Imagine you are a small business owner operating a manufacturing facility. You don’t know if your product is subject to the 5% or 18% GST rate. So, you approach the Authority for Advance Ruling (AAR), like many law-abiding taxpayers, in the hopes of obtaining clarification and averting further disputes. According to the AAR, your product draws 5%. You start billing and filing your returns appropriately, relieved.
A year later, during a departmental audit, the officer informs you that your reliance on the AAR is “misconceived.” Worse, he points out that higher judicial forums, including the Appellate Tribunal and High Courts, have already decided differently. In addition to penalties and interest, you are now required to pay differential tax. Your first thought is incredulity: Why am I being punished for adhering to this ruling if the government itself issued it?
This actual case brings out a basic fact under GST law: Advance Rulings are not automatically binding. They are only binding on the applicant who applied for them and the officer having jurisdiction over that applicant. Beyond that, they carry no additional binding force of law.
The Law on Binding Effect: Section 103 CGST Act
The Central Goods and Services Tax Act, 2017 clearly spells out the scope of Advance Rulings. Section 103(1) states:
“The advance ruling pronounced by the Authority or the Appellate Authority under this Chapter shall be binding only-
(a) on the applicant who had sought it in respect of any matter referred to in sub-section (2) of section 97 for advance ruling;
(b) on the concerned officer or the jurisdictional officer in respect of the applicant.”
This wording is unambiguous. The binding effect is strictly confined to the applicant and the concerned officer. An Advance Ruling does not become law of the land. As a result, it cannot supersede legal precedents, statutes, or third parties.
Yet in practice, we often see departmental orders or even taxpayers themselves citing an AAR or AAAR Rulings to support or attack a classification, an exemption claim, or a valuation method. This misplaced reliance is not just legally weak but also exposes taxpayers to unnecessary risk.
Case Law Clarity: Sarkar Diesel & Anr. v. Deputy Commissioner, State Tax (2024)
The Calcutta High Court in Sarkar Diesel & Anr. v. Deputy Commissioner, State Tax, Krishnagar Charge & Ors [2024 (7) TMI 374] put the issue beyond doubt. The Court held:
• Advance Rulings pronounced in one State are not binding on the tax department of another State.
• They also do not bind third-party taxpayers.
• Reliance placed on such rulings in disputes involving other assessees or jurisdictions is legally unsustainable.
The Court reasoned that every AAR operates only within its statutory framework, which is inherently limited. Binding force flows from law, not from administrative convenience. Thus, unless you are the original applicant or the jurisdictional officer dealing with that applicant then the AAR has no binding effect on your case.
This aligns with the statutory scheme of Section 103. To quote the Court: “Advance rulings pronounced in one particular State are not binding either on the department of another State or on third-party assessees.”
Higher Judicial Pronouncements Always Prevail
Another common misconception is that if an AAR exists on an issue, it remains persuasive until expressly overturned. This is not true. Once a higher judicial forum such as the Appellate Authority for Advance Ruling (AAAR), the CESTAT, a High Court, or the Supreme Court pronounces on the issue, that decision overrides any contrary AAR.
The Supreme Court in Union of India v. Kamlakshi Finance Corporation Ltd. (1991) made it crystal clear:
“The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not ‘acceptable’ to the department and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court.”
This dictum applies with full force to GST today. An AAR cannot prevail over binding judgments of higher forums. If an assessee or department officer relies on an AAR that has been effectively neutralised by appellate rulings, they are ignoring the very principle of judicial discipline.
Why Are AARs Still Used by Taxpayers?
There are multiple rationales for it:
1. False sense of security: Taxpayers assume that an AAR has universal weightage because it is issued by a statutory body under the GST.
2. Speed and accessibility: Obtaining an AAR is less expensive and faster than waiting for a High Court ruling.
3. Lack of awareness: Many small businesses and even officers are not fully aware of Section 103’s limitation.
4. Convenience – An AAR can be used to justify a stand before auditors, even if it doesn’t ultimately hold in law.
But this ease of use frequently backfires. Reliance on an AAR becomes not only inappropriate but also dangerous. You see once a court’s decision on the matter is rendered that contradicts it, then it leads to subjecting taxpayers to demands, interest, and penalties.
Human Impact: A Double-Edged Sword
Let’s return to the manufacturer that we had in mind earlier. He was now held liable for tax arrears even though he acted in good faith and relied on an AAR ruling. He believes this to be betrayal: why ask me to approach the AAR if its rulings don’t protect me?
•Anxiety about compliance: Taxpayers often feel as though they are torn between two opposing authorities.
•Litigation costs: Once disputes arise, small businesses are dragged into prolonged litigation they cannot afford.
• Erosion of trust: Despite being intended to streamline indirect taxation, the GST system starts to seem capricious and unpredictable.
• Unclear and Contradictory Rulings: Sometimes the AAR decisions are either contradictory across states or misinterprets law or is even opposite to what the law states.
This demonstrates why communication clarity is just as crucial as the law. Taxpayers should be informed that AARs are not a replacement for higher court precedents. And as for tax officers, they should not cite pointless AARs decisions to bolster tax demands.
Lessons for Taxpayers and Officers
1. Check Section 103 first – Always verify whether the AAR cited is binding in your case. If you are not the applicant, chances are it isn’t.
2.Prioritise judicial precedents – If there is a High Court or Tribunal ruling, that takes precedence over any AAR.
3. Beware of outdated reliance – An AAR issued before a higher court decision cannot survive against it.
4. Know your remedies – If you disagree with an AAR that binds you as an applicant, your remedy then lies in appeal, not in mere blind reliance.
5. Educate stakeholders – Chartered accountants, lawyers, and consultants must explain these nuances clearly to clients, reducing the gap between perception and reality.
Conclusion
Advance Rulings were introduced under GST with a noble aim: to provide clarity, reduce litigation, and build taxpayer confidence. However, their limited binding effect under Section 103 means they cannot be stretched beyond their statutory scope.
As the Calcutta High Court held in Sarkar Diesel (2024), such rulings cannot bind third parties or departments in other States. And as the Supreme Court reminded us in Kamlakshi Finance (1991), judicial discipline demands that higher appellate rulings prevail.
For taxpayers, the lesson is clear: do not anchor your compliance strategy solely on Advance Rulings. Treat them as guidance, not gospel. The real safety lies in keeping track of higher judicial pronouncements and aligning business practices accordingly.
Ultimately, the GST regime must mature into a system where clarity is not a privilege but a norm. Until then, both taxpayers and officers must remember: convenience cannot override law, and discipline in following judicial hierarchies is the bedrock of tax certainty.