2013 (7) TMI 856 - HC - Income Tax

Jurisdiction of Authority for Advance Ruling - Refusal to give ruling on final hearing - Whether there was any contravention of SEBI guidelines - Held that - Authority has proceeded to refuse to give a ruling on the basis that the petitioner had contravened the SEBI Guidelines - agreement entered into in 2004 between TIL and AT&T was not acted upon due to commercial reasons and that the Draft Prospectus filed with SEBI in 2006 while coming out with the IPO had disclosed the agreement entered into by it with AT&T. From the above, it is clear that on examination of the facts of the Petitioner s case SEBI has concluded that there has been no breach of SEBI guidelines. In case there had been any breach of its guidelines and/or an illegal act as suggested by the Authority in its impugned order, SEBI would have issued to the petitioner a notice to show cause - Decided in favour of petitioner. Refusal to pass ruling - whether the Authority after having admitted the questions can refuse to give a ruling on the question of law formulated at the final hearing without there being any change in facts or circumstances - Held that - Authority has a discretion to refuse to give a ruling on a question of law even in respect of matters outside the proviso to Section 245R(2) of the Act, yet this discretion of refusing to rule on a question cannot be arbitrary. The Authority can exercise its discretion not to give a ruling only in cases where fraud and/or illegality is ex facie evident or the fraud or illegality has been established in some proceedings. Such a discretion is not to be exercised on a mere suspicion of illegality or fraud having taken place - Authority is not correct in refusing to give a ruling at the time of final hearing in the absence of any fresh material, merely on the basis of the suspicion. The Authority may be entitled to consider questions of public interest and not answer the questions when the foundation of the transaction is on the face of it coloured by illegality/or mis-representation of facts in making the application to the Authority - Decided in favour of Petitioner.

Summary

Issues Involved:

1. Jurisdiction of the Authority for Advance Ruling (AAR) to refuse a ruling after admitting the application.
2. Applicability of SEBI Guidelines and alleged circumvention.
3. Discretionary power of AAR to refuse a ruling based on public interest or suspicion of illegality.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Authority for Advance Ruling (AAR) to refuse a ruling after admitting the application:

The petitioner challenged the refusal of the AAR to give a ruling after admitting the application under Section 245R(2) of the Income-tax Act, 1961. The petitioner argued that once the application was admitted, the AAR could not refuse to give a ruling unless the case fell under the proviso to Section 245R(2) of the Act. The proviso restricts the AAR from entertaining applications if the question is already pending before another authority, involves the determination of fair market value, or is designed for tax avoidance. The court noted that the AAR had admitted the application without objections and had recorded that the questions required a ruling. Therefore, the refusal to give a ruling at the final hearing was without jurisdiction.

2. Applicability of SEBI Guidelines and alleged circumvention:

The AAR refused to give a ruling on the grounds that the transaction in question circumvented SEBI Guidelines, specifically Guideline 2.6.1. The petitioner argued that the transaction was fully disclosed in the Draft Red Herring Prospectus filed with SEBI during the IPO and had received necessary approvals. The court examined a communication from SEBI dated 7 May 2013, which clarified that there was no breach or circumvention of SEBI Guidelines. SEBI confirmed that the agreement between the petitioner and AT&T was disclosed and not acted upon due to commercial considerations. The court held that there was no contravention of SEBI Guidelines, and the AAR's refusal based on alleged circumvention was unfounded.

3. Discretionary power of AAR to refuse a ruling based on public interest or suspicion of illegality:

The AAR claimed discretion to refuse a ruling in cases involving public interest or suspected illegality, citing its decision in the Microsoft Operations case. The court acknowledged that while the AAR might have discretion in appropriate cases, such discretion must be exercised based on clear evidence of fraud or illegality, not mere suspicion. The court emphasized that the AAR could not refuse to give a ruling without concrete evidence of illegality or fraud. In this case, SEBI's communication clarified that there was no breach of guidelines, and no show-cause notice or adjudication order was issued against the petitioner. Therefore, the AAR's refusal based on suspicion was not justified.

Conclusion:

The court set aside the AAR's order dated 27 August 2012, and directed the AAR to give a ruling on the questions posed by the petitioner. The court did not address the larger jurisdictional questions raised by the petitioner, leaving them open for future cases. The petition was allowed, and no order as to costs was made.