AAR was set up to ascertain tax liabilities of non-resident firms, certain categories of residents and PSUs so as to avoid time-consuming and expensive litigation.
Section 245 S of the Income Tax Act, 1961, provides that the advance ruling under the provisions of Section 245 R shall be binding on all.
But taxpayers have been under pressure as the revenue authorities virtually sought to expand the AAR remit by claiming that its decisions would have a persuasive impact on them. The income tax department has in several cases cited this norm when the AAA findings went in its favour.
The issue was debated on Monday before an apex court bench headed by chief justice SH Kapadia and the court reserved its judgment on a batch of petitions filed by the director of income tax (iInternational taxation) and companies against a few AAR rulings.
The issue is being closely watched by foreign entities which seek opinion from AAR on taxation of cross-border transactions involving Indian entities.
According to Ernst & Young tax leader Sudhir Kapadia, AAR rulings apply only to those applicants who approached the authority but had a persuasive effect on other similar matters.
To cite an instance, Luxembourg-based International Hotel Licensing Company (IHCL), an arm of the Marriott Group, had moved the apex court in 2007 against the ruling of the quasi-judicial body that foreign firms were liable to pay tax on assignment fee charged from Indian companies for promotional activities abroad.
IHLC had challenged the decision of AAR that held it was liable to pay tax on considerations charged for promoting abroad an upcoming hotel of Unitech Hospitality.
Similarly, in the case of US-based Columbia Sportswear Company, the AAR had held that activities of its Liaison Office in India which were not confined to the purchase of goods in the country for exports would qualify as the firm's business connection under the Act and the concept of permanent establishment (PE) under the India-USA tax treaty. If the AAR view prevailed, then the firm was liable to pay tax in India.
Curiously, the I-T department doesn't exactly go by AAR's findings which are not in its favour. For example, the department had challenged AAR's opinion that exempted E*Trade Mauritius, a wholly-owned subsidiary of US-based E*Trade Financial Corporation from paying tax in India. The tax demand was made on the transaction where E*Trade Financial Corporation sold its stake in IL&FS Investmart, an Indian company, to HSBC Violet Investments, also based in Mauritius.
Besides these, Amiantit International Holding, Cairn UK Holdings, Hyosung Corp, UAE Exchange Centre, Royal Bank of Canada, Compagnie, Seagate Singapore and Honeywell Technologies are other entities deliberating the issue in the Supreme Court.