Page 1 Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

SPECIAL LEAVE PETITION (C) No. 31543 of 2011

Columbia Sportswear Company … Petitioner

Versus

Director of Income Tax, Bangalore … Respondent

WITH

SPECIAL LEAVE PETITION (C) No. 3318 of 2011 ,

SPECIAL LEAVE PETITION (C) No. 13760 of 2011 ,

CIVIL APPEAL No. 2996 of 20O8,

CIVIL APPEAL No. 5839 of 2008,

CIVIL APPEAL No. 7035 of 2011 ,

CIVIL APPEAL No. 6987 of 2010 ,

CIVIL APPEAL No. 10064 of 2011 ,

AND

CIVIL APPEAL No. 11327 of 2011 ,

O R D E R

A. K. PATNAIK, J.

SPECIAL LEAVE PETITION (C) No. 31543 of 2011 :

This is a petition under Article 136 of the Constitution

of India seeking special leave to appeal against the order

dated 08.08.2011 of the Authority for Advance Rulings

Page 2 (Income Tax) constituted under Chapter XIX-B of the

Income Tax Act, 1961 (for short ‘the Act’) in A.A.R. No.862 of

2009.

2.The petitioner is a company incorporated in the United

States of America (for short ‘the USA’) and is engaged in the

business of designing, developing, marketing and

distributing outdoor apparel. For making purchases for its

business, the petitioner established a liaison office in

Chennai with the permission of the Reserve Bank of India

(for short ‘the RBI’) in 1995. The RBI granted the

permission in its letter dated 01.03.1995 subject to the

conditions stipulated therein. The permission letter dated

01.03.1995 of the RBI stated that the liaison office of the

petitioner was for the purpose of undertaking purely liaison

activities viz. to inspect the quality, to ensure shipments

and to act as a communication channel between head office

and parties in India and except such liaison work, the

liaison office will not undertake any other activity of a

trading, commercial or industrial nature nor shall it enter

into any business contracts in its own name without the

prior permission of the RBI. The petitioner also obtained

2

Page 3 permission on 19.06.2000 from the RBI for opening an

additional liaison office in Bangalore on the same terms and

conditions as mentioned in the letter dated 01.03.1995 of

the RBI.

3.On 10.12.2009, the petitioner filed an application

before the Authority for Advance Rulings (for short ‘the

Authority’) on the questions relating to its transactions in its

liaison office in India set out in Annexure-II to the

application. Questions No. 1 to 6 as set out in Annexure-II

to the application of the petitioner before the Authority are

extracted hereinbelow:

“1. Whether based on the nature of

activities carried on by the Liaison Office

[‘India LO’] of the Applicant in India, as

listed in the Statement of relevant facts

[Annexure III], any income accrues or

arises in India as per Section 5(2)9B) of

the Act?

2. Whether based on the nature of

activities carried on by the India LO, as

listed in the Statement of relevant facts

[Annexure III], the Applicant can be said

to have a business connection in India as

per the provisions of Section 9(1)(i) of Act

read with its Explanation 2?

3. If the answer to Query 2 is in the

affirmative, whether various activities

3

Page 4 carried out by the India LO, as listed in

the Statement of relevant facts [Annexure

III], are covered under the phrase

‘through or from operations which are

confined to the purchase of goods in

India for the purpose of export’ as stated

in part (b) of Explanation 1 to Section

9(1)(i) of the Act?

4. If the answer to Query 3 is in the

negative, how would the profits

attributable to the ‘operations in India’ be

determined and what would be the broad

principles to be borne in mind for

attributing income to the India LO?

5. Whether the India LO creates a

permanent establishment [‘PE’] for the

Applicant in India under Article 5(1) of

the Agreement for Avoidance of Double

Taxation and Prevention of Fiscal Evasion

with respect to Taxes on Income and

Capital Gains entered into between the

Government of the Republic of India and

the Government of the United States of

America [‘Treaty’] read with the PE

exclusion available for purchase function

in terms of paragraph 3(d) of Article 5 of

the Treaty?

