Case Law Details
Recently Bombay high court in the case of The Prudential Assurance Company Ltd. (Taxpayer) [AIT-2010-170-HC] on the binding nature of a ruling pronounced by the Authority for Advance Rulings (AAR), reiterated the relevant provisions of the Indian Tax Laws (ITL) and held that an AAR ruling is binding on a taxpayer and the Tax Authority, in relation to the transaction in respect of which the AAR ruling was sought.
The AAR ruling continues to apply unless there is a change in law or facts on the basis of which the AAR ruling was earlier pronounced. A subsequent AAR ruling in respect of a different taxpayer does not disturb this position. Also, the Tax Authority cannot invoke its revisionary powers under the ITL to give effect to the latter AAR ruling that supports its view, on the basis that the order passed based on the earlier AAR ruling is erroneous or prejudicial to the interests of the revenue.
Background and facts
The Taxpayer, a company incorporated in the UK, was engaged in the business of insurance and was registered as a sub-account of a Foreign Institutional Investor (FII) with the concerned authorities in India. The Taxpayer was engaged in buying and selling of shares to earn profits.
The Taxpayer sought an advance ruling from the AAR on the tax ability of the transactions carried out by it. The AAR agreed with the Taxpayer that the transactions, being carried out in the ordinary course of its business, were in the nature of business profits and not capital gains. Since the Taxpayer did not have a permanent establishment in India under the relevant tax treaty provisions, its business profits was not taxable in India.
Subsequently, in the case of Fidelity North star Fund [288 ITR 641] (Fidelity Ruling) , the AAR held that profits earned on purchase and sale of shares by an Fll is taxable as capital gains. The Tax Authority considered this subsequent AAR ruling as laying down the correct position in law.
The ITL provisions enable a superior tax officer, the Commissioner of Income Tax (CIT), to invoke revisionary powers to set aside an order passed by a subordinate tax officer if the CIT considers that the order passed is erroneous, insofar as it is prejudicial to the interests of the revenue.
A subordinate tax officer completed the assessment of the Taxpayer, based on the AAR ruling in the Taxpayer’s case. However, relying on the Fidelity Ruling, the CIT invoked its revisionary powers and issued a notice to the Taxpayer seeking to set aside the order passed by the subordinate tax officer, on the ground that it was erroneous and prejudicial to the interests of the revenue.
Aggrieved, the Taxpayer filed a writ petition before the HC.
Taxpayer’s contentions
The ITL provides for the AAR ruling to be binding on a taxpayer and the Tax Authority, in respect of the transaction in relation to which it has been sought. This ruling continues to be binding on both unless there is a change in law or facts.
The Fidelity Ruling does not constitute a change in law.
Therefore, the CIT was not justified in invoking its revisionary powers to set aside an order that was passed based on the binding AAR ruling in its own case.
Tax Authority’s contentions
At this stage, only a notice was issued to the Taxpayer and, hence, there is no reason for the HC to exercise its extraordinary jurisdiction as is necessary in case of a writ petition.
The Fidelity Ruling clarifies the position on the tax ability and the nature of income from purchase and sale of shares. This Fidelity Ruling applies to the facts of the Taxpayer’s case and, hence, its profits on purchase and sale of shares are taxable as capital gains.
Pursuant to the Fidelity Ruling, the Indian administrative authority had issued Circular No. 4/2007 dated 15 July 2007, directing subordinate tax officers to evaluate whether, in a given case, shares held by a taxpayer were in the nature of investment or stock-in-trade.
The concerned subordinate tax officer in the case of the Taxpayer did not comply with this circular and, hence, the CIT was justified in invoking its revisionary powers.
HC decision
The AAR ruling is binding on the taxpayer who had sought it and on the Tax Authority, in relation to the transaction in respect of which the AAR ruling was sought. Furthermore, an AAR ruling continues to be binding unless there is a change in law or facts on the basis of which it had been pronounced.
If there is change in law or facts, the relevant AAR Rules (Rule 18 of Authority for Advance Rulings (Procedure) Rules, 1996) enable the AAR to modify its ruling as it considers appropriate, before the ruling is given effect to by the Tax Authority. This modification is to be carried out after allowing the taxpayer and the Tax Authority a reasonable opportunity of being heard.
The binding effect of an AAR ruling can be displaced only in accordance with the above stated procedure stipulated in the law. Until such time, the AAR ruling continues to operate and bind the Taxpayer and the Tax Authority.
Thus, the subsequent Fidelity Ruling can neither bind the Taxpayer nor can it displace the binding effect of the AAR ruling rendered in favour of the Taxpayer. Therefore, it was not proper for the CIT to invoke its revisionary powers.
The CIT could not also have come to the conclusion that the view of the subordinate tax officer was erroneous or that it was prejudicial to the interests of the revenue, when the subordinate tax officer had followed a binding ruling of the AAR.
Since the CIT had exceeded its jurisdiction in invoking revisionary proceedings, the Taxpayer was held not required to respond to the notice or pursue the revisionary proceedings.
The HC, accordingly, quashed and set aside the notice issued to the Taxpayer.
Comments :-This decision of the HC reiterates the principle of the binding nature of an AAR ruling and clarifies that a subsequent adverse AAR ruling in respect of another taxpayer, even if given under comparable facts, cannot disturb this position. An AAR ruling continues to be binding unless there is a change in law or facts, which would require the Tax Authority to follow the procedure provided in the ITL. Also, the HC has clarified that the CIT cannot invoke its revisionary jurisdiction to set aside an order passed by a subordinate tax officer who follows a binding AAR ruling.
