Whether an advance ruling pronounced by AAR can be challenged by the applicant or by any income-tax authority directly to the Supreme Court?

Case:- COLUMBIA SPORTSWEAR CO. VERSUS DIRECTOR OF INCOME TAX, BANGLORE

Citation: - 2012 (283) E.L.T. 321 (S.C.)

Brief fact: - The Petitioner is a company incorporated in the United States of America and is engaged in the business of designing, developing, marketing and distributing outdoor apparel. For making purchases for its business, the petitioner established a liaison office in Chennai with the permission of the Reserve Bank of India (for short 'the RBI') in 1995. The RBI granted the permission in its letter dated 1-3-1995 subject to the conditions stipulated therein. The permission letter dated 1-3-1995 of the RBI stated that the liaison office of the petitioner was for the purpose of undertaking purely liaison activities viz, to inspect the quality, to ensure shipments and to act as a communication channel between head office and parties in India and except such liaison work, the liaison office will not undertake any other activity of a trading, commercial or industrial nature nor shall it enter into any business contracts in its own name without the prior permission of the RBI. The petitioner also obtained permission on 19-6-2000 from the RBI for opening an additional liaison office in Bangalore on the same terms and conditions as mentioned in the letter dated 1-3- 1995 of the RBI. On 10-12-2009, the petitioner filed an application before the Authority for Advance Rulings (for short 'the Authority') on the questions relating to its transactions in its liaison office in India set out in Annexure-II to the application. Questions No. 1 to 6 as set out in Annexure-II to the application of the petitioner before the Authority are extracted herein below:

"1. Whether based on the nature of activities carried on by the Liaison Office ['India LO’] of the Applicant in India, as listed in the Statement of relevant facts Annexure 111], any income accrues or arises in India as per Section 5(2)9B) of the Act?

2. Whether based on the nature of activities carried on by the India LO, as listed in the Statement of relevant facts Annexure III], the Applicant can be said to have a business connection in India as per the provisions of Section 9(1)(i) of Act read with its Explanation 2?

3. If the answer to Query 2 is in the affirmative, whether various activities carried out by the India LO, as listed in the Statement of relevant facts [Annexure 111], are covered under the phrase 'through or from operations which are confined to the purchase of goods in India for the purpose of ex-port' as stated in part (b) of Explanation Ito Section 9(1)(i) of the Act?

4. If the answer to Query 3 is in the negative, how would the profits attributable to the 'operations in India' be determined and what would be the broad principles to be borne in mind for attributing income to the India LO?

5. Whether the India LO creates a permanent establishment ['PE'] for the Applicant in India under Article 5(1) of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains entered into between the Government of the Re-public of India and the Government of the United States of America ['Treaty'] read with the PE exclusion available for purchase function in terms of paragraph 3(d) of Article 5 of the Treaty?

6. If the answer to Query 5 is in the affirmative, how would the profits attributable to the PE in India be determined and what would be the broad principles to be borne in mind for attributing income to India LO under the Treaty?"

The respondent filed his reply dated 10-12-2010 to the aforesaid application of the petitioner before the Authority. The petitioner also filed its response dated 8-2-2011 to the reply of the respondent. The Authority heard the petitioner and the respondent and passed the impugned order dated 8-8-2011. In para 34 of the impugned order, the Authority gave its ruling on the six questions as follows "(1) A portion of the income of the business of designing, manufacturing and sale of the products imported by the applicant from India accrues to the applicant in India. (2) The applicant has a business connection in India being its liaison office located in India. (3) The activities of the Liaison Office in India are not confined to the purchase of goods in India for the purpose of export. (4) The income taxable in India will be only that part of the income that can be attributed to the operations carried out in India. This is a matter of computation. (5) The Indian Liaison Office involves a 'Permanent Establishment' for the applicant under Article 5.1 of the DTAA. (6) In terms of Article 7 of the DTAA only the income attributable to the Liaison Office of the applicant is taxable in India."

Aggrieved by the above order, the petitioner has challenged the impugned order on various grounds mentioned in this special leave petition. On 10-2-2012, order passed for calling upon the learned counsel for the parties to first address on the question of maintainability of special leave petitions filed either by the assessee or by the Department against the advance rulings of the Authority.

