In his Budget Speech of 1992-93, the then Finance Minister had assured that, in the interest of avoiding needless litigation and promoting better taxpayer relations in a scheme for giving advance rulings in respect of transactions involving non-residents was being worked out and would be put into operation [see End Note 1]. Though the system was only implemented in 1993, the concept of Advance Rulings was conceptualized in the Direct Taxes Enquiry Committee, 1971 headed by Justice K.N. Wanchoo. Advance Rulings were conceived to furnish taxpayers with an avenue where interpretation of tax laws could be sought. The Authority for Advance Rulings (‘AAR’) was instituted as a mechanism to prevent litigation, pre-empt or plan tax liability, and to generally foster a business-friendly environment where taxpayers may approach Revenue authorities for ascertaining the proper legal position.
From the bygone era of laws dealing with Central Excise, Value Added Tax [but for those commodities whose debut in Goods and Services Tax (‘GST’) is yet to be notified] and Service Tax, the concept of issuing Advance Rulings has been grandfathered into the GST regime as well. This article discusses the provisions under which an AAR has been set up, functions of AAR and its effects on one of the largest tax-paying nations in the world.
As per the scheme of GST Laws enacted in the country this month, an assessee may seek clarification on specific matters or questions relating to the supply of goods or services or both from the AAR. In addition, the GST Laws provide for an Appellate Authority for Advance Rulings (‘AAAR’) to deliberate over matters which have been deemed not determinable by the AAR or to adjudicate those advance rulings over which the applicant or other interested persons, viz. concerned officer or jurisdictional officer, is aggrieved.
Advance Rulings - Scope and Procedure
Sections 95 to 106 in Chapter XVII of the Central GST (‘CGST’) Act deal with Advance Rulings. An ‘advance ruling’ has been defined as a decision provided by the AAR or AAAR to an applicant on specified matters or questions in relation to the supply of goods or services. Interestingly, the definition of an advance ruling permits not only those supplies that are proposed to be undertaken, but also those supplies which are already being undertaken. The usage of the term ‘advance ruling’, therefore, is not literal enough to reject queries arising from existing transactions or supplies already being undertaken by the supplier. An ‘applicant’ has been defined as any person registered or desirous of being registered under the CGST Act. Again, it is noteworthy that even those persons who anticipate their liability to be registered may obtain a clarification on that aspect.
An AAR constituted under the provisions of a State GST (‘SGST’) Act or Union Territory GST (‘UTGST’) Act would be deemed to be the authority for advance ruling in respect of that State or Union Territory. To illustrate, the AAR or AAAR in the National Capital Territory of New Delhi would be termed as ‘Delhi Authority for Advance Ruling’ (‘DAAR’), or the ‘Delhi Appellate Authority for Advance Ruling’ (‘DAAAR’). The CGST Act specifically provides that the State AAR will provide advance rulings in respect of the CGST Act.
‘An Application’ seeking advance ruling is required to be made by stating ‘the question’ on which an advance ruling is sought, in the prescribed form and manner, upon payment of requisite fees. At this juncture, it is pertinent to note that the singular form of the word ‘question’ has been employed in this Section. A straightforward reading of Section 97(1) suggests that an applicant may raise only one query in every application made before the AAR. However, a perusal of the Application form in FORM GST ARA-01 indicates that it provides for seeking clarification on multiple issues under a single application.
In a significant move, the CGST Act prescribes certain questions in relation to which an advance ruling may be sought, and lists out the following queries:
- Classification of goods or services or both
- Applicability of a notification issued under GST Acts
- Determining time of supply of goods or service or both,
- Determining value of supply of goods or service or both
- Eligibility to ITC
- Liability to be registered, and lastly;
- Characterization as ‘supply of goods or services or both’
Thus, the scope for which an advance ruling may be obtained has been categorically prescribed under the above list, which is exhaustive, and no queries other than those featured above would be entertained for advance rulings. Consequently, issues in respect of the nature of tax liable to be paid, export and import matters requiring clarification, determination of location of the supplier are not matters which can be clarified by the AAR. Adverting to the Integrated GST (‘IGST’) Act for clarity is of no avail here as it directly borrows and incorporates these provisions mutatis mutandis. Effectively, the range of issues on which advance ruling may be sought becomes severely reduced.
