Overruling of earlier decisions by Authority for Advance Rulings

The provisions relating to Authority for Advance Rulings (AAR) were introduced by the Finance Act 1993. The intent was to create an independent adjudicatory body and to ensure further that the procedure is simple, inexpensive, expeditious and authoritative. The main advantage of seeking the ruling of AAR was that the non-resident investor can be sure of its liability towards income-tax even before the start of investment in India.

The AAR is a high level quasi judicial and independent judicial body chaired by a retired judge of Supreme Court and two other members. The rulings of the AAR are binding on the applicant as well as the Tax department. In other words, the rulings of the AAR are considered to be final. However any party feeling aggrieved by the rulings may exercise its constitutional rights to go in Writ in High Court or SLP in Supreme Court.

Although the rulings are binding on the applicant, however, being quasi judicial in nature, the rulings are normally treated as a precedent having a high persuasive value. In other words, although the rulings are binding only on the applicant, however, other assessees also follow the principle laid by the AAR in its rulings. Therefore, consistency in the rulings is highly desirable.

In India, the hierarchical judicial system of courts is followed. In the case of Dunlop India Ltd 154 ITR 172 the Hon’ble Apex court held that “the hierarchical system of courts which exist in our country, it is necessary for each lower tier, including the High Court, to accept loyally the decision of the higher tiers”. The decision given by one Bench of a particular judicial authority is followed by the other benches of the same court. In case the other bench does not agree with the decision, then the matter is referred for consideration of a Special (full) Bench consisting of more members.

The AAR, being a quasi judicial body, should also follow the aforesaid healthy judicial system. The AAR should pronounce rulings on the normal issues by a regular bench (consisting of two members) and refer the matter involving controversial issues to a larger bench (consisting of three members).

However, it is unfortunate to observe that the AAR has dissented from its earlier decisions without referring the matter for consideration of a larger bench.

Reference in this regard may be made to the recent decision of AAR in the case of VNU Internation B.V. dated 28.03.2011. Vide the said ruling, the AAR held that the applicant is required to file its return of income in India despite its income not being liable to tax in India. But in the case of Vanenburg Group B.V., [289 ITR 464] AAR had held that Section 139 and other sections are merely machinery provisions to determine the amount of tax. There would be no occasion to call a machinery section in aid where there is no liability at al”.

In yet another decision pronounced by AAR on 01.08.2011 [Cairn UK Holdings Limited] the AAR again dissented from its earlier decision in the case of Timken France SAS, AAR 739 of 2007. In the said case, the AAR dissenting from its earlier decisions held that in case of non-residents, long term capital gain arising from the transfer of shares, the benefit of reduced rate of tax @ 10% mentioned in the proviso to section 112 is not available.

The AAR is advised to follow the procedure set by the Hon’ble Supreme Court whereunder the judgment given by the Hon’ble Apex Court is generally not dissented from. If any Bench of the Hon’ble Apex Court feels that its earlier decision needs a review, a larger bench is constituted, and then only the earlier decisions are re-considered. The AAR should also follow the well accepted healthy practice of constituting a larger Bench on the lines of Special Benches constituted by the Appellate Tribunals, High Courts and the Supreme Court.

(Author is a Sr. Partner in S.S. Kothari Mehta & Co.) hp.agrawal@sskmin.com .