JUNE 28, 2019

By Satya Sai & Satish Gandla

THE Authority for Advance Rulings ('AAR') was introduced as a mechanism to prevent/minimise litigation, plan tax liability, and to foster a business-friendly environment where taxpayers may approach Revenue Authorities for ascertaining the proper legal implications.

The taxpayers are happy with the introduction of AAR under GST as they are given a chance to correctly assess the tax implications with the help of the Government before the assessment takes place and thereby reduces unwanted litigation under GST. Since the timelines for seeking resolution of an issue under advance ruling mechanism are fixed and are comparatively shorter than the timelines for settlement of such issues under the regular appellate mechanism, the taxpayers preferred to resort to AAR mechanism to know the GST implications beforehand instead of facing litigation to decide the matter at a future point of time. A taxpayer can make an application to AAR for ruling in respect of specified matters and obtain an advance ruling in respect of such matters within relatively shorter span of time.

However, looking at the past rulings by AAR and Appellate Authority for Advance Ruling ('AAAR'), the majority of rulings have been decided in favour of revenue. This may be because of the fact that the constitution of the AAR & AAAR wholly comprises of the Central & State revenue officers without inducting any judicial members.

Further, different AARs have pronounced different rulings on similar issues. This results in compliance challenges for the taxpayers. Due to such divergent rulings, the same taxpayer may be compelled to follow different legal positions in different States for a specific transaction. Though the GST Council has proposed to establish a central-level appellate authority to deal with such cases which can lend some uniformity to such rulings but to expect a judicial approach in such rulings would still be a distant dream.

As discussed supra, the whole intent behind establishing the AAR was to reduce litigation and to provide certainty to the taxpayers. However, with revenue favoured rulings and divergent rulings in case of same transaction, it appears that the purpose of establishing AAR is not met by the Government. Instead of reducing litigation, the rulings are likely to increase the litigation because of pro-revenue rulings and divergent views on the same transaction.

Under GST, if the AAAR holds the appeal against the assessee, no appellate mechanism has been provided under the GST laws to challenge the order of the appellate authority before an appellate forum.

Similar practice was followed under the direct taxes as well. However, in Columbia Sportswear Company vs Director of Income Tax, Bangalore - 2012-TIOL-134-SC-IT-LB, the Supreme Court has held that the advance ruling authority was a tribunal within the meaning of Articles 226 and/or 227 of the Indian Constitution. It was held that writ petitions against the advance rulings could be entertained by the High Court. The Court has held that though the direct tax law has provided no statutory appeal, the rulings of the AAR could be challenged before the High Court. Several times the rulings of AAR have been challenged under the direct tax laws and admitted by the High Court/Supreme Court Verizon Data Services India Pvt Ltd - Madras High Court W.P. 14921 of 2011; UAE Exchange Centre Ltd - 2009-TIOL-84-HC-DEL-IT; Ishikawajma Harima Heavy Industries (288) ITR 408.

Recently, the Bombay High Court in the case of JSW Energy Ltd Vs Union of India and Ors - 2019-TIOL-1236-HC-MUM-GST has held that because GST Statutes have not provided for any further appeal against the decision of the AAAR, the High Court cannot examine the impugned orders (passed by AAAR) on their substantive merits or de-merits. It further held that the impugned orders would have to be examined by applying the principles of judicial review and not the principles which apply in case of an appeal. The High Court has held that its jurisdiction is limited to evaluate the correctness of decision making process adopted by the Appellate Authority to pronounce it's ruling and not the correctness of decision pronounced by the Appellate Authority.

The High Court has relied on the judgement given by the Supreme Court in the case of Appropriate Authority and another vs. Smt. Sudha Patil and anr (1999) 235 ITR 118 (SC). wherein it was held that merely because no appeal mechanism has been provided for, against the order of appropriate authority directing compulsory acquisition by the Government, the supervisory power of the High Court does not get enlarged nor can the High Court exercise an appellate power.

In view of the above, it appears that an order passed by the AAAR against the assessee cannot be further appealed by the assessee before the High Court or before the Supreme Court except in peculiar situations such as orders passed against the principles of natural justice, orders passed exceeding the jurisdiction of the authority etc. In such case, the order pronounced by the AAAR shall be final and will be binding on the assessee.

However, recently, the Delhi High Court in the case of Sonka Publication (India) Pvt Ltd Vs Union of India & Ors - 2019-TIOL-1022-HC-DEL-GST has decided the writ petition filed by the assessee against the order passed by the Delhi AAR. The issue questioned by the assessee before the AAR was whether the books 'Sulekh Sarita' are 'Printed Books' classifiable under HSN 4901 or 'Exercise Books' under HSN 4820. The AAR had held that the books printed and sold by the assessee are classifiable as 'Exercise Books' under HSN 4820. The High Court, without discussing anything regarding its jurisdiction to allow the writ petition or regarding the appellate remedy available to the assessee against the order of AAAR, has proceeded to decide the matter on merits of the case and has decided the matter in favour of the assessee.

Therefore, it is clear from the above that there are divergent views by the High Courts on allowing the writ petition filed against the orders passed by the advance ruling authorities. The legal position with respect to challenging the correctness of orders passed by AAAR before Courts is yet to be crystalized. The view of the Government is that the advance ruling mechanism is beneficial to the assessee as it reduces litigation, however, what would be the benefits to an assessee if the matters are always held in favour of the revenue by AAR/AAAR.

Having noted the cons of advance ruling mechanism under GST, the taxpayers are now in limbo as to whether it is beneficial to venture into the advance ruling mechanism by giving up their alternate remedies of going through the normal route. Though there is a possibility that the AAR/AAAR rules in favour of the assessee, opting to file an advance ruling application may be disastrous for the assessee if it is held against the assessee. Thus, it would be a honey trap to the assessee as he cannot further challenge the matters decided by AAR/AAAR and the assessees have to be abide by the rulings of AAR/AAAR which are detrimental to his interests.

(The authors are Principal Associate and Senior Associate respectively in GST Practice, Lakshmikumaran & Sridharan, Hyderabad. The views expressed in this Article are strictly personal.)