2016 (2) TMI 575 - HC - Income Tax

Court upholds validity of Income Tax Act provision preventing parallel proceedings, dismisses petitions for AYs 2008-09, 2009-10, remands AY 2010-11.

The Court upheld the constitutional validity of the proviso to Section 245R(2) of the Income Tax Act, 1961, noting the purpose of preventing parallel ... 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 entity should not be subject to any taxation requirement which is more burdensome than the requirement to which an Indian entity is subject. Section 90 (2) of the Act mandates that where any provision of the Act is more beneficial to an Assessee than a provision of the DTAA, then the provision of the Act shall apply. It is not understood 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 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, the Court finds that it serves no purpose, and certainly not that of the Petitioner, to pronounce on the validity of the portion of clause (i) of Section 245R(2) of the Act, that exempts resident PSUs from the bar of that provision, to be violative of Article 14 of the Constitution. Therefore, the Court declines the prayer to declare clause (i) of the proviso to Section 245 R (2) of the Act to be violative of Article 14 of the Constitution. The applications filed by the Petitioner in 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 applying clause (i) to proviso to Section 245R(2) of the Act. Notices under Section 142(1) of the Act in respect of those transactions pertaining to AY 2010-11 were issued only after the filing of the application before the AAR. Issues Involved:1. Constitutional validity of clause (i) of the proviso to Section 245R(2) of the Income Tax Act, 1961.2. Discrimination under Article 14 of the Constitution of India and Article 25 of the Double Taxation Avoidance Agreement (DTAA) between India and the Republic of South Korea.3. Interpretation of the term 'pending' in the context of Section 245R(2) of the Income Tax Act, 1961.4. Applicability of the bar under clause (i) of the proviso to Section 245R(2) of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Constitutional Validity of Clause (i) of the Proviso to Section 245R(2) of the Income Tax Act, 1961:The Petitioner challenged the constitutional validity of clause (i) of the proviso to Section 245R(2) on the grounds that it is discriminatory. The proviso exempts Public Sector Undertakings (PSUs) notified by the Central Government from the bar imposed by the said clause, while non-resident applicants like the Petitioner are not exempted. The Court noted that the object behind the proviso is to prevent parallel proceedings on the same issue before two different fora. The Court declined to declare the proviso unconstitutional, noting that merely invalidating the discriminatory portion would not benefit the Petitioner unless the Court extended the same exemption to non-resident applicants, which would defeat the purpose of the proviso.2. Discrimination under Article 14 of the Constitution of India and Article 25 of the DTAA:The Petitioner argued that the proviso to Section 245R(2) is discriminatory and violates Article 14 of the Constitution and Article 25 of the DTAA, which mandates that nationals of South Korea should not be subjected to more burdensome taxation requirements than Indian nationals. The Court found that even if the discriminatory portion is invalidated, the result would be that the bar would apply equally to both residents and non-residents, making the provision equally burdensome for both. Therefore, Article 25 of the DTAA does not aid the Petitioner.3. Interpretation of the Term 'Pending' in the Context of Section 245R(2) of the Income Tax Act, 1961:The Court examined whether the mere issuance of a notice under Section 143(2) of the Act would make the question raised in the application before the AAR 'pending' before the income tax authorities. The Court concluded that the mere filing of a return or issuance of a notice under Section 143(2) does not necessarily mean that the question is pending. However, notices under Section 142(1) accompanied by a detailed questionnaire issued before the filing of the application before the AAR would make the question pending.4. Applicability of the Bar under Clause (i) of the Proviso to Section 245R(2) of the Income Tax Act, 1961:The Court found that the notices under Section 142(1) issued to the Petitioner for AYs 2008-09 and 2009-10 were prior to the filing of the applications before the AAR, making the question raised in the applications pending before the income tax authorities. Therefore, the AAR's rejection of the applications for these years was upheld. However, for AY 2010-11, the notices under Section 142(1) were issued after the filing of the applications before the AAR, and thus, the AAR erred in rejecting these applications. The Court set aside the AAR's order for AY 2010-11 and remanded the applications for fresh consideration.Conclusion:The Court dismissed the writ petitions for AYs 2008-09 and 2009-10, upholding the AAR's rejection of the applications. For AY 2010-11, the Court set aside the AAR's order and remanded the applications for a fresh decision. The petitions were disposed of with no order as to costs.