“Big Shot Game: Begin by Assessee but last as per Department Verdict”

Aiming to reduce department’s workload and providing clarity to each assessee without undergoing litigation trouble. The framework of Advance Ruling, gives an option to the assessee to file an application before the department i.e. Advance Ruling Authority (ARA)to address any doubt or uncertainty in the taxability of the activity undertaken or likely to be undertaken by them. In the Advance Ruling application, applicant/assessee gets a chance to explain its transaction/activity and discuss its taxability.

The mechanism of Advance Ruling was introduced in 1998, after seven years of the economic reforms launch. With the brief backdrop of the present, subject matter of Advance Ruling with the relevant provisions, this article is going to discuss the basic possibilities of rejection of Advance Ruling applications.

Amendments in Statutory Acts for incorporating Advance Ruling Structure

For giving strict structure of Advance Ruling in indirect taxation regime, necessary legislation was introduced by adding new chapters like Chapter VB in Customs Act, 1962; Chapter IIIA in Central Excise Act, 1994 and Chapter VA in Finance Act, 1994 [regulating, Service Tax Law]. Further, as GST has subsumed maximum of the indirect tax regime; provisions of Advance Ruling were also enacted in Central Goods & Service Tax (CGST) Act, 2017 [‘Act’] vide Chapter XVII i.e., Section 95 to 106 of the Act. As notion of Advance Ruling already existed in the pre-GST era, provisions enumerated in CGST are more or less similar with the sections of Finance Act, 1994.

Background of Advance Ruling Application in GST

Before jumping on the present topic of Advance Ruling application it may be interesting to note that initially, it was only for non-residents. However, since 2015 it became available to any taxpayer/assessee for clarifying its queries regarding taxability. While discussing the taxability, the applicant can also claim benefit of any available exemption notification or argue on non-taxability.

Just like normal code of conduct maintained by the courts, proceedings of Advance Ruling applications have to undergo with two steps process. First is examining the credibility of application in terms of the application CGST provisions. According to which the application can be rejected or accepted by the Advance Ruling Authority “ARA” forum. If the application is accepted by the ARA, next step will be discussion on merits of the case. After examining the facts and submitted documents, concerned ARA forum shall pronounce its order within ninety days from the receipt of application. The said time limit is specified under sub-section (6) of section 98 of the Act.

It is imperative to note that, no application can be rejected without granting proper opportunity of being heard. Appreciating the principle of natural justice, said condition is stipulated in section 98 of the Act. Even, if in any case the ARA or AAAR wants to rectify its own ruling referring section 102 of the Act, within six months of the order’s date then too, applicant/appellant is entitled for getting, opportunity of being heard before issuing the rectification order.

Further, in case if the applicant is not satisfied with the rejection or ruling ordered by ARA they can file an appeal against the passed order before Appellate Authority of Advance Ruling (AAAR) under sections 99 to 101 of the Act.

Severity of Rejection or Acceptation of Advance Ruling Application

The topic of maintainability of Advance Ruling application is indispensable in two ways; one is obvious to argue and contradict the department’s stand. Another is the most pivotal aspect; which is to guide the client correctly and utilize its hard-earned money in their interest only. As rejection of Advance Ruling application, consequently trash away all the efforts incurred in building facts and taxability discussion of the application.

The subject matter of Advance Ruling like its provisions, authority and step-by-step procedure has been discussed many times. However, maintainability of the Advance Ruling is not being discussed much. Thus, understanding the relevance of maintainability of Advance Ruling application is very much important. As this stick can be used for managing many lost/confused assesses, without hampering interest of the revenue department.

Maintainability: Basis behind Rejection of Advance Ruling Application

Undoubtedly, concept of Advance Ruling is a great option for any prudent taxpayer. However, while submitting the application, the applicant has to be very cautious. As section 98(2) of the Act, gives full authority to department to reject the Advance Ruling application if it is not covered under the scope of application for Advance Ruling, stipulated under section 97(2) of the Act. The seven sub-clauses mentioned in sub-section (2) of section 97 of the Act are reiterated as under:

97 (2) The question on which the advance ruling is sought under this Act, shall be in respect of,––

(a) classification of any goods or services or both;

(b) applicability of a notification issued under the provisions of this Act;

(c) determination of time and value of supply of goods or services or both;

(d) admissibility of input tax credit of tax paid or deemed to have been paid;

(e) determination of the liability to pay tax on any goods or services or both;

(f) whether applicant is required to be registered;

(g) whether any particular thing done by the applicant with respect to any goods or services or both amounts to or results in a supply of goods or services or both, within the meaning of that term.

