members from Central and State Tax Authorities. The absence of judicial member in AAR or the Appellate Authority for Advance Ruling ('AAAR' for brevity) may impair its independence. It is for this reason that some litigants have even filed public interest litigation before the High Court of Gujarat, Madras and Rajasthan challenging relevant provisions of GST laws relating to the constitution of AAR and AAAR for being coram non judice.

The intention behind setting up of the AAR has been to provide certainty to the taxpayer with respect to his obligations under the GST laws by way of an expeditious ruling, to avoid unnecessary litigation.

As on date, over 350 orders have been passed by the AARs and over 35 orders have been passed by the AAARs. Some issues are interpreted by different authorities in different manner, leading to divergence in views. The divergent rulings of the authority have led to confusion in implementation of the already intricate GST laws. Some instances of conflicting rulings on common issues given by AAR in different States are briefly discussed hereunder:

- GST on solar power generating system: The Maharashtra and Rajasthan AARs have ruled that supply under turnkey composite EPC contract to be works contract, leviable to GST @ 18%, while the Uttarakhand AAR has ruled that goods supplied for the specified purpose of setting up of solar power generating system would be leviable to GST @ 5%.

-  Activity of bus body building: The Goa AAR has ruled that building and mounting of the body on the chassis is supply of services, while the Maharashtra AAR has ruled that fabrication, fitting and mounting of bus bodies on the chassis is a composite supply with goods being principal supply.

- Classification of polypropylene leno bags: The Odisha and West Bengal AARs have ruled that PP Leno Bags are classified under Tariff Entry 3923, while the West Bengal AAR, in another ruling has held the application in favour of the assesssee ruling that the product is classifiable under Tariff Entry 6305.

- Works contract services pertaining to railways: The Maharashtra AAR has ruled that the services of sub-contractor would be leviable to GST @ 12%, while the Bihar AAR has ruled that such services would be leviable to GST @ 18%.

- GST on parts for waste-to-energy plants: The Karnataka AAR has ruled that turbine is not a renewable energy device as it does not convert waste to energy and hence not leviable to GST @ 5%, while Andhra Pradesh and Maharashtra AARs have ruled that parts for the manufacture of waste to energy plants/devices are leviable to GST @ 5%.

While some of the rulings of AARs are modified by the AAARs, some rulings are in conflict with that of other AARs/AAARs. As a damage control measure, the Government has even clarified its position with regard to the confusion created due to divergent rulings on some of the above issues by way of issuance of circulars. Some of the issues have also been represented before the GST Council for recommending changes in legal position or the rate of tax. The latest example being the issue relating to GST rate on solar power projects.

To mitigate this problem permanently, the GST Council in its 31 st meeting held on 22.12.2018, gave an in-principal approval for amending GST Acts for creation of a Centralised Appellate Authority for Advance Ruling ('Centralized AAAR' for brevity) to deal with cases of conflicting decisions by two or more State AAARs on the same issue.

It may be pertinent to note that as per the above recommendation, the Centralized AAAR can be approached only to look into the cases of conflicting decisions by two or more AAARs on the same issue. Therefore, the person aggrieved by the order of AAR must first approach AAAR even if the decision of the AAR is conflicting with that of another AAR/AAAR.

The rulings of the AARs/AAARs are binding on the applicant who sought the ruling and the jurisdictional officer concerned. A question, therefore, arises as to whether the aggrieved party has a legal remedy to appeal against the adverse ruling? The Hon'ble High Court of Delhi in UAE Exchange Ltd. has inter alia held that an applicant or interested person may challenge an advance ruling by filing a writ petition under Articles 226 with the jurisdictional High Court or under Article 32 with the Supreme Court of India.

The above decision leads to another question as to which is the appropriate forum for appeal against an advance ruling? In this regard, the Hon'ble Supreme Court in Columbia Sportswear Co. v. Director of Income Tax, Bengaluru - 2012-TIOL-134-SC-IT-LB has laid down the principle of writ in a High Court versus Special Leave Petition (SLP) in the Supreme Court against an advance ruling, laying the controversy to rest by holding that the aggrieved party to a dispute can file a writ against the ruling of AAR; and only in exceptional situations, the Apex Court shall exercise discretion in allowing a SLP against an AAR ruling.

Interestingly, some of the decisions of the AAR under GST laws have already been challenged before the High Courts by way of writ petition. The Gujarat AAR in - 2018-TIOL-57-AAR-GST (In Re: R.B. Construction Company) ruled that work of laying of underground pipeline network was covered under definition of 'works contract' under GST Act which was treated as supply of services and thus, part of supply which was pending on or after appointed date was liable to tax and that transitional Input Tax Credit was not admissible since no input/material was required for testing and commissioning of pipeline network which was pending on appointed date. The Hon'ble High Court of Gujarat has admitted the petition and has issued returnable notice to the Government in this regard.

At this juncture, it would be worth noting that not all the advance rulings have left the applicant in a bad taste. Some of the issues addressed by AAR in favour of the applicant are briefly discussed hereunder:

-  The Uttar Pradesh AAR has ruled that incidental supply of spare parts/ goods in a comprehensive annual maintenance contract qualifies to be a composite supply of service taxable @ 18%, irrespective of the rate of tax on goods.

-  The Rajasthan AAR has ruled that reimbursement of expenses and salary paid by foreign Head Office to the liaison office established in India is not liable to GST and the Liaison Office is not required to get registration under GST.

-  The Kerala AAR has inter alia ruled that the supply of medicines and allied items provided by the hospital through the pharmacy to the in-patients is part of composite supply to facilitate health care services and is not taxable.

-  The West Bengal AAR has ruled that the applicant (Indian Institute of Management) is an "Educational Institution" after the introduction of the IIM Act with effect from 31.01.2018 and hence the applicant is eligible for exemption from payment of GST.

-  The Maharashtra AAR has ruled that an importer need not obtain registration in a State where the port is located and that the goods can be supplied by the importer from the place of business in the State where the applicant is registered.

After introduction of GST, advance rulings were the most sought-after subject that the assessees would rely upon, on an expectation that the AAR would clear the ambiguity on some of the positions that do not have any judicial precedence. In fact, during the initial phase, some of the assessees even filed writ petitions in Kerala High Court seeking direction to notify authority for advance ruling after implementation of GST and in Delhi High Court for manual acceptance of the advance ruling applications due to the lack of functionality of electronic filing of applications on the GSTN common portal.

The assessees's 'josh' to rush to AARs does not seem to be all that 'high' now, particularly after the ruling of the Karnataka AAR - 2018-TIOL-113-AAR-GST  which inter alia held that activities such as accounting, other administrative and IT system maintenance performed by employees at the Corporate Office for the units located in other States shall be treated as supply leviable to tax. This ruling has also been upheld by the AAAR - 2018-TIOL-31-AAAR-GST. It would be interesting to see if this ruling is appealed against before the High Court.

(The author is a Principal Associate at Lakshmikumaran & Sridharan, Bangalore and the views expressed are strictly personal.)