AAR ruling is binding on a taxpayer and the Tax Authority in relation to transaction in respect of which the AAR ruling was sought: Bombay HC

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.

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