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AAR To SC: Longer & Costlier?

Published on Sat, Aug 04 16:38, Updated at Sat, Aug 04 at 16:43
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This week the concept of Advance Rulings had a near death experience in the Supreme Court. And while Advance Rulings may survive this, it’s not clear if they will hereafter thrive in their current form. Is it time to mourn the death of Advance Rulings? Has their certainty and speed advantage been buried? Payaswini Upadhyay digs deeper.

The Authority for Advance Rulings was established in 1993 to give non-resident taxpayers an advance indication of their potential tax liability. The purpose was to enhance certainty and reduce litigation. The authority has 6 months to rule on an application, though it often takes between 9 to 18 months and the decision is binding on both the taxpayer and revenue. Advance rulings are not appealable but this has not precluded either taxpayers or revenue from exercising their constitutional rights to go in for a writ before the high court or a Special Leave Petition at the Supreme Court.

In 2001 French bank Societe Generale was the first to file an SLP against an AAR ruling and in 2007, Japanese company IHI was the first to win such an appeal – taxpayers have preferred the SLP route to get a speedy outcome. Revenue filed its first special leave petition against an AAR ruling in 2007, but has since appealed at both, the high court and supreme court levels. The increasing number of SLPs alarmed the apex court. So when US company Columbia Sportswear filed a special leave petition against an AAR ruling, the apex court decided to take a holistic view of the matter.

Mukesh Butani
Managing Partner, BMR Advisors
“The whole debate on maintainability of Special Leave Petition against an AAR decision came up couple of years back in Fosters case when the SC said that the right forum for maintainability is the HC. And since, then there has been confusion in the minds of the taxpayers and the tax department whether the right forum is the HC or the SC. On Feb 10th when it was hearing the Columbia Sports matter, it suo motu decided that the whole issue on where the appeal is maintainable has to be first decided by the SC.”

Daksha Baxi
Executive Director, Khaitan & Co.
“As the hearings were going on, the SC realized that there were several other SLPs which were also filed against the rulings of the AAR. They got concerned about the fact that is it right that practically every AAR ruling comes before the SC and should the SC be hearing it or not hearing it. So they considered whether it was appropriate for any other court to hear the appeal against the AAR, especially since the statute says it is binding.”

The Supreme Court, in its order this week acknowledged the binding nature of an advance ruling, qualified the AAR as a quasi-judicial authority and said its decisions are open to judicial review by high courts and the Supreme Court.

Mukesh Butani
Managing Partner, BMR Advisors
“In the past, the AAR orders that were appealed against, the SC admitted all the SLPs. Thereafter the SC decided the matters; so in a way it became final. Now it will have to go to the HCs which means that it slightly elongates the process to achieve finality on the matter. It's very much possible that there are similar principles of law and they go to different HCs and they take differing views. So one way of looking at it is that the taxpayer and the tax department now have two innings to play with and another way of looking at it is to say that it’s going to take time for the matter to get into finality.”

Dinesh Vyas
Senior Tax Counsel
“It is likely to happen more that the department will, as a routine, likely to take the matters to the HC. And in the process therefore what will happen is that an element of uncertainty will be introduced with regard to the carrying on of the business transaction forward.”

Daksha Baxi
Executive Director, Khaitan & Co.
“It certainly reduces the ability of the non resident taxpayer to rely on achieving certainty faster using the AAR route. Now that the aggrieved party would have to go through High Court and then the Supreme Court, certainly in a situation where we are seeing that in most cases where a tax payer favorable ruling is given, the tax authorities do take it up before the SC to contest it, it does seem that it will be much longer before finality is achieved and the efficacy of AAR ruling to that extent is much reduced and undermined.”

The Supreme Court has left a small window open for direct approach via an SLP – only for cases that raise ‘substantial questions of general importance’. But it has not explained what it means by ‘substantial questions of general importance’.

Dinesh Vyas
Senior Tax Counsel
“The distinction is here- a case where the issue is typically confined to the particular business structure of the transaction which has gone before the AAR and that is not likely to have an impact over other cases, then obviously this is a matter which will go to HC because there is no question of general public importance. On the other hand, take for eg, there is an interpretation of important Section - that interpretation will have a bearing not only on the case of a taxpayer but also on several other taxpayers. This will become a substantial question of law of general public importance.”

Daksha Baxi
Executive Director, Khaitan & Co.
“We expected the SC to lay down, with all due respect, to lay down certain principles on the basis of which the SC will entertain SLP directly. And on the basis of which the aggrieved party can determine that these are principles that they are not able to meet and therefore they will have to go to the HC. So when the SC says something of general importance, we're not able to understand whether giving the benefit of a treaty between India and Mauritius is of general importance or not because one of the SLPs was with regards to that and even that has been sent back in as much as that the aggrieved party can go to the HC.”

Daksha is referring to the SLP filed by revenue in the E*Trade Mauritius case. That petition was filed in 2010 and now like the 7 other petitions it was clubbed with, the E*Trade case will have to first stop at the High Court before making it back to Supreme court. 1 year AT THE AAR, 2 years at the Supreme Court and now back to the high court.

Inexpensive, expeditious and binding- that’s how the AAR describes the advantages of an advance ruling. Advantages that have already been eroded by internal AAR delays and appeal crazy parties. This week’s Supreme Court order may have exacerbated the problem further. Experts are also confounded by 2 key arguments that never made it to the Supreme Court order. Whether the authority has the power to rule in cases of tax avoidance and that, it must follow its own precedent. The lack of consistency combined with the lack of speed could very well be the last nail in the coffin.

In Mumbai, Payaswini Upadhyay

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