AAR cannot be applied for Transaction already pending before Tax Authorities

Brief:

The Assessee filed application with AAR for for determination of the question regarding taxability of its profits arising from offshore sales. The AAR rejected the applications as notice Section 143(2)/ 142(1)  were already issued prior to the filing of the application before the AAR, the transaction in respect of which the ruling of the AAR was sought was filed before the date of the application.

Thus Delhi High Court stated:

• AY 2008-09 & 2009-10 Notice 142(1) …………issued before application therefore application rejection is valid.
• AY 2010-11 Notice 142(1)   ………..issued after application to AAR therefore Rejection is erred by AAR.

Facts of the Case:

The facts of the present case are that the Petitioner is a company incorporated in South Korea. It states that it is a comprehensive energy solution provider and manufactures transformers, switchgears, motors, decelerators and industrial pumps and is also engaged in the wind energy business. It supplies transformers to customers all over the world including in India. The Petitioner states that it has been engaged in several projects in India and has been regularly assessed to income tax since the Assessment Year (‘AY’) 2008-09. It is further stated that, it being a resident of South Korea, it is entitled to the benefit of the DTAA between the India and South Korea.

It is stated that Power Grid Corporation of India Ltd. (‘PGCIL’) floated tenders inviting global bids for setting up sub-stations in various locations in India. The Petitioner being a successful bidder, supplied equipments for the said projects. The case of the Petitioner is that supply of the equipment was effected outside India and all work related thereto was also to be performed outside India. As far as the on shore portion, including transportation, was concerned that was to be carried out in India by Larsen and Toubro Ltd. (‘L&T’) in terms of a memorandum of understanding (‘MOU’) entered into between the Petitioner and L&T.

It is stated that in relation to the invoices raised by the Petitioner on PGCIL for the supply of equipment, PGCIL released advance payment to the Petitioner after deducting tax at source. There were supplies of equipment by the Petitioner to PGCIL during AYs 2008-09, 2009-2010 and 2010-2011 for the various projects of PGCIL. Some portion of the payment was made by PGCIL after deducting TDS. While filing its return of income for the aforementioned AYs, the Petitioner took the stand that no portion of its revenue from off shore supplies was liable to be taxed in India. Consistent with this position, the Petitioner claimed refund of TDS deducted by PGCIL. In reference to each of the returns filed by the Petitioner, notices were issued both under Section 143(2) of the Act as well as 142(1) of the Act by the Assessing Officer (‘AO’) concerned.

Applications before the AAR

On 23rd September 2011, the Petitioner filed separate applications before the AAR seeking a ruling on the issue of taxability of the profits from off shore supplies made during the aforementioned AYs to PGCIL. On 10th October 2011, one more application was filed before the AAR with respect to the supply made for a project of PGCIL at Maharani Bagh. In fact there were seven applications filed by the Petitioner before the AAR for advance rulings.

The details of dates if issuance of notices under Section 143(2) & 142 (1), the dates of filing of the applications before the AAR for each of the transactions in the three AYs are as under:

Before the AAR, a preliminary objection raised by the Revenue was that the above applications of the Petitioner could not be entertained in view of the bar under proviso to Section 245R(2) of the Act. In other words, it was contended that the question involved in the applications filed by the Petitioner was already pending before the AO and therefore the AAR could not entertain the applications.

Contention of Assessee:

Mr. Deepak Chopra, learned counsel for the Petitioner at the outset urged that on the face of it, clause (i) of the proviso to Section 245R(2) was discriminatory. It exempted PSUs notified by the Central Government from the bar imposed by the said clause. There was no justification in creating such a classification that had no nexus to the object of the legislation. However, Mr. Chopra was candid to submit that the attempt by the Petitioner was not to deny the benefit to the PSUs but to ensure that non-resident applicants like the Petitioner are also extended the same benefit i.e. being exempted from the bar imposed by clause (i) of the proviso to Section 245R (2) of the Act. In other words, the Petitioner states that it would not be satisfied by removal of the offending part of clause (i) of the proviso to Section 245R(2) but would want the Court to rule that non-residents will also be exempted from the bar just as resident applicant in terms of sub-clause (iii) of clause (b) of Section 245N.

