It’s intriguing to see how Supreme Court’s (SC’s) decisions are increasingly breaking new grounds on tax policy and administration adding to the common law of the land. A recent decision by a three-member bench deciding the fate of a batch of special leave petitions (SLP) by non-resident taxpayers and the Revenue is another landmark verdict , insomuch as the ruling delineates constitutional privileges of High Courts (under Article 226/227) in issuing writ against the order of Authority for Advance Rulings (AAR).
The Court has held that a constitutional challenge against an order of AAR, which under the Income-tax law is final and binding, would lie before High Courts and not with the SC, as was the convention. The SC in reaching the conclusion, upheld AAR, as on par with a ‘tribunal’, which is vested with judicial authority as civil court under the Code of Civil Procedures (CPC). It buttressed by holding that a direct appeal to the SC against AAR’s order would override the basic structure of the Constitution,which grants High Court superintendence over all courts and ‘tribunals’. Though, it has left a window open for an SLP under exceptional situations.
The Court’s ruling provides greater sense of clarity as to maintainability of constitutional remedy (writ or SLP) against the AAR order, particularly where the binding nature of AAR’s order has become a bone of contention. The ruling whilst, does not deprecate AAR’s efficacy as quasi-judicial authority (whose decision is conclusive under the law insofar as facts are concerned), it certainly won’t appease non-resident taxpayers in search of finality of disputes on cross-border transactions. Taxpayers’ apprehension is now premised on existence of two-level of constitutional remedy against AAR’s order which would inevitably prolong the period of disputes, especially in high stakes matters and to an extent, such eventuality could defeat the legislative intent underlying creation of the AAR institution .
For those present to witness the pleadings, Justice Patnaik’s question, ‘why should the Revenue and taxpayer not have a second inning’, held the most important answer – the outcome of the Court’s ruling should be taken with a pinch of salt!
AAR – legislative intent and historical challenges to its authority
Stepping back in history –the institution of AAR was created by the Finance Act of 1993, following the recommendation of the Wanchoo Committee (although conceptualized in the mid-70s). AAR was created as an independent adjudicatory body to be chaired by a retired judge of the Apex Court, and would exercise its judiciary power in issuing binding rulings.
It is only in 2004 that the first AAR order was brought to challenge before the SC in IHI Ltd, Japan’s case. The Apex Court allowed the SLP and ruled in favor of the taxpayer, overturning the outcome of AAR ruling. An identical remedy was allowed later in 2007 in the famous Morgan Stanley case on determination of taxability of back office operations again in favor of the taxpayer. In neither of these landmark cases, the Court examined (on record) the question of maintainability of SLP dehors High Court’s jurisdiction in a writ. However, a year later, in Foster’s Australia’s case, a two-member bench of the Apex Court ordered the applicant to withdraw the SLP and instead, file a writ in the High Court? The SC’s order in Foster’s case was not reasoned adequately to lay down principles as to the determination of an appropriate forum for appealing.
Has the debate been settled or new riddles will hound?
The ruling could have been more encompassing as it did not address most relevant aspects of the AAR’s adjudicating power, which were raised in the pleadings, though did not find mention in the order.
The most relevant conundrum is, if the AAR, under its constitution, has powers to adjudicate matters involving tax avoidance. In recent instances, the AAR has passed its ‘binding’ ruling in cases where the Authority itself alleged an arrangement as a device for tax avoidance after diving deep into the facts.
AAR’s indiscretion in giving rulings in such cases has ignited a larger legal debate on the AAR’s competence and whether such ruling could be regarded per incuriam.
Another aspect worrying taxpayers is, whether the AAR would be competent to adjudicate cases which are premised on conflicting /varying facts presented by the applicant and tax administration.
Though the Court has upheld the AAR’s capacity as ‘tribunal’, would this imply that the AAR could exercise the same functions as an Income tax Appellate tribunal? Would this not lead to inevitable conflict of adjusting powers of ITAT and AAR, and in turn, ‘forum duplicity’? Can an AAR reverse its own ruling? In the past, it has done so; something that an ITAT can’t.
Lastly, I worry reading the concluding paragraphs of the judgment –the AAR is a ‘tribunal’ alright, however, in future how will the riddle of ‘forum conveniens’ be dealt with, especially where the applicant’s jurisdiction falls with more than one High Court or the applicant and respondent have different jurisdictions.
What about the principle of consistency? Understandably, all will be resolved, but, not before a Court battle. Should the seat of AAR alone decide the appropriate jurisdiction for writ, to the exclusion of privilege of other High Courts .The jury is out!
In conclusion, I think the SC had an opportunity to resolve riddles surrounding the AAR’s empowerment and clarify the rule of consistency.
A greater clarity could have gone a long way in strengthening AAR’s credibility as an independent adjudicatory authority, particularly in the light of its expanded role in GAAR era.
The author is Partner with BMR Legal and was assisted by Sumit Singhania – views are entirely personal.