Binding AAR Rulings can be challenged but not directly in the Supreme Court

The Petitioner, a USA company, filed an application for advance ruling on the question whether its liaison office in India was a business connection/ permanent establishment and whether its business profits were taxable under the Act and the DTAA. The AAR held that the liaison office was a business connection/ PE and that the income attributable thereto was assessable to tax in India. The Petitioner filed a SLP directly in the Supreme Court to challenge the AARs ruling. The Supreme Court had to consider whether the AAR was a tribunal/ court and its rulings could be challenged despite their binding effect and whether a direct challenge in the Supreme Court was desirable. HELD:

(i) The term Court is meant to refer to a Courts of Civil Judicature while the term Tribunals means those bodies of men who are appointed to decide controversies arising under certain special laws. U/s 245N, the AAR has the power to determine the tax liability arising out of a transaction and such determination may include a determination of issue of fact or issue of law. U/s 245S, its rulings are binding on the Applicant and the department. Consequently, the AAR is exercising judicial power and is a tribunal whose rulings can be challenged under Articles 136 and 227 of the Constitution;

(ii) The fact that the ruling pronounced by the AAR is binding does not affect the jurisdiction of the Court under Article 136 or under Articles 226 and 227 of the Constitution to entertain a challenge to the ruling.

(iii) The ruling should in the first instance be challenged before the High Court instead of directly in the Supreme Court. To avoid the matter remaining pending in the High Court for years, which would defeat the objective of enabling the applicant to get an expeditious ruling, the matter should be heard directly by a Division Bench of the High Court and decided as expeditiously as possible;

(iv) Ordinarily, an aggrieved party should not be encouraged to appeal directly to the Supreme Court unless it appears to the Court that the SLP raises substantial questions of general importance or a similar question is already pending before it for decision. On facts, as the SLP did not raise a substantial question of general importance nor was a similar question already pending before the Supreme Court, the Petitioner should move the High Court under Article 226/ 227 of the Constitution.