Ongoing businesses won't get advance service tax ruling

BANGALORE: The Authority for Advance Rulings (AAR), in one of the first cases to be decided in the realm of service tax, has held that a ruling can be sought only in relation to a proposed transaction. The activity or transaction, in relation to which the ruling is sought, ought not to have commenced as on the date of filing of the application.
The AAR was commenting on a plea filed by McDonalds India (McDonalds), which sought an advance ruling on the service tax liability on the franchise agreements already executed by it, prior to the date of introduction of service-tax. The tax was introduced to cover franchise services from July 1, ’03.
Though the agreements in question were executed prior to this date, they also cover several years succeeding the introduction of service-tax. This led to McDonalds filing an application with the AAR to obtain an advance ruling. McDonalds has entered into franchise agreements with a few parties, under which the right, licence and privilege were granted for a period of 20 years from the date of opening the restaurants. The agreements were executed in November 1998 and February ’00, respectively, and thereafter the restaurants commenced operation.
Section 96A of The Finance Act has defined terms such as ‘advance ruling’ and ‘applicant’. In the context of service tax, an advance ruling means: The determination by the AAR of a question of law or fact, specified in the application, regarding the liability to pay service tax in relation to a service ‘proposed to be provided’.
Further, an ‘applicant’ includes, a wholly-owned subsidiary in India, of which the holding company is a foreign company who ‘proposes to undertake’ any business activity in India. The ruling, once given, is binding on the applicant and the tax authorities. In addition, the ruling has a persuasive effect on similar cases.
In view of the terms used in the above definitions and use of the words ‘proposes to undertake’, the AAR held that the benefit of seeking an advance ruling would not apply in the case of an ongoing business or undertaking that has already commenced the business. In McDonalds’ case as the business had already commenced, the application was held non-maintainable. The AAR did not give a ruling in respect of the question raised in the application. “This decision is within the four corners of the law. However, the provisions contained in relation to service tax are in a narrow compass. They entail giving an advance ruling only in relation to a proposed transaction and not where the transactions have already been entered or are ongoing,� states Ashok Dhingra, director, indirect taxes, Bharat S Raut and Co, a chartered accounting firm.
Ironically, the scope of advance rulings in the direct tax realm is wider and includes transactions that have been undertaken by a non-resident applicant. “As the purpose of creating an Authority for Advance Rulings, is to bring certainty to the tax provisions and pre-empt any potential exposure to any particular transactions, the government should expand the scope of reference. It should include at least those ongoing transactions that have come under the service tax net on account of new levies,� adds Mr Dhingra.