The Karnataka High Court has held that a third party cannot challenge an order passed by the Authority for Advance Ruling (AAR) or the Appellate Authority for Advance Ruling (AAAR) merely because the ruling has indirect financial consequences for it.
The Bench of Justice S.G. Pandit and Justice K.V. Aravind ruled that the advance ruling mechanism under Chapter XVII of the Central Goods and Services Tax (CGST) Act is a self-contained code whose decisions are binding only upon the applicant who sought the ruling and the concerned tax authorities. Consequently, third parties, even if contractually affected by the outcome, cannot invoke writ jurisdiction to challenge such rulings.
The petitioner, a joint venture of the Government of India and the Government of Karnataka established to implement the Bengaluru Metro Rail Project, had entered into a contract with Petitioner for the supply of 150 Standard Gauge Intermediate Cars compatible with the existing metro train sets.
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The contract provided that BMRCL would reimburse the “applicable GST” payable by Petitioner. Subsequently, Petitioner approached the Karnataka Authority for Advance Ruling seeking classification of the supply under the GST law.
The AAR initially held that the transaction constituted a composite supply taxable as supply of intermediate cars. However, on appeal by the Revenue, the Karnataka AAAR reclassified different components of the contract separately, resulting in varying GST rates ranging from 5% to 28% on different supplies and services.
Although Petitioner accepted the AAAR’s ruling, BMRCL challenged it before the Karnataka High Court, contending that because it was contractually obliged to reimburse the applicable GST, the higher tax burden imposed substantial financial consequences on it.
The principal question before the Court was whether a person who is neither the applicant before the AAR nor the concerned tax officer could maintain a writ petition challenging an advance ruling solely because the ruling resulted in financial implications under a private commercial contract.
BMRCL argued that although it was not a party to the advance ruling proceedings, the AAAR’s decision directly affected it because the contract required reimbursement of the GST payable by Petitioner.
It contended that the expression “applicable GST” referred only to GST legally payable; the AAAR’s reclassification substantially enhanced its financial liability; the ruling therefore produced direct civil and pecuniary consequences; and in the absence of any alternative statutory remedy, a writ petition under Article 226 of the Constitution was maintainable.
The petitioner relied on several judgments dealing with the concept of an “aggrieved person” to support its claim of locus standi.
The department opposed the petition, arguing that Section 103 of the CGST Act expressly limits the binding effect of advance rulings to the applicant who sought the ruling; and the concerned or jurisdictional tax officer.
According to the department, advance rulings are decisions in personam, and a third party cannot challenge such rulings irrespective of any commercial consequences arising from contractual arrangements.
The High Court undertook an extensive examination of the statutory framework governing advance rulings under Sections 97 to 103 of the CGST Act.
The Bench observed that Chapter XVII establishes a special dispute-resolution mechanism exclusively between the applicant and the tax authorities.
The Court noted that Section 103 unambiguously provides that an advance ruling binds only the applicant who sought the ruling; and the concerned or jurisdictional officer.
It found no statutory basis for extending either the binding effect or the right to challenge such rulings to third parties.
The Court observed that any increased tax burden merely flowed from the contractual arrangement between BMRCL and Petitioner and did not alter the statutory nature of the advance ruling. The Bench held that commercial consequences arising out of private contracts cannot enlarge the scope of the advance ruling provisions.
A significant aspect of the judgment was the Court’s examination of the contractual clauses governing tax reimbursement.
The Bench found that the agreement merely obligated BMRCL to reimburse the “applicable GST” as invoiced by Petitioner. The contract nowhere specified the classification of the supplies; the applicable GST rate; or any mutually agreed tax treatment.
Therefore, the Court held that “applicable GST” necessarily meant GST determined in accordance with law, including the classification ultimately accepted by Petitioner following the AAAR’s ruling.
Since the contract itself did not prescribe any particular GST rate or classification, the Court held that the AAAR’s decision had not altered any contractual rights or obligations.
The High Court relied upon decisions of the Bombay, Madras, Calcutta and Madhya Pradesh High Courts interpreting Section 103 of the CGST Act.
The Bench observed that judicial consensus recognises advance rulings as decisions in personam, binding only upon the applicant and the concerned tax authorities.
It also distinguished earlier decisions relied upon by BMRCL, noting that those judgments either did not interpret Section 103 or arose in materially different factual circumstances where pre-existing statutory liabilities had been altered.
The Court ultimately held that BMRCL could not be regarded as an “aggrieved person” for the purposes of challenging the AAAR’s ruling.
It further observed that entertaining the writ petition would effectively require the Court to rewrite the contractual terms by importing provisions relating to GST classification and applicable tax rates that the parties themselves had never incorporated.
Such an exercise, the Bench held, would be impermissible under Article 226 of the Constitution.
Accordingly, the writ petition was dismissed for want of locus standi.
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