Pendency, before a statutory forum, of a similar matter in respect to transaction with a different party is no bar to seek advance ruling

Court :Authority for Advanced Ruling

Citation: Advanced Ruling (AAR), in the case of LS Cable Ltd. (AAR No. 858- 861 of 2009)

Brief: Recently, the Authority for Advanced Ruling held that pendency of a similar matter of the applicant in respect to transaction with a different party, before a statutory forum, is no bar to seek advance ruling in respect of another transaction.

Background- As per clause (i) of proviso to Section 245R of the Income-tax Act, 1961 (the Act), the AAR shall not allow an application, where the question raised in the application is already pending before any income-tax authority or Appellate Tribunal or any court.

Facts of the case

• · The applicant, a tax resident of Korea, was engaged in the business of manufacturing electric wire and cable for power distribution. The applicant entered into the following three separate contracts with Delhi Transco Limited (DTL)

– Onshore supply contract

-Onshore service contract

-Offshore supply contract including supply of equipments and materials.

• · The applicant contended that in the offshore supply contract, the sale would be concluded outside India and payment would be received outside India and therefore the income was not taxable either under the Act or India-Korea tax treaty (the tax treaty). Accordingly, the applicant sought the ruling of AAR on the tax ability of income from offshore contract under Section 245 of the Act.
• · The tax department contended that the application of the applicant was not maintainable before the AAR since similar question of law was pending before the Delhi High Court in a case involving the applicant and Power Grid Corporation Limited (PGCL).

Applicant’s contentions:- The applicant contended that the transaction under consideration is with a different party and is different from the transaction challenged before the judicial authorities.

Tax department’s contentions:- The tax department contended that a similar issue involving the offshore supply of goods, in the applicant’s own case was pending before certain judicial authorities, and hence, the application made before the AAR was not maintainable. Also, allowing the application notwithstanding the pendency of the matter before the High Court would lead to conflicting verdicts and might create confusion.

AAR’s ruling

• The AAR observed that the matter pending before the High Court is confined to the aspect whether the contract with PGCL was a composite contract. However, the matter raised before the AARs wider in scope.
• The AAR examined the expression ‘transaction’ used under Section 245N(a)(i) and 245S(1)(b) of the Act and held that ‘question already pending’ as contemplated by the restrictive proviso to Section 245R of the Act should be confined to the transaction giving rise to the application for advance ruling or an identical transaction between the same parties.
• Further, if the tax department’s contention is accepted, the pendency of a question before any authority relating to the receipts from off¬shore supplies in any contract between the applicant and any party would operate as a bar to seek advance ruling which cannot be the intention of the legislature. Further, the very purpose of providing the speedy remedy of seeking advance ruling at the initial stage would be defeated if the applicant has to indefinitely wait till all the proceedings of its contracting party before various forums come to an end.
• The purpose of deletion of words ‘in the applicant’s case’ in Section 245R(2) of the Act by Finance Act, 2000 was to deny the remedy of advance ruling in respect of the same transaction; if the question is pending before the assessing or appellate authorities in a proceeding concerning one party to the transaction, then the other party to the contract/transaction cannot seek advance ruling on the same question. Further, the mere possibility of conflicting decisions is not a good ground to truncate or restrict the scope of the remedy provided by the Act. Accordingly, the AAR admitted the application of the applicant.

Our Comments

The AAR ruling provides that only a transaction giving rise to the application for advance ruling or an identical transaction between the same parties, if pending before a statutory forum, would be barred from seeking an advance ruling. The ruling will provide relief to applicants, who have some matter pending before a statutory forum but want to seek an advance ruling on similar transaction, but with a different party.