Tax Thoughts

Authority for 'Adverse' Rulings - A Case for Re-constituting the AAR under GST Act

Mr. Arvind Datar (Senior Advocate)
Sep 14, 2018

On September 12, 2018, 12 rulings were rendered by various Authorities for Advance Rulings (AAR) which have been constituted under the Central Goods and Services Tax Act, 2017 and the respective legislations applicable to States and Union Territories. Except one, all rulings were in favour of the Revenue. The net result is that out of 114 rulings rendered so far by these Authorities, over 80 have been in favour of the Revenue. The Authority for Advance Rulings has virtually become an Authority for Adverse Rulings.  If this consistent pro-Revenue bias continues, there will soon be no application which is made for Advance Rulings.

An Authority for Advance Rulings (AAR) was first introduced by the Finance Act, 1993 with the insertion of Chapter XIX-B in the Income-tax Act, 1961. This was headed by a retired Supreme Court judge, and was later amended to include a retired Chief Justice of a High Court or a High Court judge having seven years’ experience. The other Members were from the Indian Revenue Service or the Indian Legal Service. The former should have served as a Member of the CBDT or CBEC and the officer from the Indian Legal Service should have been of the rank of an Additional Secretary.

The initial period of the AAR under the Income-tax Act, 1961 was indeed a glorious period when it was headed by Justice S. Ranganathan, former judge of the Supreme Court. He was a past President of the ITAT, a judge of the Delhi High Court and later elevated to the Supreme Court. Few judges in India were as thorough with taxation matters as he was. The approach adopted was completely fair and equitable and without any bias either towards the assessee or to the Revenue. The initial confidence generated by the AAR made it popular amongst various non-resident investors who could approach the AAR to understand their tax liability. At present, the AAR is hamstrung by the existence of several vacancies. Its popularity made Parliament extend it to domestic investors and for excise and customs cases as well.

AAR for GST

Section 96 of the CGST Act provides for the creation of an AAR and section 99 thereof provides for creation of an Appellate Authority for Advance Rulings. Each State and Union Territory is to have its own AAR and Appellate Authority although the GST Council can create a common AAR for two or more States.

The fatal flaw in the GST enactments is that the AAR for each State is manned only by Revenue Officers from the Central and State Governments respectively. The State enactments contemplate rules to be framed for their qualifications, tenure of appointments and so on but, till date, no rules have been framed. What is even worse is that the Appellate Authority also comprises of officers of the rank of Chief Commissioner from the Central Government and officers of the rank of Commissioner from the State Government. Thus, AAR and the Appellate Authority are completely manned by Revenue Officers. With this background, it is no surprise that more than 80% of the rulings are in favour of the Revenue. Indeed, an examination of several orders indicate a complete absence of judicial approach and a failure to understand the basic principles of either taxation or interpretation.

It is strange that the Members who constitute the AAR are also simultaneously discharging their administrative / executive functions. Similarly, it is believed that the Members of the Appellate Authority are neither on deputation nor do they hold the post as Appellate Members separately from their administrative / executive functions. Thus, we have an unfortunate situation of a person who is a Member of the AAR reporting administratively to the Appellate Authority. It would be seen that in direct and indirect taxes, the Commissioner (Appeals) performs an independent function and the ITO / AO does not administratively report to the CIT (Appeals) / CCE (Appeals). 

The Columbia Sportswear decision

In Columbia Sportswear v. DIT (2011) 12 SCC 224, a three-judge bench of the Supreme Court examined the role of the AAR and held that it exercised judicial power and was also a “Tribunal”.  It exercises judicial power because, unlike an assessment order, the Authority gives notice to the Department and hears both the assessee and the Department. The hearings are adversarial and are in the nature of a lis. In such a situation, it is mandatory that the Authority should be a quasi-judicial body consisting of a Judicial Member and a Technical Member.

It is even worse that the Appellate Authority should also be manned by Revenue Officers exclusively. The rulings of the Advance Authority are binding on the particular applicant but have strong persuasive value in other cases. Thus, a ruling on a classification issue will operate, albeit, indirectly, as a precedent and will be followed by assessing officers, particularly if it is adverse to the assessees.

The intention of the Central Government to create such a body manned by revenue officers may be to ensure that revenue is not lost. However, such an approach is fatal to the institution and it is only a matter of time before the AAR and the Appellate Authority will become defunct.

It is a supreme paradox for a body that exercises judicial power to have a one sided and revenue biased approach.

Revenue Bar Association:

The Revenue Bar Association has filed a writ petition in the Madras High Court challenging the constitutional validity of the provisions relating to the AAR and the Appellate Authority and also the relevant notifications appointing Members to the bodies in the State of Tamil Nadu. The High Court has issued notice in the writ petition.

If the Union of India wants to promote “ease-of-doing business” and also wants to generate confidence amongst assessees, then it is imperative that both the AAR and the Appellate Authority are reconstituted to include judicial members in their composition as is the case of any Tribunal. It would be ideal if both these bodies are shifted to the Ministry of Law to ensure that they are truly independent. The independence of all Tribunals and quasi-judicial officers is as important as the independence of the judiciary.

In fine, if the present trend continues, the AAR will truly become an Authority for Adverse Rulings and will cease to inspire any confidence amongst the assessees. Assessees will soon completely avoid the AARs and hope for some justice before GST Tribunal, if and when it is constituted.

The author is a Senior Advocate practicing in the Supreme Court. 

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