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Authority for Advance Rulings

1. Introduction

   1. The Scheme of Advance Ruling is an unique innovation in the field of tax jurisprudence. At present, the scope is limited to non-residents, residents having transactions with non-residents and public sector companies as notified in the official Gazette.
       

   2. The Government of India has constituted an Authority for Advance Rulings (AAR) which functions under the Ministry of Finance. This institution is headed by retired judge of the Supreme Court as the Chairman and two other technical members.
       

   3. The setting up of an Authority for Advance Rulings (AARs) with the insertion of a new Chapter XIX-B (sections 245N to 245V) in the Income-tax Act, w.e.f. 1st June, 1993, is an attempt to enable the non-residents or residents in their dealings with non-residents, to obtain advance rulings on issues on facts or law, within six months of the application and such rulings are binding both on the applicant as well as the Revenue. Similar legislation has been introduced and AARs are set up for indirect taxes. The Customs Act, 1962 and Central Excise Act, 1944 were covered by provisions relating to AARs by the Finance Act, 1999 while the Service Tax was covered by Finance Act, 2003 by introducing sections 96A to 96-I in the Finance Act, 1994.
       

2. Advance Rulings : Meaning – Section 245N

   Advance Ruling means resolving a controversial tax question, whether of facts or of law, in relation to transaction which has been undertaken or proposed to be undertaken.

   The following main features emerge;

   1. A determination of a question by the Authority.

   2. The question could be a question of law or fact.

   3. The question is the one which is specified in the application made by the applicant.

   4. The application has to be in relation to the transaction of the Applicant – Whether already undertaken or to be undertaken in future.
       

3. Applicant – Section 245N(6)

   Who can apply?

   1. An "Applicant" means any person who is a non-resident or a resident as notified by the Central Government making an application. So, only a non-resident and notified residents can be an Applicant. Public sector companies have been notified u/s. 245(b)(iii) vide notification No. 725 (E) (E) dated 3-8-2000 – (2000) 245 ITR (St.) 5

   2. A non-resident means a person who is not a "resident" (section 2(30) of the Act), and for the purposes of sections 92, 93 and 168 includes a person who is not ordinary resident within the meaning of sub-section (6) of
      section 6.

   3. A "resident" is defined to mean a person who is resident in India within the meaning of section 6 of the Act.

   4. Section 245N does not stipulate in specific terms that applicant should be a non-resident as on the date of application.

   5. Person Returning to India, can obtain the Advance Ruling for the period he is Resident but not ordinary Resident.
      The Authority has in Advance Ruling No. P-5 of 1995 (1997) 223 ITR 379 and Advance Ruling P-12 of 1995 (1997) 228 ITR 61 has held that a ruling with respect to the tax liability of a person returning to India and becoming resident and not ordinary resident is maintainable.

   6. The non-resident status of the Applicant is to be determined with reference to the year preceding the financial year in which the application is submitted.

   7. The Authority for Advance Ruling has in the case of Robert W. Smith (1995) 212 ITR 275 and in the case of Monte Harris (1996) 218 ITR 413 held that it would be very difficult to enforce the condition that an applicant is a non-resident at the time of making an application as the residential status would be determined on the basis of his stay in India throughout the previous year. Accordingly, if a person is non-resident in the previous year immediately preceding the previous year in which the application is made, the application would be maintainable.

   8. P. No. 20 of 1995 - [1999] 237 ITR 382 (UK)
      For maintainability of application, the Applicant should have been non-resident in previous year preceding financial year in which application is filed.

   9. Steffen, Robertson and Kirsten Consulting Engineers and Scientists vs. CIT- [1998] 230 ITR 206 - (South Africa)
      A foreign company entered into collaboration agreement with an Indian company. The agreement stipulated that foreign company would not be liable to pay any taxes in India and that Indian company was liable to pay tax which may have to be paid by foreign company. As the foreign company was bound to file returns and pay advance tax, determination of question whether income accrued or arose to it in India would affect it. Therefore foreign company was entitled to file application for advance ruling.
       

4. Application for Advance Ruling – Section 245-O

   1. The provisions relating to filing of the application are contained in Rule 10 of the Procedure Rules.

   2. On a combined reading of the Act, the Rules and the Procedure Rules, the following procedure emerges regarding the application.

      1. An Applicant has to make the application in Form No. 34C, stating the question on which Advance Rule is sought.

      2. The application, in quadruplicate, should be presented in the prescribed form (Form No. 34C) either by the applicant in person or by an authorised representative or may be sent by registered post to the Authority.