6. If the answer to Query 5 is in the

affirmative, how would the profits

attributable to the PE in India be

determined and what would be the broad

principles to be borne in mind for

attributing income to India LO under the

Treaty?’

4.The respondent filed his reply dated 10.12.2010 to the

aforesaid application of the petitioner before the Authority.

4

Page 5 The petitioner also filed its response dated 08.02.2011 to

the reply of the respondent. The Authority heard the

petitioner and the respondent and passed the impugned

order dated 08.08.2011. In para 34 of the impugned order,

the Authority gave its ruling on the six

questions as follows:

“(1) A portion of the income of the

business of designing, manufacturing

and sale of the products imported by the

applicant from India accrues to the

applicant in India.

(2) The applicant has a business

connection in India being its liaison office

located in India.

(3) The activities of the Liaison Office in

India are not confined to the purchase of

goods in India for the purpose of export.

(4) The income taxable in India will be

only that part of the income that can be

attributed to the operations carried out in

India. This is a matter of computation.

(5) The Indian Liaison Office involves a

‘Permanent Establishment’ for the

applicant under Article 5.1 of the DTAA.

(6) In terms of Article 7 of the DTAA only

the income attributable to the Liaison

Office of the applicant is taxable in

India.”

5

Page 6 Aggrieved, the petitioner has challenged the impugned order

on various grounds mentioned in this special leave petition.

5.On 10.02.2012, we passed orders calling upon the

learned counsel for the parties to first address us on the

question of maintainability of special leave petitions filed

either by the assessee or by the Department against the

advance rulings of the Authority. Learned counsel for the

parties referred to the provisions of Chapter XIX-B of the Act

to show that the Authority is a quasi-judicial Tribunal.

They submitted that the order of the Authority is an

adjudicating order determining a question of law or fact

specified in the application and sub-section (5) of Section

245R mandates compliance with the principles of natural

justice. They further submitted that the Authority is also

vested with the powers of a civil court in relation to the

discovery and inspection, enforcing the attendance of

persons and examining them on oath and compelling the

production of books of account, etc. They argued that as

the Authority is a quasi-judicial Tribunal, its orders can be

challenged before the High Court by way of judicial review

under Article 226/227 of the Constitution or before this

6

Page 7 Court by way of an appeal under Article 136 of the

Constitution. They submitted that this Court may, however,

decline to interfere with the order passed by the Authority in

exercise of its powers under Article 136 of the Constitution

where it feels that it would be more appropriate that the

order of the Authority must first be examined by the High

Court under Article 226/227 of the Constitution. They

relied upon the decision of this Court in Durga Shankar

Mehta v. Thakur Raghuraj Singh and Others [(1955) 1 SCR

267] in which it has been held that the expression

“Tribunal” used in Article 136 of the Constitution includes,

within its ambit all adjudicating bodies, provided they are

created by the State and are invested with judicial as

distinguished from purely administrative or executive

functions. They cited the decisions of this Court in Kihoto

Hollohan v. Zachillhu and Others [1992 Supp (2) SCC 651],

Jyotendrasinhji v. S.I. Tripathi and Others [1993 Supp (3)

SCC 389], L. Chandra Kumar v. Union of India and Others

[(1997) 3 SCC 261] and Union of India v. R. Gandhi,

President, Madras Bar Association [(2010) 11 SCC 1] in

support of their submission that where a tribunal is

7

Page 8 constituted by an Act of the legislature for adjudicating any

particular matter, the power of the constitutional courts

under Article 226/227 or 136 is not ousted even if the Act

makes the decision of the tribunal final.

