Advance Ruling Route to get embroiled in the Indian judicial process?
In a significant ruling, the Supreme Court of India (“Supreme Court”) has recently held that petitions in respect of rulings by the Authority for Advance Rulings (“AAR”), can be subject to the writ jurisdiction of the respective High Court under Article 226 of the Constitution of India (“Constitution”), and that the Supreme Court may decline to exercise its jurisdiction under Article 136 of the Constitution if it is of the view that the matter may more appropriately be dealt with by the High Court under Article 226.
The AAR route was introduced to provide certainty and expeditious justice to non-resident investors and this ruling raises afresh, the issue of what would be considered significant enough to warrant a special leave petition (“SLP”) before the Supreme Court, and whether the advance ruling process would be delayed and thus rendered infructuous by the parties having to approach High Courts.
The AAR is a specialized tribunal set up to consider international tax issues arising from proposed or existing transactions. With a statutory obligation to pronounce rulings within a six month period, the body was conceptualized as a mechanism to provide certainty on an expeditious basis to non-residents, with respect to their Indian tax obligations. AAR rulings are binding only on the parties involved. However, since its inception, the AAR has contributed significantly to the texture and depth of Indian international tax jurisprudence by its consideration of evolving issues of international tax. The AAR is presided over by a retired judge of the Supreme Court and two other members, which has also contributed to the quality of its rulings.
As discussed above, AAR rulings instill a sense of confidence in foreign investors as it helps them plan their business affairs in an efficient manner keeping in mind the tax implications in India. In order to ensure the degree of certainty, it was specified that the rulings would be non-appealable in nature. However, parties opt to exercise their constitutional rights of reconsideration by approaching the Supreme Court under the SLP route, and in certain situations, by approaching a High Court by filing a writ petition.
In the current case, an SLP was filed by the Columbia Sportswear Company1. A three judge bench2 of the Hon’ble Supreme Court passed an order requiring the applicant to make arguments on the maintainability of the SLP, and also clubbed all the SLPs filed against the rulings of AAR to consider the preliminary question of whether an advance ruling pronounced by the AAR can be challenged before a High Court under Article 226/227 of the Constitution prior to consideration by the Supreme Court under Article 136 of the Constitution.
Whether the AAR is a “Tribunal”: Under Article 227 of the Constitution, it is specified that the High Court shall have superintendence over all courts and tribunals throughout the territories in which it has jurisdiction. Further, under Article 136 the Supreme Court has the discretion to grant special leave from any judgment / decree etc. by any court or tribunal in India. The first issue which was considered by the Supreme Court is whether the AAR would constitute a “Tribunal” for the purposes of Articles 227 and 136. The basis of this consideration was that a “Tribunal” has been defined by virtue of previous case law as a body invested with judicial (as against purely administrative or executive functions), which was relevant to consider in light of the fact that AAR rulings are only binding on the parties involved.
In this regard, the Supreme Court stated that the test for determining whether a body is a ‘Tribunal’ or not is to determine whether it has the power to pronounce upon the rights and liabilities arising out of some special law3. For this purpose, the Supreme Court looked into the definition of advance ruling4, according to which the AAR may make a ruling in relation to a proposed or a completed transaction that is undertaken or proposed to be undertaken by a non-resident applicant, or in relation to the tax liability of a non-resident arising out of such transaction. Further, considering section 245S of the Income Tax Act, 1961 (“Act”), the Supreme Court observed that the determination made by the AAR is binding on the applicant, the Indian tax authorities and the parties involved in the transaction. The Supreme Court importantly noted that while with respect to other parties the ruling is of merely persuasive nature, this would not imply that the principle of law laid down in a case by the AAR is not to be followed in future. Accordingly, the Court concluded that the AAR is a body acting in judicial capacity exercising judicial power conferred on it by Chapter XIX-B of the Act and can thus, be regarded as a ‘Tribunal’ and that the decision of an AAR is amendable to challenge under Article 226/227 and 136 of the Constitution.
