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2016 (2) TMI 575 - DELHI HIGH COURT

2016 (2) TMI 575 - DELHI HIGH COURT - [2016] 382 ITR 371 - Advance Rulings - Constitutional validity of clause (i) of the proviso to 245R (2) - When can a question be stated to be 'pending'? - whether the said provision is discriminatory and violative of Article 14 of the Constitution of India as well Article 25 of the Double Taxation Avoidance Agreement (‘DTAA’) between India and the Republic of South Korea? - Held that:- Article 45 of the DTAA mandates that the Petitioner as a South Korean ent .....

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al Government notified PSUs from its ambit is invalidated. Even if the offending portion is invalidated, the result would be that in terms of clause (i) of the proviso to Section 245R(2) of the Act, the bar would apply equally to both a resident and a non-resident. In other words, the provision would become equally burdensome to both a resident and a non-resident. Consequently, neither Article 25 of the DTAA can come to the aid of the Petitioner.

For all of the aforementioned reasons, .....

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respect of the transaction of supply of equipment for AY 2008-09 and 2009-10 were rightly rejected by the AAR since on the date of filing of such applications before the AAR, the question raised therein was already pending before the income tax authorities by virtue of the notices under Section 142 (1) of the Act having already been issued to the Petitioner. However as regards the three applications concerning the supply contracts executed during AY 2010-11, the AAR erred in rejecting them by a .....

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BHU BAKHRU, JJ. For The Petitoner : Mr.Deepak Chopra, Mr. Amit Srivastava and Ms. Manasvini Bajpai, Advocates. For The Respondent : Mr.Ashok K. Manchanda, Senior Standing counsel with Ms. Vibhooti and Mr.Aamir Aziz, Advocates. Mr. Vivek Goyal, CGSC for UOI. ORDER Dr.S.Muralidhar,J.: CM No. 16561/2013 (for exemption) in W.P.(C) 7788/2013 CM No. 16563/2013 (for exemption) in W.P.(C) 7789/2013 CM No. 16565/2013 (for exemption) in W.P.(C) 7790/2013 CM No. 16567/2013 (for exemption) in W.P.(C) 7791/2 .....

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ea of the Respondent Income Tax Department that the bar under clause (i) of the proviso to Section 245R (2) of the Income Tax Act, 1961 ( Act ) to the AAR allowing the applications stood attracted. 4. These petitions challenge inter alia the said impugned order of the AAR and constitutional validity of clause (i) of the proviso to 245R (2) of the Act on the ground that the said provision is discriminatory and violative of Article 14 of the Constitution of India as well Article 25 of the Double T .....

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for advance ruling at the instance of a non-resident. The said decision of this Court was set aside by the Supreme Court in Sin Oceanic Shipping ASA v. AAR (2014) 223 Taxman 102 (SC) . The Supreme Court took note of the fact that the AAR itself had subsequently, by an order dated 13th December 2013, taken the view that the mere filing of a return would not constitute a bar to entertaining an application for advance ruling in terms of Section 245N of the Act. Relevant facts 6. The facts of the pr .....

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AY ) 2008-09. It is further stated that, it being a resident of South Korea, it is entitled to the benefit of the DTAA between the India and South Korea. 7. It is stated that Power Grid Corporation of India Ltd. ( PGCIL ) floated tenders inviting global bids for setting up sub-stations in various locations in India. The Petitioner being a successful bidder, supplied equipments for the said projects. The case of the Petitioner is that supply of the equipment was effected outside India and all wo .....

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e were supplies of equipment by the Petitioner to PGCIL during AYs 2008-09, 2009-2010 and 2010-2011 for the various projects of PGCIL. Some portion of the payment was made by PGCIL after deducting TDS. While filing its return of income for the aforementioned AYs, the Petitioner took the stand that no portion of its revenue from off shore supplies was liable to be taxed in India. Consistent with this position, the Petitioner claimed refund of TDS deducted by PGCIL. In reference to each of the ret .....

