A peep into Authority of Advance Rulings

V Sai Aditya

INTRODUCTION

The Indian Judiciary System dates back to the 18th century and there have been cases long pending of the past 10 – 15 years which are yet to be settled.  In the midst of all this, if an assessee’s file is trapped between the webs of such system it may land up like the fate of the earlier cases.  Further, the judiciary system is the result of the transactions and events that have already happened and is like an aftermath.  If an assessee, who has no idea about the taxability of the transaction, is about to enter into or wishes to obtain clarity on its taxability to avoid future long driven litigation, wants to do so, it might not be possible.  Therefore, the scheme of Advance Ruling was introduced by the Finance Act, 1993 in Chapter XIX-B of the Income-tax Act, 1961 (“Act”), which came into force with effect from June1st, 1993. The Authority isan independent adjudicatory body which has been entrusted with the power of giving advance rulings.  Accordingly, a high level body headed by a retired Supreme Court Judge has been set-up.

The Authority shall consist of a Chairman and such number of Vice Chairmen, Revenue Ministers and Law Members as the Central Government may by notification, appoint.  The qualifications and other conditions for the members are mentioned in section 245-O of the Act.

Chairman, who has been Judge of the Supreme Court
Vice Chairman, who has been Judge of High Court
Revenue Member from the Indian Revenue Service
Law Member from the Indian Legal Service
A Bench shall consists of the Chairman or the Vice Chairman and one Revenue Member and one Law Member
The Authority shall be located in National Capital Territory of Delhi and its benches shall be located at such places as the Central Government may, by notification specify.
APPLICABILITY:

The main purpose of the Authority is to provide Advance Ruling to an applicant.  Advance Ruling can be sought only for:

A transaction which has been undertaken or proposed to be undertaken by a non-resident applicant or,
Determination of the tax liability of a non-resident arising out of a transaction undertaken or proposed to be undertaken by a resident applicant with such non-resident
Determination of the tax liability of a resident applicant arising out of a transaction undertaken or proposed to be undertaken by the applicant and such determination shall include the determination of any question of law or of fact specified in the application;
Determination or decision 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;
Determination or decision by the Authority whether an arrangement, which is proposed to be undertaken by any person being a resident or a non-resident, is an impermissible avoidance arrangement and may be subjected to General Anti-Avoidance Rules (“GAAR”). Chapter X-A deals with impermissible avoidance arrangement.  The Chapter consists of section 95 which has come into effect from 1 April, 2016.
Under section 245N, advance ruling can be sought by the following applicants:

A non-resident who has undertaken or wishes to undertake a transaction;
A resident who has undertaken or wishes to undertake a transaction with a non-resident;
A resident who has undertaken or proposesto undertake one or more transactions of value of Rs.100 crore or more in total [vide Notification No. 73, dated 28-11-2014] (the eligibility conditions of a resident shall be specified by the Central Government by notification in the Official Gazette)
Any person (resident or non-resident), who wishes to know if the arrangement proposed to be entered into by him / her is an impermissible avoidance arrangement and may be subjected to GAAR (applicable from 1-4-2015)
APPLICATION TO AAR:

Therefore, the doors of the Authority are open to all.  Further, the application can be made on a question of law or on a question of fact.

Upon making an application, the Authority determines the tax liability arising out of a transaction mentioned above.

The application is to be made in quadruplicate and filed with the Authority along with the prescribed fee.  An option has been provided to the applicants to withdraw the application within 30 days from the date of the application.

Upon receipt of the application, the Authority has the power to wither allow or reject the application.  However, certain applications cannot be accepted by the Authority which have been listed in section 245R of the Act.

The Authority shall not allow the application where the question raised in the application:

is already pending before any income-tax authority or Appellate Tribunal, except in the case of a resident applicant mentioned in point (c) above, or any court;
involves determination of fair market value of any property;
relates to a transaction or issue which is designed prima facie for the avoidance of income-tax, except in the case of a resident applicant mentioned in point (c) above or in point (d)
An opportunity of being heard has to be granted to the applicant before rejecting the application.

The time limit within which the Authority is to pronounce the judgement is six months from the receipt of the application.

Some of the issues on which applications are files and rulings are frequently sought from the Authority are:

International taxation, i.e., application of Double Taxation Avoidance Agreements – Determination of a PE; taxation of royalty, fees for technical services; withholding taxes etc.
DTAA vs Indian Income –tax Act, 1961
The Authority, to a large extent helps the applicants foresee their income tax liability and the total outflow in terms of tax.  This in turn, helps in reducing the litigations in the country.  It is pertinent to note that the ruling passed by the Authority is binding on the applicant in respect of the transaction for which the ruling is sought.  In case, in the forthcoming years, there is a change in facts, the same ruling will not apply and the applicant cannot take shelter under that. The Ruling is also binding on the Commissioner of Income Tax, and the Income tax authorities subordinate to him, in respect of the applicant who had sought it and the transaction in relation to which it had been sought.

The rulings passed by the Authority can also be termed as void in certain cases which have been mentioned in section 245T of the Act.