      3. The application and the accompanying annexures may be neatly typed in one side of plain white paper of A-4 size (210 x 297 mm) leaving a minimum margin of 30 mm on all the four sides and may be duly indexed and paged.

      4. Only photocopies of the documents on A-4 size may be enclosed with the application except when a document cannot be legibly reduced to A-4 size on photocopier and, in the latter case, it should be folded to A-4 size.

      5. All copies of the application along with annexures and documents may have loose sheets stapled on the left hand corner. These copies need not be in the form of paper books.

      6. The application has to be in quadruplicate and can be filed in Hindi or English (Practically it is advisable to send five copies of the application). [Rule 3].

      7. The application has to be verified by the Applicant in the prescribed manner. If signed by a Constituted Attorney, a copy of the Power of Attorney and an affidavit setting out the unavoidable reasons which entitles him to sign is required to be attached.

      8. The application has to be filed by the applicant or by an authorised representative to the secretary or an officer authorised by him or the application can also be sent by registered post addressed to the secretary, Authority for Advance Rulings, New Delhi.

      9. If the Applicant is not assessed to tax in India, he shall indicate in Annexure-I to the application;

      10.  

   • his head office in a country other than India;• place where his office and residence are located or likely to be located in India; and• the name and address of his representative in India, if any, authorised to receive notices and papers and act on his behalf.

5. Questions on which Advance Ruling can be sought

   1. 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, advance ruling cannot be sought where the question is already pending in the case of the applicant before any income tax authority, the Appellate Tribunal or any court; or
      Involves determination of fair market value of any property; or
      Relates to a transaction which is designed prima facie for avoidance of income tax.
       

   2. A ruling can also be sought at the stage of assessment when the matter regarding computation of income is pending before the Assessing Officer or before the Commissioner of Income-tax (Appeals) or before the Appellate Tribunal. However, such a ruling can be sought only by a resident applicant notified by the Central Government. (Public sector undertakings have been notified).
      Dr. Rajnikant R. Bhatt vs. CIT - (1996) 222 ITR 562
      As the Applicant had filed his return of income subsequent to the filing of his application before AAR, the question raised before the AAR was not pending before any income tax authority on the date of application. The application was therefore maintainable.
       

   3. Proviso to clause (ii) of sub-section (2) of section 245R specifies that the Authority shall not allow the application where the question raised in the application involves determination of fair market value of any property. Accordingly, where an application involves the determination of value of an asset, the said application would not be allowed to be raised before the Authority.
       

   4. As per clause (iii) of proviso to section 245R(2), the Authority shall not allow the application where the question raised in the application 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 specified by the Central Government. In case of Natwest (1996) 220 ITR 377, the Authority has held that the application was liable to be rejected as the questions raised in the application were prima facie designed for avoidance of tax.
       

   5. Dljmb Mauritius Investment Co.vs. CIT – (1997) 228 ITR 268 -– (Mauritius)
      The Applicant was a special purpose vehicle to pool resources for investments in India, and therefore entitled to the benefits of Indo-Mauritius treaty. The applicant had given explanations as to why it was necessary to channel all the funds through a single entity and as to the several difficulties faced in organizing a company in India for the purpose. It was not a device to avoid tax. Therefore, the application was maintainable.
       

6. Withdrawal of Application – Section 245Q(3)

   The Applicant may, however, withdraw the application within 30 days of making the application. An Applicant is not permitted to withdraw the application after this period or else the Applicant would be at liberty to withdraw the same any time during the pendency of the proceedings, should he feel at any stage that the ruling is likely to adversely affect him.
    

7. Authorised representative

   The applicant is entitled to represent his case before the Authority either personally or through an authorised representative. If the applicant desires to be represented by an authorised representative, a duly authenticated document authorising him to appear for the applicant should be enclosed.
    

8. Payment of fee

   The application should be accompanied by a fee Rs. 2,500/- (two thousand five hundred Indian rupees) through a bank draft drawn in favour of the 'Authority for Advance Rulings' payable at New Delhi.
    

9. Time limit for pronouncing the Advance Ruling?

   The advance ruling is required to be pronounced by the Authority within six months of the receipt of the application.
    

10. Binding nature of Advance Ruling

    Advance ruling pronounced by the Authority would be binding in respect of the transaction(s) in relation to which ruling has been sought:

    • on the Commissioner and the income tax authorities subordinate to him in respect of the applicant; and

    • on the applicant who had sought it.

