Government of India, in order to provide a suitable mechanism for resolution of tax disputes between the tax department and foreign companies operating in India, inserted provisions relating to Authority for Advance Rulings (AAR) in 1993. Further, in order to make sure that the rulings of AAR are obeyed by the Department as well as by the person seeking the ruling, it was provided that the ruling shall be binding upon the applicant, in respect of the transaction for which the ruling has been sought, and on the commissioner and the income-tax authorities subordinate to him, except where:
if the ruling has been obtained by the applicant by fraud or by misrepresentation.
A large number of cases are being referred to AAR, and in the process it has been noticed that the AAR has delivered conflicting decisions. Therefore, a question arises as to whether a ruling of the AAR in the case of an assessee shall cease to have a binding force if a different view is taken by the AAR in the case of some other assessee.
In this context a recent decision of the Bombay High Court (Prudential Assurance Company Ltd. vs DIT [324 ITR 381] )may be referred to. In this case, the assessee is a registered FII.
On 30.04.2001, the AAR in the case of this very assessee held that the purchase and sale of shares by the assessee constitutes ‘business profits’ and not ‘capital gains’. The Assessing officer, based upon the aforesaid ruling, passed the assessment order holding that the nature of surplus made by assessee is ‘business profits’. He further held that such business profits were not liable to tax in India because assessee did not have any Permanent Establishment in India.
Later on, in the case of Fidelity Northstar Fund, [288 ITR 641], the AAR took a different view and held that the profits from purchase and sale of equities by FII would consti-tute ‘capital gains’ and would be chargeable to tax acco-rdingly.
On the basis of the later case, the Director of Income-tax formed an opinion that the assessment orders pas-sed in case of Prudential Assurance were liable to be revised under section 263.
The Director mentioned in the notice that in view of the subsequent ruling of the AAR, the assessment made on the basis of earlier ruling could be re-opened and revised.
The assessee filed a writ. The High Court observed that the rules clearly provide that the AAR may suo moto or on an representation made to it by the applicant or the commissioner, modify its ruling in such respects as it considers appropriate, if there is any change in the law or facts.
The High Court held:
“There is merit in the submission which has been urged on behalf of the petiti-oner that the commissio-ner has manifestly excee-ded his jurisdiction in relying upon the ruling of the Authority for Advance ruling in case of Fidelity Northstar Fund, as a ruling which would apply to the petitioner. Ex facie, section 245S shows that a ruling of the Authority for Advance Rulings binds the applicant, the Commissioner and the income-tax authorities subordinate to him and shall apply in relation to the transaction in which the ruling was sought. The ruling rendered in the case of Fidelity Northstar Fund, by the Authority for Advance Rulings cannot bind the petitioner nor can it displace the binding effect of the ruling rendered in the case of the petitioners”.
The above case clearly gives a message that a legal position settled by AAR sho-uld not be disturbed by departmental authorities by any subsequent action. The CBDT should issue directions to all officers not to unsettle a controversy which has already been settled by AAR. Otherwise, the objective of creating a high pro-file institution like AAR will be defeated.
The author is a Sr Partner in S S Kothari Mehta & Co.E-mail: hp.agrawal@sskmin.com
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