6. The preliminary question that we have to decide is

whether an advance ruling pronounced by the Authority can

be challenged by the applicant or by the Commissioner or

any income-tax authority subordinate to him under Article

226/227 of the Constitution before the High Court or under

Article 136 of the Constitution before this Court. Under

Article 226 of the Constitution, the High Court can issue

writs of Certiorari and Prohibition to control the proceedings

of not only a subordinate court but also of any person, body

or authority having the duty to act judicially, such as a

tribunal. Under Article 227 of the Constitution, the High

Court has superintendence over all courts and tribunals

throughout the territory in relation to which it exercises

jurisdiction. Under Article 136 of the Constitution, this

Court may, in its discretion, grant special leave to appeal

from any judgment, decree, determination, sentence or

order in any cause or matter passed or made by any court

8

Page 9 or tribunal in the territory of India. Hence, we have to

decide whether the Authority, if not a court, is a tribunal

within the meaning of expression in Articles 136 and 227 of

the Constitution and whether the Authority has a duty to

act judicially and is amenable to writs of Certiorari and

Prohibition under Article 226 of the Constitution.

7.The meaning of the expression “tribunal” in Article 136

and the expression “tribunals” in Article 227 of the

Constitution has been explained by Hidayatullah, J., in

Harinagar Sugar Mills v. Shyam Sunder [AIR 1961 S.C.

1669] in paragraph 32, relevant portion of which is quoted

herein below:

“With the growth of civilisation and the problems

of modern life, a large number of administrative

tribunals have come into existence. These

tribunals have the authority of law to pronounce

upon valuable rights; they act in a judicial

manner and even on evidence on oath, but they

are not part of the ordinary Courts of Civil

Judicature. They share the exercise of the

judicial power of the State, but they are brought

into existence to implement some administrative

policy or to determine controversies arising out of

some administrative law. They are very similar to

Courts, but are not Courts. When the

Constitution speaks of 'Courts' in Art. 136, 227

or 228 or in Art. 233 to 237 or in the Lists, it

contemplates Courts of Civil Judicature but not

9

Page 10 tribunals other than such Courts. This is the

reason for using both the expressions in Arts.

136 and 227.

By "Courts" is meant Courts of Civil Judicature

and by "tribunals", those bodies of men who are

appointed to decide controversies arising under

certain special laws. Among the powers of the

State is included the power to decide such

controversies. This is undoubtedly one of the

attributes of the State, and is aptly called the

judicial power of the State. In the exercise of this

power, a clear division is thus noticeable. Broadly

speaking, certain special matters go before

tribunals, and the residue goes before the

ordinary Courts of Civil Judicature. Their

procedures may differ, but the functions are not

essentially different. What distinguishes them

has never been successfully established…..”

Thus, the test for determining whether a body is a tribunal

or not is to find out whether it is vested with the judicial

power of the State by any law to pronounce upon rights or

liabilities arising out of some special law and this test has

been reiterated by this Court in Jaswant Sugar Mills Ltd. v.

Lakshmi Chand & Ors. [AIR 1963 SC 677], Associated

Cement Companies Ltd . v. P.N. Sharma & Anr. [AIR 1965 SC

1595] and in the recent decision of the Constitution Bench

in Union of India v. R. Gandhi, President, Madras Bar

Association [(2010) 11 SCC 1].

1

Page 11 8.We may now examine the provisions of Chapter XIX B

of the Act on Advance Ruling to find out whether the

Authority pronounces upon the rights or liabilities arising

out of the Act. Section 245N(a) of Chapter XIX B which

defines “advance rulings” is extracted hereinbelow:

“245N. In this Chapter, unless the context

otherwise requires,—

(a) "advance ruling" means—

(i) a determination by the Authority in

relation to a transaction which has been

undertaken or is proposed to be undertaken

by a non-resident applicant; or

(ii) a determination by the Authority in

relation to the tax liability of a non-resident

arising out of a transaction which has been

undertaken or is proposed to be undertaken

by a resident applicant with such non-

resident, and such determination shall

include the determination of any question of

law or of fact specified in the application;

