By Aakanksha Mishra, Gujarat National Law University.

In this era of liberalized international trade and increasing globalization, the need for good tax laws and good tax administration is increasingly felt by modern economies. The Government of India has entered into several DTAAs to resolve taxation related problems arising out of cross border trade and investment. The conflicting interplay between the provisions of Income tax Act, 1961 and the DTAAs often lead to uncertainty in the taxing regime and thereby hinder entry of foreign players into Indian markets. Thus the taxpayers would like to be sure of the tax implications of their proposed transactions and in that context the facility of Advance ruling in interpretation of tax laws would go a long way in making up their mind for investment in a particular country. With a view avoid time consuming and expensive litigation in respect of disputes regarding assessment of income-tax liability in the cases of non-residents and in cases of residents having transactions with non-residents, and public sector companies, a Scheme of Advance Ruling in India was incorporated into Chapter XIX-B of the Income-tax Act, 1961 vide Finance Act of 1993. The scheme enables the applicants to obtain, in advance, a binding ruling from the Authority for Advance Rulings on issues which may arise in determining their tax liabilities.

Section 245N(B) of the Income-tax Act lays down various categories of applicants.

  1. Any non-resident person whether individual, company, firm, association of persons or other body corporate can make an application for seeking an advance ruling in regard to his/its tax liability.
  2. A resident who has undertaken or proposes to undertake a transaction with a non-resident may seek a ruling for determination on any question of law or fact in relation to such transaction involving the tax liability of the non resident.
  3. A resident falling within notified categories may seek 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 fact relating to such computation of total income.

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The applicant may seek advance ruling by making an application to the Authority in the prescribed form i.e. Form No. 34C, 34D or 34E, as the case may be in the manner indicated therein and following the procedure as prescribed in AAR (Procedure) Rules, 1996. The application including the documents annexed thereto shall be signed in the manner indicated in the prescribed form. Section 245R of the Income-tax Act, 1961 lays down the procedure required to be followed on receipt of the application. Under the said provision a copy of the application is forwarded to the jurisdictional Commissioner of Income-tax calling upon him to furnish the relevant records. The Authority may, after examining the application and the records called for, by order, either allow or reject the application. Discretion is implicit in Section 245R(2) to accept or reject such an application.[1] However, no application can be rejected unless an opportunity has been given to the applicant of being heard. In case the Authority decides to proceed with the application, an opportunity of hearing is given both to the jurisdictional Commissioner of Income-tax as well as to the applicant. The applicant is entitled to represent his case before the Authority either personally or through an authorised representative e.g., a Chartered Accountant, Advocate, any other tax practitioner.

 Non-resident applicants and resident applicants having transactions with a non-resident can apply for advance ruling even before taking up a transaction in India (i.e. proposed transaction) or in respect of a transaction, which has already been undertaken by them. Public sector companies can seek advance ruling only when an issue relating to computation of their total income is pending before any income-tax authority or the Income-tax Appellate Tribunal.

 The applicant may withdraw his application within 30 days from the date of filing the application, and thereafter only with the leave of the Authority. The AAR within six months of the receipt of a valid application should pronounce its’ ruling. However this time limit is directory in nature.

The ruling is binding in respect of the transaction in relation to which ruling has been sought  on the Commissioner and the income-tax authorities subordinate to him in respect of the applicant as well as on the applicant who has sought it. Ruling in any other case cannot displace the binding character of advance ruling rendered between the assessee and the revenue.[2]

 Since the advance ruling is binding on the applicant he cannot challenge it vide appellate proceedings. However, the applicant can invoke the writ jurisdiction of the High Courts in terms of Articles 226 of the Constitution or can move the High Court’s supervisory jurisdiction under Article 227.[3] According to sub-section (2) of section 245S of the Income-tax Act, the advance ruling shall cease to be binding where there is a change in law or facts on the basis of which the advance ruling was pronounced. Under Section 245T of the Income-tax Act, 1 961 , an advance ruling becomes void where the Authority finds, on a representation made to it by the Commissioner of Income-tax or otherwise, that an advance ruling pronounced by it has been obtained by the applicant by fraud or misrepresentation of facts. In such a case all the provisions of the Income-tax Act will apply as if the advance ruling had never been made.

The advance ruling can be sought on any question of law or fact specified in the application in relation to a transaction which has been undertaken, or is proposed to be undertaken, by the non-resident applicant. However, an advance ruling cannot be sought where the question

  1. Is already pending in the case of the Non-resident applicant before any income-tax authority, the Appellate Tribunal or any court. For example, where question on which ruling is sought before AAR by payee is identical to the question that is pending before the appellate authority at instance of payer, the application is not maintainable by virtue of proviso to Section 245R(2).[4]
  2. Involves determination of fair market value of any property
  3. Relates to a transaction which is fashioned prima facie for avoidance of income-tax. The expression ‘transaction designed to avoid income tax’ within the meaning of clause (iii) of proviso to Section 245R(2) covers only such transactions which are sham or nominal or which would lead to inescapable inference of a contrived device solely with a view to avoid tax. [5]

Advance rulings are most commonly sought under the following circumstances-

  1. Use of DTAAs in tax planning, conflict between DTAAs and domestic tax legislation
  2. Determination of Permanent establishment (mostly in case of BPO and Liaison offices)
  3. Transfer of assets into and out of tax jurisdictions vis-à-vis Indian taxation.
  4. Taxation of services, royalties, technical fees and income from supply of labour, equipments etc.
  5. Taxation of Foreign Investment Institutions, investment funds, venture capital funds, offshore funds, financial instruments and derivatives, cross-border leasing.
  6. Taxation of e-commerce.
  7. Problems relating to withholding of tax.

The primary benefits of an advance ruling are that it helps the applicant in planning their income-tax affairs well in advance, to bring certainty in determination of income-tax liability and thereby avoid protracted litigation. It also helps the public sector companies in resolving their disputes relating to computation of total income pending before any income-tax authority or the Income-tax Appellate Tribunal.

[1] Microsoft Operations Pte Ltd, In re, 328 ITR 408 (AAR- New Delhi)

[2] Prudential Assurance Co. Ltd v. DIT (International Taxation), 324 ITR 381 (Bom)

[3] UAE Exchange Centre Limited v. Union of India, 313 ITR 94( Delhi)

[4] Foster Pty. Ltd, In Re, [2011] 202 Taxmann 155 (AAR- New Delhi)

[5] Star Television Entertainment Ltd, In Re, [2010]  188 Taxmann 206, (AAR- New Delhi)

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