In a recent decision Bombay High Court (HC) 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
