*connectedthinking pwc
Background
The AAR, in a recent ruling in the case of L S Cable Ltd.1, on the facts of the case, the Authority for Advance Ruling (“AAR”) held that the assessee could not be debarred from approaching the AAR even if a similar question is pending before any other authority, as an AAR ruling is transaction specific apart from being assessee specific. In rendering its ruling, the AAR analysed the aspect of the pendency of proceedings as contained in clause (i) of the proviso to section 245R(2)2 of the Income-tax Act, 1961 (“the Act”).
1 L S Cable Ltd. In re [ 2010-TII-23-ARA-INTL]
2 “(2) The Authority may, after examining the application and the records called for, by order, either allow or reject the application:
[Provided that the Authority shall not allow the application where the question raised in the application –
(i) is already pending before any income tax authority or Appellate Tribunal [except in the case of a resident applicant falling in sub-clause (iii) of clause (b) of section 245N] or any court.
Facts
• LS Cable Ltd. (“the applicant”), a company incorporated in, and a tax resident of, Korea, entered into three separate contracts with Delhi Transco Ltd. (“ DTL”), an Indian company, in respect of,
- an offshore supply contract involving the supply of the equipment and materials, including mandatory spares on Cost, Insurance and Freight (“CIF”) basis,
- onshore supply contracts, and, - onshore service contracts
• The applicant applied for an advance ruling with regard to the taxability of the payments to be made by DTL for the offshore supply contract.
Maintainability of an application before the Authority for Advance Rulings where similar issues are pending before tax authorities
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17 June, 2010
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• The applicant also stated in its application, that the taxability of offshore supplies in respect of contracts with other parties was in dispute before certain judicial authorities (High Court and the Appellate Commissioner).
Issue
Were an application can be made before the AAR under clause (i) of the proviso to section 245R(2) where an applicant’s case is pending before certain other tax authorities on similar issue?
Revenue’s contentions – Application not maintainable
• A similar issue involving the offshore supply of goods, in the applicant’s case was pending before certain judicial authorities, and hence, the application made before the AAR was not maintainable. The application therefore was rejected in limine, i.e., at the start itself.
• Allowing the application notwithstanding the pendency of the matter before the High Court would lead to conflicting verdicts and might create confusion.
Applicant’s contentions
• As regards the maintainability of the application before the AAR, it was contended by the applicant that, the transaction giving rise to the dispute being challenged before the judicial authorities was different from the contract under consideration and that it was with a different party.
• On merits, considering the various clauses in the offshore supply contract with DTL, it was contended that, the title and property in the goods, the payment and the sale transaction, were being concluded outside India. Accordingly, no income accrued or arose in India and no income would be received or deemed to be received in India. Hence, no payment under the offshore supply contract was taxable in India.
AAR’s observations and ruling
• The AAR observed that, there was no doubt that, a contract with a different party, unconnected with the contract being considered, gives rise to a distinct and separate transaction.
• The receipts arising from the contracts awarded by DTL were not the subject matter of dispute before any tax authority, Tribunal or Court.
• On a stand-alone basis, the pendency of a matter of a similar nature before a statutory forum was sufficient to oust the jurisdiction of the Authority to deal with the application.
However, based on the emphasis in the Act on an advance ruling being transaction- specific, the meaning of pendency was to be confined to the particular transaction giving rise to the application or an identical transaction between the same parties.
If the above restrictive interpretation were not given to the words “question already pending”, then,
- this would lead to unintended consequences,
- roving inquiries would have to be made as to whether any such question was pending anywhere in the country at the assessment or appellate stage and whether the contracts in such cases were of a similar nature with similar terms, - the purpose of providing a speedy remedy of seeking an advance ruling at the
initial stage itself would be frustrated in awaiting the completion of all proceedings before the various fora, and this might defeat the purpose of the advance ruling provisions contained in the Act.
• Under the Act, the reference to the “question already pending” was in general and not restricted to any applicant’s case. However, the purpose was to deny the remedy of advance ruling in respect of the same transaction, if the question is pending consideration before the assessing or appellate authorities in a proceeding concerning another party to the transaction.
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• The mere possibility of conflicting decisions cannot truncate or restrict the scope of remedy provided under the Act.
The AAR reiterated the time-tested maxim that any ruling was binding on the applicant and the Revenue authorities only in respect of the transaction in relation to which the ruling was sought. If in respect of some other transaction, the law is laid down by the Supreme Court or the jurisdictional High Court that will have to be followed by the authorities concerned.
The AAR ruled that in light of the facts of the case, the application cannot be barred from being accepted for determination though on the above issue, for the determination of the tax liability is pending before the AAR.
Conclusion
The AAR ruling is pertinent in respect of the pendency of proceedings, while deciding on admissibility of an application. It has laid down certain parameters in that the term
“question already pending” needs to be understood with respect to the same or an identical transaction between the parties to the contract. A transaction with a different party not connected with the contract, though of a similar nature, gives rise to a distinct and a separate transaction.
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