Appellant Contention: - TheLearned counsel for the parties referred to the provisions of Chapter XIX-B of the Act to show that the Authority is a quasi-judicial Tribunal. They submitted that the order of the Authority is an adjudicating order determining a question of law or fact specified in the application and sub-section (5) of Section 245R mandates compliance with the principles of natural justice. They further submitted that the Authority is also vested with the powers of a civil court in relation to the discovery and inspection, enforcing the attendance of persons and examining them on oath and compelling the production of books of account, etc. They argued that as the Authority is a quasi-judicial Tribunal, its orders can be challenged before the High Court by way of judicial review under Article 226/227 of the Constitution or before the Supreme Court by way of an appeal under Article 136 of the Constitution. They submitted that SC may, however, decline to interfere with the order passed by the Authority in exercise of its powers under Article 135 of the Constitution where it feels that it would be more appropriate that the order of the Authority must first be examined by the High Court under Article 226/227 of the Constitution. They relied upon the decision of SC in llurga Shankar Mehta v. Thakur Raghuraj Singh and Others [(1955) 1 SCR 267] in which it has been held that the expression "Tribunal" used in Article 136 of the Constitution includes, within its ambit all adjudicating bodies, pro-vided they are created by the State and are invested with judicial as distinguished from purely administrative or executive functions. They cited the decisions of SC in Kihoto Hollohan v. Zachillhu and Others [1992 Supp (2) SCC 651], lyotendrasinhji v. S.I. Tripathi and Others [1993 Supp (3) SCC 389], L. Chandra Kumar v. Union of India and Others [(1997) 3 SCC 261 = 1997 (92) E.L.T. 318 (S.C.)] and Union of India v. R. Gandhi, President, Madras Bar Association [(2010) 11 SCC 1 = 2010 (261) E.L.T. 3 (S.C.)] in support of their submission that where a Tribunal is constituted by an Act of the legislature for adjudicating any particular matter, the power of the constitutional courts under Article 226/227 or 136 is not ousted even if the Act makes the decision of the Tribunal to be final.

In simple words, the appellant held that Tribunal is a Quasi-judicial authority as the orders passed by it are final and binding. Then, on similar grounds, appellant held that as orders passed by the Authority for Advance Ruling (AAR) are final and binding on the applicant who sought the ruling and the authorities subordinate to the AAR, hence, it can be very well said that AAR is also a quasi- judicial authority like Tribunal. Further, the appellant contended that, when, in case of decision given by Tribunal, any of the party aggrieved by the order of the Tribunal can further appeal to HC or SC even when the order of the Tribunal is held to by final by the Act under which Tribunal is constituted then, in case of Advance Ruling also, orders passed by AAR can be challenged in HC or SC and applications for further appeal and writ petitions can be made to HC or SC.

Reasoning of Judgment: The Hon’ble Supreme Court held that under Article 226 of the Constitution, the High Court can issue writs of Certiorari and Prohibition to control the proceedings of not only a subordinate court but also of any person, body or authority having the duty to act judicially, such as a Tribunal. Under Article 227 of the Constitution, the High Court has superintendence over all courts and Tribunals through-out the territory in relation to which it exercises jurisdiction. Under Article 136 of the Constitution, this Court may, in its discretion, grant special leave to appeal from any judgment, decree, determination, sentence or order in any cause or matter passed or made by any court or Tribunal in the territory of India.

The Hon’ble Supreme court examined the provisions of Chapter XIX B of the Act on Advance Ruling to find out whether the Authority pronounces upon the rights or liabilities arising out of the Act. Section 245N (a) of Chapter XIX B which defines "advance rulings" is extracted hereinbelow

"245N. In this Chapter, unless the context otherwise requires,— (a) "advance ruling" means — (i) a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant; or
(ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been under-taken or is proposed to be undertaken by a resident applicant with such nonresident, and such determination shall include the determination of any question of law or of fact specified in the application;
(iii) a determination or decision by the Authority in respect of an issue relating to computation of total income which is pending be-fore any income-tax authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application : [Provided that where an advance ruling has been pronounced, before the date on which the Finance Act, 2003 receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-clause (ii) of this clause as it stood immediately before such date, such ruling shall be binding on the persons specified in section 245ST.