Whether AAR rulings can be challenged under Article 226: The Supreme Court examined two issues in relation to the availability of the writ petition route under Article 226. The first was whether parties could file a writ in a situation where the AAR ruling was, by virtue of the statute declared binding. In this regard, the Supreme Court relied on previous cases such as Kihoto Hollohan v. Zachillhu and Others5 to hold that the powers of the Supreme Court under Article 136, and the powers of the High Court under 226 and 227 cannot be affected by a statute made by the Legislature.
The second issue was whether an AAR ruling can only be challenged by way of an SLP under Article 136. In this regard reference was made to the observations of the AAR in Groupe Industrial Marcel Dassault In re6, where it was emphasized that the object of an advance ruling is expeditious justice and that permitting a challenge before the High Court would be “counter productive since writ petitions are likely to be pending in High Courts for years” and involve multiple levels of adjudication.
The Supreme Court held as follows: “We have considered the aforesaid observations of the Authority but we do not think that we 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 negate a part of the basic structure of the Constitution.” However, due regard was paid to the objective of expeditious justice delivery and the Supreme Court held that when an advance ruling is challenged at the High Court, it should be heard directly by the Division Bench and be dealt with in an expeditious manner.
Finally, the Supreme Court considered the circumstances when an SLP would be admitted, and referred to various cases included that of Sirpur Paper Mills Ltd. v. Commissioner of Wealth Tax, Hyderabad7 to hold that SLPs would be admitted only where they involve questions of great importance.
The Supreme Court has been concerned in the recent past with the overemployment of the SLP route and the use of this route as an appeal process against AAR rulings. This may be a reason why it clubbed the various AAR SLPs to consider the issue of their maintainability.
While the constitutional availability of both the SLP route and the writ petition route (before the High Courts) are not contentious issues, and while it cannot be said that this ruling would reduce the constitutional power of the Supreme Court to consider SLPs, the impact of this ruling appears to be to provide direction to persons appealing AAR rulings, to only approach the Supreme Court in case of issues involving significant questions of law. As there can be few bright line tests to determine what nature of significance is contemplated, it is likely that parties will now approach the High Courts under Article 226 by filing a writ petition, and go through two levels of judicial review. On a more positive note, the Supreme Court has noted the fact that the objective of the AAR is to provide certainty on the tax payable as expeditiously as possible. Thus to that extent the Supreme Court has made an order that a Division Bench (bench consisting of two judges) of the High Court would directly hear the petitions and decide it as expeditiously as possible, which may reduce the time involved at the High Court level.
The other impact that is required to be considered is the impact of this ruling on currently pending SLPs before the Supreme Court. As the judgment does not distinguish between admitted SLPs and those pending admission, and as it only appears to have examined whether Columbia Sportswear itself involves a significant question of law, without indication on whether it has considered maintainability for the other clubbed matters (some of which were previously admitted), this ruling is likely to cause immense hardship to parties whose SLPs were admitted by the Supreme Court several years ago, who would now, after incurring significant time and expense before the Supreme Court, need to approach the High Court in order to obtain justice. Thus, while the ruling does not depart significantly from the settled position of law as laid down in cases such as L.Chandra Kumar8, this unexpected twist in approach is likely to be another blow to the confidence of foreign investors, who are already reeling under the slew of recent legislative, regulatory and judicial setbacks to the Indian investment climate.
1 SPECIAL LEAVE PETITION (C) No. 31543 of 2011
2 Hon'ble Chief Justice S. H. Kapadia, Hon'ble Mr. Justice A.K. Patnaik, Hon'ble Mr. Justice Swatanter Kumar
3 Jaswant Sugar Mills Ltd. v. Lakshmi Chand & Ors. AIR 1963 SC 677, Associated Cement Companies Ltd. v. P.N. Sharma & Anr. AIR 1965 SC 1595 and Constitution Bench in Union of India v. R. Gandhi, President, Madras Bar Association (2010) 11 SCC 1
4 Under section 245N (a) of the Income-tax Act, 1961
5 1992 Supp (2) SCC 651
6 In re 2012 340 ITR 353 (AAR)
7 AIR 1970 SC 1520
8 (1997) 3 SCC 261