Processing of applications before the AAR
The CGST Act then prescribes the procedure to be followed on receipt of the application. It states that the AAR is to forward a copy of the application to the ‘concerned officer’, and may seek relevant documents where necessary. The AAR may admit or reject the application, though no application may be rejected without the applicant being granted an opportunity of personal hearing. Specifically, the AAR is barred from admitting an application in circumstances where the query raised is already pending or has been decided in any proceedings under the CGST Act. The specific use of the words ‘in the case of an applicant’ unearths doubts revolving around the extent of the AAR’s power to reject an application where the query raised is pending or decided in any proceedings under the CGST Act. Can the AAR bar an applicant from seeking an advance ruling because the issue is pending adjudication in any application filed by an unknown party before it, or does the provision only seek to restrict applications where the law has already been declared? On perusal of the application format in FORM GST ARA-01, it becomes clear that the restriction on the AAR is limited to admitting an application where the question raised has been adjudicated, or is pending adjudication in the applicant’s own case.
The AAR is required to issue its ruling on the query raised in the application within a time limit of 90 days. Upon the issuance of an advance ruling, the AAR is to dispatch a signed and certified copy of the Advance ruling to three parties, viz. the applicant, the concerned officer and the jurisdictional officer. It is significant to note that there is no definition nor any elaboration on the terms ‘concerned officer’ or ‘jurisdictional officer’, though the officers have been repeatedly referred to in the provisions for advance rulings. Thus, it may be presumed that a notification in this regard is in the offing.
Appeal mechanism in respect of advance rulings
The CGST Act has also instituted an appeal mechanism by way of the AAAR. An appeal before the AAAR may be preferred:
- By the AAR itself - where the members of the authority are of differing views, the AAR may refer the question to the AAAR.
- From the aggrieved party - the applicant, the concerned officer, or the jurisdictional officer may appeal to the AAAR within a period of 30 days from the date on which the advance ruling was received by all of them.
In a significant measure, the three parties (Applicant, concerned officer or jurisdictional officer) have the right to appeal against the advance ruling issued by the AAR before 30 days from the latest date on which the advance ruling was received by the abovementioned three parties. For example, where the advance ruling has been pronounced on 10-7-2017 and the applicant and the concerned officer receive the same on 12-7-2017 but the jurisdictional officer receives it on 15-7-2017, the date of reckoning for time limit to prefer an appeal before the AAAR is 15-7-2017 despite the applicant having received it on 12-7-2017. Nonetheless, the AAAR is empowered to condone the delay if sufficient cause for the same is demonstrated.
Whereas a difference of opinion amidst the members of the AAR would lead to that issue being referred before the AAAR, in circumstances where the members of the AAAR differ on any point before it in appeal or reference, it shall be deemed that no advance ruling can be issued in respect of the query posed in the appeal or reference. Thus, the above provision spells a veritable dead-end for proactive taxpayers who seek to have their stance abundantly clarified to avoid any prosecution.
At this juncture, the apposite point for consideration is the way forward for an applicant whose appeal before the AAAR has been deemed as unresolvable. Does the applicant await audit, or does the appellant escalate the issue by preferring a writ before the jurisdictional High Court(s)?
Binding nature of the Advance Rulings
Under Section 102, the CGST Act contemplates the rectification of an advance ruling by the AAR or the AAAR, where such error is apparent on the face of record. Such rectification may be sought by the applicant, the concerned officer, the jurisdictional officer or the appellant within 6 months from the date of the order. It has been specified that the advance ruling shall be binding only on the applicant for the matters already specified, the concerned officer and the jurisdictional officer. The advance ruling shall bind the abovementioned persons unless laws, facts and circumstances involved in the application have changed.
Hitherto, an advance ruling would cement the position of law in respect of the issue over which clarity has been sought. The CGST Act makes a marked departure from this position by stating that the advance ruling would be binding only on the applicant, the concerned officer and the jurisdictional officer. Consider, for example, Company A requires clarification on the classification of its product ‘Choco-fills’. Company B had already raised the same question in respect of its product ‘Choco-Fillz’ before the DAAR and an advance ruling was obtained by Company B that the choco-fillz are biscuits. Since the advance ruling obtained by Company B is binding only on it and the concerned officer and jurisdictional officer in that case, there is no clarity on whether Company A may directly follow the advance ruling obtained by Company B or whether the matter should be pursued afresh. Thus, where the Choco-fillz may be ruled as a biscuit for Company B, the same Choco-fills sold by Company A may be held as chocolate wafers because of this seemingly small but significant deviation. This deviation espouses more chaos than compliance, and would lead to mounting applications and litigation.
To conclude, the laws have provided for a seemingly approachable mechanism to mitigate tax prosecution and to foster higher compliance. Whether or not it achieves the true objective of setting up an assessee-friendly body to unburden Courts or the Revenue officials remains to be seen.
[The authors are respectively Partner, Senior Associate and Joint Partner, Lakshmikumaran & Sridharan, Chennai]