Thus Hon’ble Supreme Court held that the plain reading of the very definition of the Advance Ruling in Section 245 N (a) show that the Authority may determine not only a transaction but also the tax liability arising out of a transaction and such determination may include a determination of issue of fact or issue of law. Moreover, the Authority may determine the quantum of income and such determination may include a determination on a issue of fact or issue of law. They find that the determination of the Authority is not just advisory but binding. Section 245S in Chapter XIX-B is quoted hereunder:
"245S. (1) The advance ruling pronounced by the Authority under section 245R shall be binding only
(a) on the applicant who had sought it;
(b) in respect of the transaction in relation to which the ruling had been sought; and
(c) on the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction.

(2) The advance ruling referred to in sub-section (1) shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced."

Further, decision of the Authority in Cyril Eugene Pereira, has been taken note of by this Court in Union of India & Anr. v. Azadi Bachao Andolan & Anr. [(2003) 263 ITR 706 at 742] to hold that the advance ruling of the Authority is binding on the applicant, in respect of the transaction in relation to which the ruling had been sought and on the Commissioner and the income-tax authorities subordinate to him and has persuasive value in respect of other parties. However, it has also been rightly held by the Authority itself that this does not mean that a principle of law laid down in a case will not be followed in future. As Section 245S expressly makes the Advance Ruling binding on the applicant, in respect of the transaction and on the Commissioner and the income tax authorities subordinate to him, the Authority is a body acting in judicial capacity. H.M. Seervai in his book "Constitutional Law of India" (Forth Edition) while discussing the tests for identifying judicial functions in paragraph 16.99 quotes the following passage from Prof, de Smiths Judicial Review on page 1502:

"An authority acts in a judicial capacity when, after investigation and deliberation, it performs an act or makes a decision that is binding and collusive and imposes obligation upon or affects the rights of individuals."

Therefore, there is no doubt in mind that the AAR is a body exercising judicial power conferred on it by Chapter XIX-B of the Act and is a Tribunal within the meaning of the expression in Articles 136 and 227 of the Constitution.

The Hon’ble Supreme Court further contended the fact that sub-section (1) of Section 245S makes the advance ruling pronounced by the Authority binding on the applicant, in respect of the transaction and on the Commissioner and the income-tax authorities subordinate to him in respect of the applicant and the transaction would not affect the jurisdiction of either this Court under Article 136 of the Constitution or of the High Courts under Articles 226 and 227 of the Constitution to entertain a challenge to the advance ruling pronounced by the Authority. The reason for this view is that Articles 136, 226 and 227 of the Constitution are constitutional provisions vesting jurisdiction on this Court and the High Courts and a provision of an Act of legislature making the decision of the Authority final or binding could not come in the way of this Court or the High Courts to exercise jurisdiction vested under the Constitution. The Hon’ble Supreme court had cited some authorities in support of this view. In lyotendrasinhji v S.I. Tripathi and Others (supra), this Court held that the provision in Section 245-1 of the Income Tax Act, 1961, declaring that every order of settlement passed under sub-section (4) of Section 245D shall be conclusive as to the matters stated therein would not bar the jurisdiction of the High Court under Article 226 of the Constitution or of this Court under Article 136 of the Constitution. Considering the settled position of law that the powers of this Court under Article 136 of the Constitution and the powers of the High Court under Articles 226 and 227 of the Constitution could not be affected by the provisions made in a statute by the Legislature making the decision of the Tribunal final or conclusive, we hold that sub-section (1) of Section 245S of the Act, insofar as, it makes the advance ruling of the Authority binding on the applicant, in respect of the transaction and on the Commissioner and income-tax authorities subordinate to him, does not bar the jurisdiction of this Court under Article 136 of the Constitution or the jurisdiction of the High Court under Articles 226 and 227 of the Constitution to entertain a challenge to the advance ruling of the Authority.

