In this article, the authors, besides giving a brief overview of the
advance ruling process, have also discussed various important technical
issues which confront an applicant seeking an advance ruling from the
AAR, such as meaning of words/phrases ‘proposed transaction’, ‘pending
before any income tax authority’, AAR’s discretionary powers to reject
an application and grounds for judicial review etc.
A. Introduction & Objective
The
scheme of advance ruling was introduced from 1st June 1993 in Chapter
XIX-B of the Income-tax Act, 1961, for the benefit of non-residents to
enable them to obtain an advance ruling from the Authority for Advance
Ruling [AAR] so that they are relieved of uncertainty with regard to
taxability of income arising out of their business /investment,
activities or transaction undertaken or proposed to be undertaken in
India.
This provisions has now been extended to residents with
regard to taxability of income arising out of one or more transactions
valuing Rs. 100 crore or more.
The most striking feature of the
Indian system is that the proceeding is adversarial (in most countries,
proceedings are negotiated), which makes the decision binding on the
applicant and the revenue authorities. In most countries, the advance
rulings are delivered by the revenue authorities and not by a judicial
or quasi-judicial body. Therefore, these rulings are largely considered
to be nonbinding. However, in India the AAR has been set up as a
high-level quasi-judicial authority, which has been granted statutory
recognition. Owing to the binding nature of rulings on the applicant as
well as the revenue, this scheme is intended to significantly faster
dispute resolution process as compared to normal litigation process.
Constitution
The AAR is an independent quasi-judicial body. An AAR Bench, generally, comprises of three members:
The Chairman, who is a retired judge of the Supreme Court or the Vice-Chairman who has been a Judge of a High Court;
One
Revenue member from the Indian Revenue Service who is a Principal Chief
Commissioner, Principal Director General, Chief Commissioner or
Director General of Income-tax; and
One Law member from the Indian Legal Service who is an Additional Secretary to the Government of India.
Scope of Advance Ruling
Generally, applicants may raise any question which relates to tax liability –
Both ‘questions of law’ as well as ‘questions of fact’ can be raised before the AAR.
Questions can pertain to both concluded transactions as well as anticipated transactions.
Hypothetical questions cannot be raised before AAR.
Applicant can raise more than one question in one application.
The
questions may relate to any aspect of the applicant’s liability
including international aspects and aspects governed by the Double Tax
Avoidance Agreements (‘DTAA ’).
Advantages of AAR
Assurance to non-resident investors to obtain the ruling without undue delay and with certainty regarding its tax implications.
Best suited to sort out complex issues of taxation including those concerning interpretation of the applicable DTAA .
Rulings
binding on the applicant as well as the revenue, not only for one year
but for all the years unless there is a change in facts/ law.
Facility to modify or reframe the questions, agreements or projects till the time of hearing.
Confidentiality of proceedings is maintained.
Protracted hearing of the application is avoided.
Significantly faster dispute resolution process as compared to the normal litigation process.
The
AAR is by law mandated to pronounce its ruling within 6 months as
compared to more time involved even at the second level appellate
tribunal level.
B. Some Important Issues
1. Meaning of Advance Ruling – Section 245N
U/s. 245N(a)(i), a non-resident applicant can seek a ruling in relation to
a transaction undertaken or proposed to be undertaken by a non-resident
applicant. U/s. 245N(a) (ii), a resident applicant can seek a ruling in
relation to determination of the tax liability of a non-resident
arising out of a transaction undertaken or proposed to be undertaken
with such non-resident.
The words ‘tax liability’ has not
been a part of subclause (i) as compared to sub-clause (ii) & (iia)
of section 245N. While deciding on maintainability of application u/s
245N, a doubt had arisen as regards admissibility of application in case
of Umicore Finance [2009] 184 Taxman 99, since, on facts, it
appeared prima facie that the determination sought by the non-resident
applicant was in relation to the tax liability of an Indian Company. The
AAR held in favour of the assessee, as follows:
“6. It seems to us that the application is maintainable having
regard to the wider language of sub-clause (i) of section 245N(a) in
contrast with the language employed in sub-clause (ii). There is no
specific requirement in sub-clause (i) that determination should relate
to the tax liability of a non-resident. Going by the averments of
the applicant, it is clear that the capital gain tax issue arising in
the case of the acquired Indian company has a direct and substantial
impact on the applicant’s business in view of the stipulations in share
purchase agreement. Subclause (i) has to be construed in a wider sense and moreover a remedial provision shall be liberally construed.
We are, therefore, of the view that the question raised by the
applicant falls within the definition of ‘advance ruling’ under section
245N(a) of the Act. Accordingly, the application is allowed under
section 245R(2) and posted for hearing on merits on 11-8-2009.”
Previously, in case of Connecteurs Cinch, S.A. [2004] 138 Taxman 120, the application was rejected u/s. 245N(a), since the applicant sought ruling on tax liability of its Indian subsidiary,
which was considered as not a consequence of the transaction undertaken
or proposed to be undertaken by the non-resident applicant.
However, while interpreting the words ‘proposed transaction’
in case of Trade Circle Enterprises LLC [2014] 42 taxmann.com 287
(AAR), it has been held that the ruling of Umicore Finance is not
applicable. The AAR while rejecting the application as incompetent, held
as follows:
“…. In order to bring in the question within the
scope of section 245N of the Act, there has to be either a transaction
undertaken or proposed transaction to be undertaken by the non-resident
applicant. This is not the case in the present application. “Transaction” or “proposed transaction” are not the same as mere intention.
In this case the applicant intends to invest in a 100 per cent
subsidiary company in India which in turn intends to set up a consortium
by way of partnership firm with the Indian company and the partnership
firm propose to acquire the undertaking of the Indian company which is
stated to be eligible for deduction u/s 80IA of the Income-tax Act,
1961. We are of the view that the 100 per cent subsidiary company has to
exist in reality and the partnership firm has to be set up in order to
make transaction or proposed transaction of the applicant with the
Indian company/subsidiary. The question relates to proposed setting
up of the subsidiary and the partnership firm with the Indian company
and as to whether the subsidiary or the partnership firm will be
eligible to 100 per cent deduction u/s 80IA of the Income-tax Act. The
ruling of this Authority in the case of Umicore Finance, In re [2009]