In line of the above provision, let’s discuss some latest live examples, where ARA/AAAR has rejected that Advance Ruling application along with its reasoning specified in the order:-

  1. Application filed by Recipient: ARA of Tamil Nadu rejected the application filed by M/s A. Nirmala {TN/05/ARA/2022 dated 28 February 2022} specifying section 103 [Applicability of Advance Ruling] of the Act whereby, it was enumerated that pronouncement made through the submitted application is binding on two entities. One is the concerned jurisdictional officer working in respect of the application and other is the applicant, undertaking or proposing to undertake the subjected transaction/activity upon which the question has been raised in the application. Accordingly, it was concluded that only the supplier i.e. provider, not the recipient; is eligible to seek Advance Ruling in terms of section 95 [Definitions of Advance Ruling] of the Act. The said standard of maintainability of Advance Ruling application is also upheld by AAAR of Gujarat in M/s Surat Municipal Corporation {GUJ/GAAR/APPEAL/2022/05}. Here it is essential to note that recipient can become applicant in Advance Ruling, if its questions pertains to Reverse Charge Mechanism (RCM) or availability of Input Tax Credit (ITC). However, in above two quoted applications, applicant has not explained its case in such manner hence, application got rejected.
  1. Application made by Third Party: As already pointed out, an Advance Ruling application can be filed by the supplier/provider specifically. Giving the same observation, Tamil Nadu ARA has rejected the application made by M/s Spacelance Solutions Pvt. Ltd. {TN/06/ARA/2022 dated 28 February 2022}. As it was applied on behalf of their customers, it was non-maintainable as per section 98(2) of the Act read with section 95(a) ibid. The same authority has already rejected the application filed by M/s Weg Industries India Pvt. Ltd. {TN/41/ARA/2021 Dated 30.11.2021} with the similar reasoning.
    There is no doubt that in above two cases, rejection of Advance Ruling applications was on valid ground. However, it is paramount to clarify that Advance Ruling application can be filed by representative or agent of the supplier/recipient of the concerned goods or services. Besides this discussion, it is necessary to highlight an exceptional case where ARA of West Bengal entertained an application whereby the applicant was not actually a supplier or recipient. It happens in the case of RITES Ltd. {27/WBAAR/2018-19 Case No. 28 of 2018} where applicant was a project management consultant responsible for passing bills after scrutinizing the same.
  1. Query related to issues pending/settled in any proceedings: It is an interesting case, where M/s New Rajamandri Electronics {KAR ADRG 81/2021 dated 31 December 2021} application was not accepted. As the applicant has raised a query based on an audit report issued in pursuance to audit conducted by the Deputy Commercial of Commercial Taxes (Audits). The said application was observed to be non-maintainable in terms of the first proviso of section 98(2) [Authority shall not admit application where raised question is pending or decided in any proceedings] of the Act.
  1. Question not related to taxability: It is already discussed that, outset scope of Advance Ruling is sticks with afore quoted seven sub-clauses stated in section 97(2) of the Act. Any application disengaging above clauses shall not be entertained by the department. This happens in the case of M/s/ Madus Tyre Care {KAR ADRG 80/2021 dated 31 December 2021} wherein applicant submits doubt related to validity of a tax invoice in terms of its related provision i.e. section 31 of the Act read with Rule 46 of GST Rules, 2017. The said application got rejected as raised question is not covered under sub-section (2) of section 97 of the Act.
  2. Supply already rendered: ARA of Maharashtra has rejected the application put forth by M/s Navratna Shipping Pvt. Ltd. {GST-ARA-24/2020-21/B-39 dated 31 March 2022} wherein applicant’s client denied to pay GST @18% after the services has been rendered. Accordingly, applicant submits its case questioning the GST rate on the correspondent services. Unfortunately, said application got rejected referring section 95(a) [Definition of Advance Ruling] of the Act with the observation that questioned service was already undertaken by the applicant.
    It may be noted that abovesaid rejection is just a bad luck of the applicant as in several cases, department has accepted Advance Ruling application related to past transactions. Like, in M/s South Indian Federation of Fishermen Societies {TN/07/ARA/2022 dated 28.02.2022} applicant got favorable order against the leviability question raised on supplied materials &labour charges incurred during warranty without any charges. However, maximum of the claims/questions were not entertained due to non-submission of documentary evidences.
  1. Application submitted with inappropriate forum: Recently, Telangana ARA in M/s Growthmode Consulting Limited {R.Com/07/2020 TSAAR Order No.15/2022} and M/s Rajasekhar Reddy Tummuru {A.R.Com/32/2021 TSAAR Order No. 19/2022} rejected the application by considering its forum not appropriate. As in both cases, the place of supply belongs to other state i.e. Maharashtra under section 12(3) of Integrated Goods and Service Tax (IGST) Act, 2017. Accordingly, Advance Ruling applications were rejected with the observation that Telegana ARA is not the appropriate forum.

CLOSING STATEMENT

Nobody can deny the eminence benefits of the Advance Ruling platform; as it has given structured window where the assessees can file application and get clarification on taxability of the activities undertaken by them. Therefore, Advance Ruling applications are always moved by the genuine taxpayers. However, the factual framing of application in Advance Ruling is very crucial aspect. As in present discussion, we have seen several incidences where the ARA/AAAR has rejected the applications outrightly. Therefore, it is always suggested to evaluate each case as per the applicable provisions and frame the case in such a way, that it wouldn’t be rejected in the initial stage (at least). Further, every counsel/consultant should draft the facts vigilantly that it gets covered under the strict scope of Advance Ruling regime. Further, submitting relevant documents aligned with the facts put forth in the Advance Ruling application is also very much required. Lastly, the writer would like to end this discussion with a humble request for doing proper home work before filing any Advance Ruling Application.

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