(iii) a determination or decision by the

Authority in respect of an issue relating to

computation of total income which is pending

before any income-tax authority or the

Appellate Tribunal and such determination or

decision shall include the determination or

decision of any question of law or of fact

relating to such computation of total income

specified in the application :

[Provided that where an advance ruling has been

pronounced, before the date on which the Finance

Act, 2003 receives the assent of the President, by

1

Page 12 the Authority in respect of an application by a

resident applicant referred to in sub-clause (ii) of

this clause as it stood immediately before such

date, such ruling shall be binding on the persons

specified in section 245S;]”

A plain reading of the very definition of advance ruling in

Section 245N (a) would show that the Authority is called

upon to make a determination in relation to a transaction

which has been undertaken or is proposed to be

undertaken by a non-resident applicant or in relation to the

tax liability of a non-resident arising out of such transaction

which has been undertaken or proposed to be undertaken

by a resident applicant with such non-resident and such

determination may be on any question of law or fact

specified in the application. Further, the Authority may

make a determination or decision in respect of a issue

relating to the computation of total income which is pending

before any income-tax authority or the Appellate Tribunal

and such determination or decision may include the

determination or decision of any question of law or of fact

relating to such computation of total income specified in the

application. Thus, the Authority may determine not only a

transaction but also the tax liability arising out of a

1

Page 13 transaction and such determination may include a

determination of issue of fact or issue of law. Moreover, the

Authority may determine the quantum of income and such

determination may include a determination on a issue of

fact or issue of law.

9.We also find that the determination of the Authority is

not just advisory but binding. Section 245S in Chapter

XIX-B is quoted hereunder:

“245S. (1) The advance ruling pronounced

by the Authority under section 245R shall

be binding only—

(a) on the applicant who had sought it;

(b) in respect of the transaction in

relation to which the ruling had been

sought; and

(c) on the Commissioner, and the

income-tax authorities subordinate to

him, in respect of the applicant and the

said transaction.

(2) The advance ruling referred to in sub-

section (1) shall be binding as aforesaid

unless there is a change in law or facts on

the basis of which the advance ruling has

been pronounced.”

The binding effect of advance ruling as provided in Section

245S has been dealt with by the Authority (Chairman and

1

Page 14 two Members) in Cyril Eugene Pereira, In re . [1999] 239 ITR

650] and at page 672 of the ITR, the Authority held:

“Thus, sub-section (2) of section 245S

has limited the binding nature of the

ruling to the case of the applicant in

respect of the transaction in relation to

which the advance ruling is sought and

to the Commissioner and authorities

subordinate to him only in respect of the

applicant and the transaction involved.

This is not to say that a principle of law

laid down in a case will not be followed in

future. The Act has made the ruling

binding in the case of one transaction

only and the parties involved in that case

in respect of that transaction. For other

transactions and for other parties, the

ruling will be of persuasive nature.”

The Authority, thus, held that the advance ruling of the

Authority is binding in the case of one transaction only and

the parties involved in respect of that transaction and for

other parties, the ruling will be of persuasive nature. The

Authority, however, has clarified that this is not to say that

a principle of law laid down in a case will not be followed in

future. This decision of the Authority in Cyril Eugene

Pereira, In re . (supra) has been taken note of by this Court

in Union of India & Anr. v. Azadi Bachao Andolan & Anr.

[2003] 263 ITR 706 at 742] to hold that the advance ruling

1

Page 15 of the Authority is binding on the applicant, in respect of

the transaction in relation to which the ruling had been

sought and on the Commissioner and the income-tax

authorities subordinate to him and has persuasive value in

respect of other parties. However, it has also been rightly

held by the Authority itself that this does not mean that a

principle of law laid down in a case will not be followed in

future.