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for a project of PGCIL at Maharani Bagh. In fact there were seven applications filed by the Petitioner before the AAR for advance rulings. 10. The details of dates of issuance of notices under Section 143(2) and 142(1), the dates of filing of the applications before the AAR for each of the transactions in the three AYs are as under: 11. Before the AAR, a preliminary objection raised by the Revenue was that the above applications of the Petitioner could not be entertained in view of the bar under .....

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titioner, it did not apply to a resident applicant falling under the ambit of sub-clause (iii) of clause (b) of Section 245N which defines applicant . In other words, the Public Sector Undertakings ( PSUs ) notified by the Government of India in the official gazette were exempt from the bar in terms of clause (i) of the proviso to Section 245R(2). Such PSUs notified by the Central Government could maintain an application for advance ruling notwithstanding that the question raised therein was alr .....

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By the impugned order, the AAR while rejecting the Petitioner's applications, came to the following conclusions: (i) A mere filing of returns does not attract the bar unless question raised in the application for advance ruling is already in issue in the return filed. In other words, the mere filing of a return prior to the date of the application before the AAR does not necessarily mean that the question raised in the application is already pending before the income tax authority. (ii) In t .....

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hority and the bar created under clause (i) of the proviso to Section 245R (2) of the Act operates. (iv) As regards the plea that the aforementioned clause (i) of the proviso to Section 245 R (2) was discriminatory, the AAR was of the view that being a creature of the Act, it could not pronounce upon the constitutional validity or the vires of any provision of the Act. It held that the AAR had no jurisdiction to deal with the question of discrimination. Submissions of counsel 14. Mr. Deepak Chop .....

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t applicants like the Petitioner are also extended the same benefit i.e. being exempted from the bar imposed by clause (i) of the proviso to Section 245R (2) of the Act. In other words, the Petitioner states that it would not be satisfied by removal of the offending part of clause (i) of the proviso to Section 245R(2) but would want the Court to rule that non-residents will also be exempted from the bar just as resident applicant in terms of sub-clause (iii) of clause (b) of Section 245N. 15. Mr .....

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r Section 143(2) in these petitions, he submitted that none of those notices, which were issued in a pre-printed format, specified the questions on which information was being sought by the AO. However, Mr. Chopra did not dispute the fact that notices under Section 142 (1) of the Act accompanied by a detailed questionnaire were issued to the Petitioner even prior to the date of filing of the applications before the AAR as far as AYs 2008-09 and 2009-10 were concerned. He, therefore, submitted th .....

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the purposes of the proviso to Section 245R of the Act was a reasonable one and had a nexus to the implied object of not having two adjudication proceedings on parallel basis in relation to the same issue. A conscious decision had been taken to exempt the Central Government PSUs seeking advance ruling from maintaining the applications before the AAR notwithstanding the pendency of such question before the income tax authorities. As regards the interpretation of the words where the question raise .....

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or is proposed to be undertaken by a non-resident applicant; or (ii) a determination by the Authority in relation to [the tax liability of a non-resident arising out of] a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident; or (iia) a determination by the Authority in relation to the tax liability of a resident applicant, arising out of a transaction which has been undertaken or is proposed to be undertaken by such applicant, and .....

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etermination or decision by the Authority whether an arrangement, which is proposed to be undertaken by any person being a resident or a non-resident, is an impermissible avoidance arrangement as referred to in Chapter X-A or not: Provided that where an advance ruling has been pronounced, before the date on which the Finance Act, 2003 receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-clause (ii) of this clause as it sto .....

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n be made by a PSU to the AAR for advance ruling on a question of law or fact arising out of a transaction between such resident PSU and a non-resident entity. 19. Under Section 245Q an application has to be made to the AAR by an applicant seeking an advance ruling. Under Section 245R(2) of the Act the AAR, on examining the application and calling for the records, can either allow or reject the application. The proviso to Section 245R(2) places a restriction on the AAR allowing such an applicati .....