    Rulings pronounced by the Authority are binding only on the applicant who has sought such ruling and with respect to the question raised before the Authority and the Commissioner and his subordinates. Accordingly, Rulings pronounced by the authorities would not be binding in case of any other assessee or the departmental authorities. However, such rulings would have persuasive value and may be relied on by the Authority itself or by the applicant /department in their cases.
     

11. Advantages of the scheme of Advance Ruling

    Some of the advantages of seeking rulings from the authority are:

    1. The non-resident investor can be sure of its liability towards income-tax even before the start of investment in India. Hence, it can mould its investment plans accordingly and it would be able to avoid long-drawn litigation.

    2. The Authority for Advance Ruling is best suited to sort out complex issues of taxation including those concerning Double Taxation Avoidance Agreements (DTAA) which arise as a result of differences of opinion between the tax collectors and the tax-payers.

    3. The rulings of the Authority are binding on the applicant as well as the Commissioner of Income-tax and authorities below him, not only for one year but for all the years unless the facts or the law change; therefore, having obtained the ruling on a given set of facts the tax-payer may be sure about his tax liability in future.

    4. The Authority is to pronounce its ruling within six months of the receipt of the application. This enables the investor to obtain the ruling and draw up the details of his transactions without undue delay on this account and with full certainty regarding its tax implications.

    5. The statute does preclude the Authority, if the circumstances so warrant, from allowing the applicant to modify or reframe the questions, agreements or projects till the time of hearing. Such a facility is generally not available before other courts or tribunals.

    6. Under the rules, the proceedings before the Authority are not open to the general public. Confidentiality of the proceedings is maintained by the Authority as contents of the application are not revealed to any unauthorised person. Thus, there is no danger of the business secrets of the applicant being leaked out to its rivals or others.

    7. Protracted hearing of the application is avoided. If a complicated issue of law or fact is not involved and the point of view put forward by the applicant is acceptable, a ruling will be pronounced by the Authority without personal hearing. In other cases, the applicant, if he so desires and, if considered necessary, a representative of the Department will be heard and a reasoned ruling will be given by the Authority in writing.
        

12. Power to rectify a ruling pronounced by it

    As per section 245U, the Authority shall be deemed to be a Civil Court. Accordingly, it would have inherent powers to rectify a ruling pronounced by it. Further, Rule 19 of the Authority for Advance Ruling (Procedure) Rules, 1996 also permits the Authority to rectify any mistake apparent from record. The Authority can rectify its ruling prior to the Ruling being given effect to by the Assessing Officer. Further, no rectification can be carried out without issuing a notice to the applicant or the Commissioner of being heard.
     

13. Conclusion

    The scope of Advance Ruling has been extended by the Central Government to now include public sector companies as defined in section 2 (36A) of the Act and person seeking advance ruling with regard to tax liability of non-resident arising out of the transaction undertaken or proposed to be undertaken by him with a non-resident. [Notification No.10965 (F.No.153/85/98-TPL) dated 21-6-1999 – reported in 105 Taxman (S4) 1]. Further, the Finance Bill, 1999, introduced the scope of Advance Ruling under the Indirect Taxes, in terms of Chapter VB in the Customs Act and Chapter IIIA in the Central Excise Act, wherein the provisions are similar to the provisions relating to Advance Ruling in the Income-tax Act. Similarly the Service Tax was covered by Finance Act, 2003.

    We hope the government will further widen the scope of Advance Ruling Authority and Advance Ruling Authority will do their best to the satisfaction of all the parties who approach them, so that the citizens can approach the government to increase the number of Advance Ruling Authority. It was the success of Income Tax Appellate Tribunal that made government to set up various other Tribunals, on the basis of performance of Income Tax Appellate Tribunal. As most of the cases before the Authority for Advance Rulings are from Mumbai, it is desirable to provide at least one Bench of Authority for Advance Rulings at Mumbai. Similarly the authority should also camp at other Centres like Chennai and Kolkata to be more accessible to assessee. We hope they will excel in their performance, which can make the government to widen the power and scope of Advance Ruling Authority. We firmly believe that, it is only professionals who can send the suggestions objectively without any fear and favour, therefore, professional bodies and professionals, collectively should send the suggestions to government, which will be in the interest of nation, which may help the government to reduce the tax evasion. We therefore strongly feel, that the professionals have responsive role in the next millennium.
     

14. Further Information
    Request for application forms may be sent by mail

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