Mr. Chopra urged that Section 90 of the Act would require the Central Government to give effect to the provision of DTAA notwithstanding the discriminatory provision under clause (i) of the first proviso to Section 245R(2) of the Act. It is further submitted by Mr. Chopra that the mere issuance of a notice under Section 143(2) of the Act would not amount to the question raised in the applications being pending before the income tax authorities. Referring to the notice issued to the Petitioner under Section 143(2) in these petitions, he submitted that none of those notices, which were issued in a pre-printed format, specified the questions on which information was being sought by the AO. However, Mr. Chopra did not dispute the fact that notices under Section 142 (1) of the Act accompanied by a detailed questionnaire were issued to the Petitioner even prior to the date of filing of the applications before the AAR as far as AYs 2008-09 and 2009-10 were concerned. He, therefore, submitted that in the event that the Petitioner did not succeed in persuading this Court about the consequential relief in respect of the proviso (i) to Section 245R(2) of the Act, then at least the applications for AY 2010-11 should be remanded to the AAR for a fresh decision.

Order/ Contention of AAR:

By the impugned order, the AAR while rejecting the Petitioner’s applications, came to the following conclusions:

(i) A mere filing of returns does not attract the bar unless question raised in the application for advance ruling is already in issue in the return filed. In other words, the mere filing of a return prior to the date of the application before the AAR does not necessarily mean that the question raised in the application is already pending before the income tax authority.

(ii) In the instant cases, notices under Section 143(2) were already issued prior to the filing of the application before the AAR, the transaction in respect of which the ruling of the AAR was sought was filed before the date of the application.

(iii) With the issue of notice under Section 143(2) of the Act, claims of the Assessee in the return are pending for adjudication before the AO. Therefore, the question raised in the application for advance ruling was pending adjudication before the assessing authority and the bar created under clause (i) of the proviso to Section 245R (2) of the Act operates

(iv) As regards the plea that the aforementioned clause (i) of the proviso to Section 245 R (2) was discriminatory, the AAR was of the view that being a creature of the Act, it could not pronounce upon the constitutional validity or the vires of any provision of the Act. It held that the AAR had no jurisdiction to deal with the question of discrimination.

Judgement of reputed High Court:

The net result of the above discussion is that the applications filed by the Petitioner in respect of the transaction of supply of equipment for AY 2008-09 and 2009-10 were rightly rejected by the AAR since on the date of filing of such applications before the AAR, the question raised therein was already pending before the income tax authorities by virtue of the notices under Section 142 (1) of the Act having already been issued to the Petitioner. Accordingly writ petitions, W.P.(C) Nos. 7788/2013, 7789/2013, 7791/2013 and 8086/2013 and the applications in those writ petitions are dismissed.

However as regards the three applications concerning the supply contracts executed during AY 2010-11, the AAR erred in rejecting them by applying clause (i) to proviso to Section 245R(2) of the Act. Notices under Section 142(1) of the Act in respect of those transactions pertaining to AY 2010-11 were issued only after the filing of the application before the AAR.

Consequently, the Court sets aside the impugned order dated 7th August 2013 of the AAR to the extent that it has rejected the Petitioner’s three applications for AY 2010-11 being AAR Nos. 1138/2011, 1141/2011 and 1142/20111 and restores the said applications to the file of the AAR for a decision afresh in accordance with law. The parties will appear before the AAR in the said applications on 1st March 2016 at 11 am.

The writ petitions, W.P.(C) Nos. 5818,7790 and 8088 of 2013 and the pending applications therein are disposed of in the above terms but in the circumstances with no order as to costs.