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onstitution. 20. The other ground on which the above provision has been attacked for being discriminatory is that in terms of Section 90(2) of the Act, the said provision will have to give way to Article 25 of the DTAA between India and Republic of South Korea. 21. There is no doubt that the proviso to Section 245R(2) makes a distinction between applicants who are residents and those who are non-residents as far as the bar on the AAR allowing an application for advance ruling was concerned. In t .....

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t of the same question. Therefore, the proviso is per se not irrational. Decision on constitutional validity 22. The Court at this stage notes that the Petitioner is not content with getting the Court to declare that the exception carved out in favour of PSUs notified by the Central Government as discriminatory or violative of Article 14 of the Constitution of India or Article 25 of the DTAA. The Petitioner realises that merely declaring the exception as unconstitutional will not benefit the Pet .....

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y re-write the statute, extending the exemption from the applicability of clause (i) of the proviso to Section 245R(2) of the Act would render the entire proviso otiose and defeat the very object of its insertion. At the same time, the mere declaration of the relevant portion of clause (i) of the proviso to Section 245 R (2) of the Act to be discriminatory and violative of Article 14 of the Constitution is, as far as the Petitioner is concerned, a pointless exercise. 23. Examining the issue from .....

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how clause (i) of the proviso to Section 245R of the Act can be said to be more beneficial to the Petitioner even if the discriminatory portion which exempts Central Government notified PSUs from its ambit is invalidated. Even if the offending portion is invalidated, the result would be that in terms of clause (i) of the proviso to Section 245R(2) of the Act, the bar would apply equally to both a resident and a non-resident. In other words, the provision would become equally burdensome to both .....

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(i) of the proviso to Section 245 R (2) of the Act to be violative of Article 14 of the Constitution. When can a question be stated to be 'pending'? 25. The Court next deals with the plea of the Petitioner that the mere issuance of a notice under Section 143 (2) of the Act would not per se make the question raised in the application before the AAR pending before the income tax authorities. 26. As already noticed, mere filing of a return by the Petitioner claiming the refund in respect o .....

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e Act is concerned, that provision itself stipulates that such notice will be issued by the AO where he has reason to believe that any claim of such exemption, deduction, allowance or relief made in return is inadmissible. It mandates that the notice should specify the particulars of such claim, loss, exemption, deduction or relief. Turning to the notice issued in the instant case to the Petitioner under Section 143(2) of the Act, it is seen that it is in a standard pre-printed format which mere .....

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t such a notice was issued prior to the filing of the application by the Petitioner before the AAR will not constitute a bar, in terms of clause (i) to proviso to Section 245R(2) of the Act, on the AAR entertaining and allowing the applications. 28. However that cannot be said of the notices under Section 142(1) of the Act issued to the Petitioner by the AOs for AYs 2008-09 and 2009-10 which were prior to the filing of the applications before the AAR. For instance, for a notice under Section 142 .....

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of the Act were accompanied by a questionnaire which raised the question of supply contracts which according to the Petitioner were executed overseas. 29. Therefore, in as much as, the notices under Section 142(1) of the Act raising the very questions that form subject matter of the applications by the Petitioner before the AAR for AYs 2008-09 and 2009-10 were issued prior to the filing of the applications, clause (i) of the proviso to Section 245R(2) of the Act stood attracted. Therefore the r .....

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it is sought to be submitted by Mr. Manchanda that as long as the notice under Section 142 (1) of the Act was issued prior to the date when the AAR took up for decision the applications filed by the Petitioner, it could be said that the question raised in the applications were already pending before the income tax authorities. The above submission appears to be contrary to the legislative intent spelt out in Section 245R(2) of the Act that the question raised in the application for advance rulin .....

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n the date of the application, and is the subject matter of a notice issued thereafter by the income tax authority, it cannot be said that such question is already pending before such income tax authority . What is relevant is not the date of consideration of the application by the AAR but the date of filing of such application before the AAR. 32. In Asgarali Nazarali v. State of Bombay AIR 1957 SC 503 it was clarified that a legal proceeding is pending as soon as commenced and until it is concl .....

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