High Court quashes AAR's order, deems subsidiaries of Government Companies eligible. AAR's discretion must be judicious.

The High Court allowed both writ petitions, quashing the AAR's order rejecting the applications. The court held that the petitions challenging the AAR's order were maintainable before the High Court under Articles 226/227. It determined that subsidiaries of a Government Company qualified as Government Companies under the relevant provisions. The court clarified that the AAR's discretionary power must be exercised judiciously and not arbitrarily. The AAR's rejection of the applications was deemed erroneous as the petitioners had not engaged in any transactions and sought rulings on proposed activities. The AAR was directed to decide on the applications within three months.

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Issues Involved:
1. Preliminary Objection on maintainability of writ petitions.
2. Whether a subsidiary to subsidiary company of a Government Company qualifies as a Government Company.
3. Discretionary power of the AAR to reject applications under Section 96D(2) of the Finance Act.
4. Consideration of facts on record regarding the proposed business activity and pending issues.

Detailed Analysis:

Preliminary Objection:
The respondent argued that the writ petitions challenging the AAR's order should be dismissed for lack of jurisdiction as such orders can only be challenged before the Supreme Court via a Special Leave Petition. The court rejected this argument, citing the Supreme Court's decision in Columbia Sportswear Company v. Director of Income Tax, Bangalore, which held that advance rulings by the Authority for Advance Rulings (Income Tax) could be challenged under Articles 226/227 of the Constitution before the High Court. Thus, the writ petitions were deemed maintainable.

Whether a Subsidiary to Subsidiary Company of a Government Company Qualifies as a Government Company:
The petitioners, subsidiaries of Gujarat State Petronet Ltd., which in turn is a subsidiary of Gujarat State Petroleum Corporation Ltd., argued they qualify as Government Companies under Section 617 of the Companies Act, 1956. The court examined the statutory definitions and concluded that the petitioners, being step-down subsidiaries of a Government Company, fall within the definition of "applicant" under Section 96A(b) of the Finance Act. Therefore, the applications filed by the petitioners were maintainable.

Discretionary Power of the AAR to Reject Applications under Section 96D(2) of the Finance Act:
The court analyzed whether the AAR had the discretionary power to reject the petitioners' applications on grounds other than those specified in the proviso to Section 96D(2). The court agreed with the view taken in Microsoft Operations Pte. Ltd. that the AAR has discretionary power, which must be exercised judiciously. However, the court held that the AAR does not possess absolute discretionary power and must decide applications unless the specific conditions in the proviso are met. The court found that the AAR erred in rejecting the applications based on the pending issue with the petitioners' holding company, as the transactions were not identical and the petitioners had not yet entered into any transactions.

Consideration of Facts on Record:
The court noted that the Commissioner had admitted the petitioners were Government Companies and their applications were maintainable. The AAR's rejection of the applications was based on the erroneous assumption that the transactions of the petitioners and their holding company were identical. The court emphasized that the petitioners had not yet commenced any activity or service and had sought advance ruling on a proposed business activity. The court concluded that the AAR's decision was not supported by the facts on record and the applications should have been decided on their merits.

Conclusion:
Both writ petitions were allowed, and the AAR's order rejecting the applications was quashed. The AAR was directed to decide the questions raised in the petitioners' applications under Section 96C on merits, preferably within three months. The rule was made absolute, and parties were ordered to bear their own costs.

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