10.As Section 245S expressly makes the Advance Ruling

binding on the applicant, in respect of the transaction and

on the Commissioner and the income tax authorities

subordinate to him, the Authority is a body acting in

judicial capacity. H.M. Seervai in his book “Constitutional

Law of India” (Forth Edition) while discussing the tests for

identifying judicial functions in paragraph 16.99 quotes the

following passage from Prof. de Smiths Judicial Review on

page 1502:

“An authority acts in a judicial capacity

when, after investigation and deliberation, it

performs an act or makes a decision that is

binding and collusive and imposes

obligation upon or affects the rights of

individuals.”

1

Page 16 We have, therefore, no doubt in our mind that the Authority

is a body exercising judicial power conferred on it by

Chapter XIX-B of the Act and is a tribunal within the

meaning of the expression in Articles 136 and 227 of the

Constitution.

11. The fact that sub-section (1) of Section 245S makes

the advance ruling pronounced by the Authority binding on

the applicant, in respect of the transaction and on the

Commissioner and the income-tax authorities subordinate

to him in respect of the applicant and the transaction would

not affect the jurisdiction of either this Court under Article

136 of the Constitution or of the High Courts under Articles

226 and 227 of the Constitution to entertain a challenge to

the advance ruling pronounced by the Authority. The

reason for this view is that Articles 136, 226 and 227 of the

Constitution are constitutional provisions vesting

jurisdiction on this Court and the High Courts and a

provision of an Act of legislature making the decision of the

Authority final or binding could not come in the way of this

Court or the High Courts to exercise jurisdiction vested

under the Constitution. We may cite some authorities in

1

Page 17 support of this view. In Kihoto Hollohan v. Zachillhu and

Others (supra), the question raised before this Court was

whether Paragraph 6(1) of Schedule–X of the Constitution

providing that the decision of the Speaker or the Chairman

on the question of disqualification of a member of the

Legislature will be final would exclude judicial review under

Articles 136, 226 and 227 of the Constitution and this

Court held that the finality clause in Paragraph 6 of the

Schedule-X of the Constitution does not completely exclude

the jurisdiction of the Courts under Articles 136, 226 and

227 of the Constitution, though it may limit the scope of

this jurisdiction. In Jyotendrasinhji v. S.I. Tripathi and

Others (supra), this Court held that the provision in Section

245-I of the Income Tax Act, 1961, declaring that every

order of settlement passed under sub-section (4) of Section

245D shall be conclusive as to the matters stated therein

would not bar the jurisdiction of the High Court under

Article 226 of the Constitution or of this Court under Article

136 of the Constitution. Considering the settled position of

law that the powers of this Court under Article 136 of the

Constitution and the powers of the High Court under

1

Page 18 Articles 226 and 227 of the Constitution could not be

affected by the provisions made in a statute by the

Legislature making the decision of the tribunal final or

conclusive, we hold that sub-section (1) of Section 245S of

the Act, insofar as, it makes the advance ruling of the

Authority binding on the applicant, in respect of the

transaction and on the Commissioner and income-tax

authorities subordinate to him, does not bar the jurisdiction

of this Court under Article 136 of the Constitution or the

jurisdiction of the High Court under Articles 226 and 227 of

the Constitution to entertain a challenge to the advance

ruling of the Authority.

12.In a recent advance ruling in Groupe Industrial Marcel

Dassault, In re [2012] 340 ITR 353 (AAR)], the Authority

has, however, observed:

“….. But permitting a challenge in the High

Court would become counter productive since

writ petitions are likely to be pending in High

Courts for years and in the case of some

High Courts, even in Letters Patent Appeals

and then again in the Supreme Court. It

appears to be appropriate to point out that

considering the object of giving an advance

ruling expeditiously, it would be consistent

with the object sought to be achieved, if the

1

Page 19 Supreme Court were to entertain an

application for Special Leave to appeal

directly from a ruling of this Authority,

preliminary or final, and render a decision

thereon rather than leaving the parties to

approach the High Courts for such a

challenge. …”

We have considered the aforesaid observations of the

Authority but we do not think that we can hold that an

advance ruling of the Authority can only be challenged

under Article 136 of the Constitution before this Court and

not under Articles 226 and/or 227 of the Constitution

before the High Court. In L. Chandra Kumar v. Union of

India and Others (supra), a Constitution Bench of this Court

has held that the power vested in the High Courts to

exercise judicial superintendence over the decisions of all

courts and tribunals within their respective jurisdictions is

part of the basic structure of the Constitution. Therefore, to

hold that an advance ruling of the authority should not be

permitted to be challenged before the High Court under

Articles 226 and/or 227 of the Constitution would be to

negate a part of the basic structure of the Constitution.

