Karnataka HC Says Third Parties Cannot Invoke Art. 226 Against GST Rulings, Dismisses BMRCL Challenge

The Karnataka High Court on 7 July held that a person who is neither the applicant nor the concerned tax authority in an advance ruling proceeding cannot challenge the ruling under Article 226 of the Constitution, as such rulings are binding only on the parties to the proceeding.

A Division Bench of Justices S.G. Pandit and K.V. Aravind dismissed Bangalore Metro Rail Corporation Limited's (BMRCL) writ petition challenging an order of the Karnataka Appellate Authority for Advance Ruling (AAAR), holding that BMRCL had no locus standi to question an advance ruling passed in proceedings to which it was not a party. It held:

“The petitioner, being a third party and neither the applicant nor the concerned authority, has no locus standi to challenge the order passed by the AAR or the AAAR by invoking Article 226 of the Constitution of India. The ruling rendered by the AAR or the AAAR is a decision in personam and binds only the applicant and the concerned/jurisdictional authority, and not any other party.”

BMRCL had entered into a contract with Bharat Earth Movers Limited (BEML) for the supply of 150 standard gauge intermediate metro rail cars. Under the agreement, BMRCL was required to reimburse the applicable Goods and Services Tax (GST) payable by BEML.

BEML subsequently approached the Authority for Advance Ruling (AAR) seeking clarification on the GST classification of the supply. The AAR initially held that the transaction constituted a composite supply. However, the Appellate Authority for Advance Ruling (AAAR) reclassified the different components of the contract and held that they attracted GST at rates ranging from 5% to 28%.

BMRCL challenged the AAAR order before the High Court, contending that the revised classification increased its financial liability since it was contractually required to reimburse GST payable by BEML.

The Court rejected the challenge, holding that Section 103 of the Central Goods and Services Tax Act, 2017 provides that an advance ruling is binding only on the applicant who sought the ruling and the concerned jurisdictional tax authority. It observed that such a ruling is a decision in personam and does not bind third parties. It also noted that the agreement between BMRCL and BEML did not specify the GST classification of the supplies or the applicable tax rate.

It held that the reference to reimbursement of “applicable GST” under the contract meant GST determined in accordance with law, including the rate applicable pursuant to the AAAR's ruling accepted by BEML. Therefore, the ruling did not create any additional contractual liability for BMRCL. The Bench observed:

“When the contract entered into between the petitioner and respondent No.4 does not provide for the classification of the supply of goods or services, or stipulate the applicable rate of GST, the question of the advance ruling rendered by the AAAR imposing any additional liability, pecuniary burden or civil consequence upon the petitioner does not arise.”

Further, the Bench held that accepting BMRCL's contention would require the Court to rewrite the contractual terms by incorporating GST classification and tax rate provisions that were not agreed upon by the parties. It noted:

“Such an exercise would, in effect, amount to amending or rewriting the terms of the contract, which is impermissible in exercise of jurisdiction under Article 226 of the Constitution of India.”

Accordingly, the High Court dismissed BMRCL's writ petition, holding that it was not maintainable as the corporation lacked locus standi to challenge the AAAR ruling.

For Petitioner: Annamalai S., Advocate

For Respondent: Jeevan J. Neeralgi, Senior Standing Counsel for R1 to R3 and Ravi Raghavan, Advocate for R4