INTRODUCTION
As was being promoted, Goods and Services Tax (GST) was touted to be the single biggest tax reform to take
place in India post-independence. It was intended to be a good and simple tax. It indeed is (pun intended). To this end, one laudable objective was to provide an authority for advance ruling (AAR) which would, amongst others:
(i) provide clarity, certainty and reasonability to businesses;
(ii) avoid anomalies and litigation with the tax authorities;
(iii) help reduce the cost of supplies of goods and services.
Unquestionably, in my view, the AAR achieved none of the above. Per contra, it added fuel to the fire.
CONCEPT OF ADVANCE RULING
As per Section 95 of CGST/SGST Law, an advance ruling means a decision provided by the authority or the Appellate Authority to an applicant on matters or on questions specified in section 97(2) or 100(1) of CGST/SGST Act in relation to the supply of goods and/or services proposed to be undertaken or being undertaken by the applicant. Thus, AAR answers questions. Questions relating to applicability of GST or rate of tax or classification or exemptions. The purport being advance agreement with the tax authorities in order to avoid disputes. It is like a prenuptial agreement, which we all know leads to divorce.
The Supreme Court in Columbia Sportswear Company vs. Director of Income-tax, Bangalore (2012) 11 SCC 224 , expounded the law on these authorities and held that AAR is a tribunal within the meaning of the expression in Articles 136 and
227 of the Constitution of India. However, a concept lost on some.
ENCROACHMENT OF POWER BY EXECUTIVE?
The constitution of AAR is found under section 96(2). It consists of one member from amongst the officers of the
Central Tax and one member from amongst the officers of the State Tax which shall be appointed by the Central and State Governments respectively. The Appellate Authority for Advance ruling (AAAR) if formed under section 99(2). It consists of the Chief Commissioner of Central Tax and Commissioner of State Tax having jurisdiction over the applicant. Appeal from Caeser to Caeser’s wife.
The composition of the AAR and AAAR makes it clear that the legislature has subsumed the power of the judiciary and in fact passed on to the executive in gross violation of basic structure doctrine of separation of powers. These provisions suffer from basic and severe infirmities with regard to independence of the judiciary that forms a fundamental part of the basic structure of the Constitution. The provisions run contrary to the directions of the Supreme Court in Union of India vs. R. Gandhi (2010)11 SCC 1 regarding structuring and organisation of Tribunals in India.
As per Supreme Court, first, only Judges and Advocates can be considered for appointment as Judicial Members
of the Tribunal. Only High Court Judges, or Judges who have served in the rank of a District Judge for at least five years or a person who has practiced as a Lawyer for ten years can be considered for appointment as a Judicial Member. Second, persons who have held a Group A or equivalent post under the Central or State Government with experience in the Indian Company Law Service (Legal Branch) and Indian Legal Service (Grade-1) cannot be considered for appointment as judicial members. The expertise in Company Law service or Indian Legal service will at best enable them to be considered for appointment as technical members. Third, only officers who are holding the ranks of Secretaries or Additional Secretaries alone can be considered for appointment as Technical members and also a Technical Member presupposes an experience in the field to which the Tribunal relates. Fourth, the Two Member Benches of the Tribunal must always comprise of a judicial member. For larger or special benches, the number of Technical Members should not be more than the Judicial Members. Clearly, the said guidelines are not
adhered to.
This, especially when existing authorities under section 28F of the Customs Act or Section 245-O of the Income tax Act, 1961, provide for AAR which comprises of a Chairman who was a Judge of the Supreme Court or a Chief Justice of the High Court or at least seven years a Judge of a High Court and such number of Vice-chairmen who has been a Judge of a High Court; revenue Members and law Members. Hence, there was no need for any deviation for GST. Deviation, often, is mischievous. The reason seems to be evident.
Thus, the constitution of AAR itself is on a shaky foundation. The same is under challenge before the Hon’ble Rajasthan High Court at Jodhpur in Abhishek Chopra vs. Union of India & Ors. [Civil Writ Petition No. 4207/2018] Time will tell.
CONTRARY RULINGS?
Apart from the above, the rulings themselves are not worthy of a read. They lack substance and evidence. There have been several instances, that too in a short span of time, where contrary rulings are delivered by different states on the same subject matter. An expected by-product. Too many cooks. This adds to confusion and litigation. It leads to representations to CBIC. A circular of CBIC clarifies an order passed by AAR. All in the name of “clarity”. God save tax (GST) payers.
In Clay Craft India Pvt. Ltd., the AAR at Rajasthan [RAJ/AAR/2019-20/33 dated 20.02.2020] held that GST is leviable on salaries paid to directors on reverse charge basis. However, in Alcon Consulting Engineers (India) Pvt. Ltd. [KAR ADRG 83/2019 dated 25.09.2019] the AAR Karnataka held otherwise on the same issue. This resulted in CBIC issuing Circular No: 140/10/2020 – GST dated 10th June, 2020 clarifying that no GST is payable on remuneration paid to directors, on reverse charge basis, where the sai directors are employees of the Company.