Nonetheless, we do understand the apprehension of the

Authority that a writ petition may remain pending in the

1

Page 20 High Court for years, first before a learned Single Judge and

thereafter in Letters Patent Appeal before the Division

Bench and as a result the object of Chapter XIX-B of the Act

which is to enable an applicant to get an advance ruling in

respect of a transaction expeditiously would be defeated.

We are, thus, of the opinion that when an advance ruling of

the Authority is challenged before the High Court under

Articles 226 and/or 227 of the Constitution, the same

should be heard directly by a Division Bench of the High

Court and decided as expeditiously as possible.

13. The only other question which we have to consider is

whether we should entertain this petition under Article 136

of the Constitution or ask the petitioner to approach the

High Court under Articles 226 and/or 227 of the

Constitution. Article 136 of the Constitution itself states

that this Court may, “in its discretion”, grant special leave

to appeal from any order passed or made by any court or

tribunal in the territory of India. The words “in its

discretion” in Article 136 of the Constitution makes the

exercise of the power of this Court in Article 136

discretionary. Hence, even if good grounds are made out in

2

Page 21 a Special Leave Petition under Article 136 for challenge to

an advance ruling given by the Authority, this Court may

still, in its discretion, refuse to grant special leave on the

ground that the challenge to the advance ruling of the

authority can also be made to the High Court under Articles

226 and/or 227 of the Constitution on the self same

grounds. In fact, in Sirpur Paper Mills Ltd. v. Commissioner

of Wealth Tax, Hyderabad [AIR 1970 SC 1520] it has been

observed that this Court does not encourage an aggrieved

party to appeal directly to this Court against the order of a

Tribunal exercising judicial functions unless it appears to

the Court that a question of principle of great importance

arises. Unless, therefore, a Special Leave Petition raises

substantial questions of general importance or a similar

question is already pending before this Court for decision,

this Court does not entertain a Special Leave Petition

directly against an order of the tribunal.

14. In this Special Leave Petition, we do not find that a

substantial question of general importance arises nor is it

shown that a similar question is already pending before this

Court for which the petitioner should be permitted to

2

Page 22 approach this Court directly against the advance ruling of

the Authority. We accordingly dispose of this Special Leave

Petition granting liberty to the petitioner to move the

appropriate High Court under Article 226 and/or 227 of the

Constitution. We request the concerned High Court to

ensure that the Writ Petition, if filed, is heard by the

Division Bench hearing income-tax matters and we request

the Division Bench to hear and dispose of the matter as

expeditiously as possible.

SPECIAL LEAVE PETITION (C) No. 3318 of 2011 ,

SPECIAL LEAVE PETITION (C) No. 13760 of 2011,

CIVIL APPEAL No. 2996 of 20O8, CIVIL APPEAL No.

5839 of 2008, CIVIL APPEAL No. 7035 of 2011 , CIVIL

APPEAL No. 6987 of 2010 , CIVIL APPEAL No. 10064 of

2011, AND CIVIL APPEAL No. 11327 of 2011 ,

Delay condoned in Special Leave Petitions.

These Special Leave Petitions and Civil Appeals are

disposed of in terms of our order passed in Special Leave

Petition (C) No.31543 of 2011.

.…………………… .CJI.

(S.H. Kapadia)

.……………………… .J.

(A. K. Patnaik)

2

Page 23 New Delhi, ……………………… ..J.

July 30, 2012. (Swatanter Kumar)

2