To put it in summarized form, it was concluded that the orders of the AAR can be challenged in HC or SC as AAR is a Tribunal. Now, the issue to be decided was whether Special Leave Petition could be filed in SC directly as the objective of setting up AAR was to expeditiously decide the matter and if writ petition was to be first filed in HC, the very purpose of deciding the matter expeditiously would be defeated.
In a recent advance ruling in Groupe Industrial Marcel Dassault, In re [(2012) 340 ITR 353 (AAR)), the Authority has, however, observed:

" But permitting a challenge in the High Court would become counter productive since writ petitions are likely to be pending in High Courts for years and in the case of some High Courts, even in Letters Patent Appeals and then again in the Supreme Court. It appears to be appropriate to point out that considering the object of giving an advance ruling expeditiously, it would be consistent with the object sought to be achieved, if the Supreme Court were to entertain an application for Special Leave to appeal directly from a ruling of this Authority, preliminary or final, and render a decision thereon rather than leaving the parties to approach the High Courts for such a challenge...."

The Hon’ble Supreme Court have considered the aforesaid observations of the Authority but they do not think that they can hold that an advance ruling of the Authority can only be challenged under Article 136 of the Constitution before this Court and not under Articles 226 and/or 227 of the Constitution before the High Court. In L. Chandra Kumar v. Union of India and Others (supra), a Constitution Bench of this Court has held that the power vested in the High Courts to exercise judicial superintendence over the decisions of all courts and tribunals within their respective jurisdictions is part of the basic structure of the Constitution. Therefore, to hold that an advance ruling of the authority should not be permitted to be challenged before the High Court under Articles 226 and/or 227 of the Constitution would be to cancel out a part of the basic structure of the Constitution. Nonetheless, they do understand the apprehension of the Authority that a writ petition may remain pending in the High Court for years, first before a learned Single Judge and thereafter in Letters Patent Appeal before the Division Bench and as a result the object of Chapter XIX-B of the Act which is to enable an applicant to get an advance ruling in respect of a transaction expeditiously would be defeated. Thus when an advance ruling of the Authority is challenged before the High Court under Articles 226 and/or 227 of the Constitution, the same should be heard directly by a Division Bench of the High Court and decided as expeditiously as possible.They further held that Article 136 of the Constitution itself states that this Court may, "in its discretion", grant special leave to appeal from any order passed or made by any court or tribunal in the territory of India. The words "in its discretion" in Article 136 of the Constitution makes the exercise of the power of this Court in Article 136 discretionary. Hence, even if good grounds are made out in a Special Leave Petition under Article 136 for challenge to an advance ruling given by the Authority, this Court may still, in its discretion, refuse to grant special leave on the ground that the challenge to the advance ruling of the authority can also be made to the High Court under Articles 226 and/or 227 of the Constitution on the self same grounds. In fact, in Sirpur Paper Mills Ltd. v. Commissioner of Wealth Tax, Hyderabad [AIR 1970 SC 1520] it has been observed that this Court does not en-courage an aggrieved party to appeal directly to this Court against the order of a Tribunal exercising judicial functions unless it appears to the Court that a question of principle of great importance arises. Unless, therefore, a Special Leave Petition raises substantial questions of general importance or a similar question is already pending before this Court for decision, this Court does not entertain a Special Leave Petition directly against an order of the Tribunal.

In the Special Leave Petition, The Hon’ble Supreme Court do not find that a substantial question of general importance arises nor is it shown that a similar question is already pending before this Court for which the petitioner should be permitted to approach this Court directly against the advance ruling of the Authority. Accordingly they dispose of this Special Leave Petition granting liberty to the petitioner to move the appropriate High Court under Article 226 and/or 227 of the Constitution and request the concerned High Court to ensure that the Writ Petition, if filed, is heard by the Division Bench hearing income-tax matters and also request the Division Bench to hear and dispose of the matter as expeditiously as possible.

Decision:- Petition disposed off

Comments: This case lays foundation for the process of step by step appeal to the higher courts. It has been rightly held that first writ petition is to be filed in the concerned High Court and that Special Leave Petition can be filed to Supreme Court in only few important special cases. Further, we appreciate the acceptance of contention of the appellant by the SC that filing writ petition in High Court will lead to delay in the consideration of matter. The SC requested the concerned HC that the writ petition be heard by the Division Bench instead of being heard by a learned single judge.

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PJ/Case Laws/2012-13/1277

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