In Columbia Asia Hospitals Pvt. Ltd KAR/AAAR/Appeal-05/2018, the AAAR Karnataka upheld the decision of the AAR which held that that activities carried out by an employee of one office of a company for another office located in another state would be a taxable supply. This, in turn, led to a PAN India debate. Owing to this, the Law Committee in the 35th GST Council Meeting, placed before the Council, a draft circular providing clarification on the taxability of activities performed by an office of an organization in one State to the office of that organization in another State. However, due to lack of agreement on the draft circular during the Officer’s Meeting, and suggestion by State of Karnataka to not issue any circular where the AAR had given a ruling, the issue was deferred for further examination by
the Law Committee.
In Fraunhofer Gesellschaft Zurforderung Der Angewandten Forschung [EV 2021-TIOL-10-AAAR-GST], the AAAR Bengaluru held that those activities being undertaken by the Liaison Office in line with the conditions specified by RBI does not amount to supply in terms of Section 7(1)(c) of the CGST Act, 2017. However, in the Dubai Chamber Of Commerce And Industry 2021-TIOL-145-AAR-GST, the AAR Mumbai held that the GST is payable by the Liaison office of Dubai Chamber of Commerce and Industry as it is an “intermediary” under Section 13(8) of the IGST Act, 2017.
In Karnataka Cooperative Milk Producers Federation Ltd 2021-TIOL-37-AAR-GST, the AAR Bengaluru held that Flavoured milk is classifiable under the Tariff heading 0402 99 90 which covers “milk and cream, concentrated or containing added sugar or other sweetening matter” and held that the
flavoured milk is covered under tariff heading 04029990 and 5 per cent GST is applicable. However, previously in Gujarat [1], Tamil Nadu [2], and Andhra Pradesh [3], it was held flavoured milk would attract 12 per cent GST. Does the same assesse pay different rate of taxes in different states? One nation one tax?
NATIONAL APPELLATE AUTHORITY
Sheer incoherence, lack of understanding of the law and bluster of the officers of the State led to this situation. Consequently, due to contradictory rulings by the State Advance Ruling Authorities, a National Appellate
Authority is sought to be constituted (Section 101B) (from a date to be notified). Appeals of appeals? Is this
an authority for advance ruling or advance assessment order?
REPLACEMENT ALREADY?
In fact, the Centre intends to replace the AARs with a Central Board of Advance Ruling. According to them, the Centralised Board will address issues relating to conflicting rulings on a single issue. This will diminish conflicts at the state level over applicability of taxes. It is also proposed that the Central Board of Advance Ruling would comprise of retired judges, thus, it would be able to co-exist with AARs and function as an Appellate Body. Not even five years of GST (including 2 years of COVID pandemic), the AAR losing its sheen?
ALL IN ALL
First, orders passed by AAR under GST should not be given much weightage. The same is, in my humble opinion, like assessment orders. The same would be a subject matter of appeal under section 100 of the CGST Act. The said orders are passed by Tax officers. There is no independence. There is lack of training. There is no independent application of mind. There is no judicial member passing such rulings. Hence, the said rulings are bound to be favouring Revenue. Not much hue and cry should be made about such rulings.
Second, in any case, the advance rulings, in terms of section 103 of the Act, would be binding only on the applicant therein and the jurisdictional officer thereof. The said rulings would not be binding on any other assessee or the Tax officer or the Court.
Third, AARs are used as a tool for purposes other than what it is intended for. The parties filing applications at
many times, do not even intend to undertake any such supply. There is no investigation into the bonafides of the applications. Many applicants seek ruling that they are liable to pay GST, irrespective of the fact whether they are liable or not, to settle scores with their competitors and invite demands on them. Several rulings are sought to encash accumulated input tax credit. AARs are also used to decide contractual disputes. They are taking the place of civil courts. Rulings are sought to seek reimbursement of taxes from customers.
Fourth, the quality of the rulings is pathetic. It leads to appeals and writ petitions across High Courts. Now, with the National Appellate Authority or Central Board for Advance ruling, has it reduced litigation or opened up unwanted litigation?
CONCLUSION
It is strongly recommended, “Do not seek any advance ruling”. Should you need to commit suicide, no permission is required
[1] M/s Gujarat Co-Operative Milk Marketing Federation Ltd reported in 2021-TIOL142-AAR-GST
[2] M/s. Britannia Industries Limited reported in 2020-TIOL-101-AAR-GST
[3] M/s. Tirumala Milk Products Pvt. Ltd reported in 2020-TIOL-244-AAR-GST
This Article was authored by Adv. Bharat Raichandani and Adv. Annweshaa Laskar
