PURPOSE OF THE AUTHORITY FOR ADVANCE RULINGS (‘AAR’)
The Authority for Advance Rulings (‘AAR’), gives a ruling to : –
- a Non-resident ; or
- Specified resident
relating to transaction which is
- undertaken or
- a future
This brings upfront clarity with regard to the taxability of income of applicant.
This scheme seeks to reduce potential disputes between
the Income-tax authorities and the taxpayers.
The provisions of law pertaining to AAR are as follows : –
- Chapter XIX – B – Section 245N to 245V of the Income Tax Act, 1961;
- Rules 44E and 44F of the Income-tax Rules,1962 ; and
- the Authority for Advance Ruling (Procedure) Rules, 1996 [‘Rules’].
ILLUSTRATION – 1
MNC Ltd. UK, intends to sell goods to IMI Private Limited, an Indian company. They are not sure whether the income arising from such sale would be taxable in India. Can MNC Ltd obtain an AAR Ruling ?
Authority for Advance Rulings, gives a ruling to a non-resident relating to transaction which is proposed to be undertaken. Hence, MNC Ltd. UK can obtain an AAR Ruling
ILLUSTRATION – 2
XYZ Ltd UK, supplied software in FY 2016-17 to IMI Private Limited, an Indian company ? There are no income tax proceedings pending against XYZ Ltd UK, in respect of any transaction. Can they obtain an Advance Ruling ?
The Authority for Advance Rulings (‘AAR’), gives a ruling to a non-resident relating to transaction which has been undertaken provided certain conditions are satisfied. Hence, XYZ Ltd UK can obtain an AAR Ruling.
ILLUSTRATION – 3
In Example (2) above, can IMI Private Limited, an Indian company obtain an Advance Ruling ?
IMI Private Limited can obtain an AAR Ruling, provided it falls within the definition of “specified person”.
IMPORTANCE OF AAR (Authority for advance rulings)
DEAL WITH UNDESIRABLE IMPACT OF GAAR
Introduction of General Anti-Avoidance Regulations (‘GAAR’), would also lead to an increase in uncertainty for the taxpayers, and therefore, a greater demand for advance rulings. The reason is that GAAR, in the form it is generally incorporated to tax laws, has the potential to be applied by tax officers to genuine transactions, which are entered for legitimate business purpose
ADVANTAGES OF AAR (Authority for advance rulings)
ASCERTAIN TAX IMPLICATIONS PRIOR TO TRANSACTION
AAR enables the non-residents, to ascertain the income tax liability of a proposed transaction, beforehand (i.e, even before making an investments or entering into any actual transactions in India). Hence, the non-resident can plan its investment to avoid long-drawn litigation/know the tax cost of dealing with Indian parties;
ASCERTAIN TAX IMPLICATIONS FOR A RESIDENT APPLICANT
Further, a resident applicant can determine the tax liability of non-resident with whom he may transact.
TIME BOUND RESOLUTION
The Authority is to pronounce its ruling
within a statutory time limit of six months of the receipt of the application,
thus providing a speedy resolution instead of long term litigations.
COMPLEX ISSUES RESOLUTION
Complex issues of Income-tax
including those concerning double taxation avoidance agreements (DTAA)
where a difference in opinion exists can be resolved
The rulings of the Authority are binding on the applicant as well as the Commissioner, and the income-tax authorities subordinate to him.
CONTINUITY OF RULING TO FUTURE YEARS
Once the ruling has been obtained on a given set of facts the taxpayer may be sure about his liability not only for one year but for all the years covered under the transaction unless there is a change in the facts or law.
COMPOSITION OF THE AAR (Authority for advance rulings)
The AAR constituted by Central Government shall consist of : –
- Chairman, who has been a Judge of the Supreme Court or the Chief Justice of a High Court or Judge of a High Court for at least seven years.
- Vice-chairman, who has been a judge of High Court;
- Member from the Indian Revenue Service(IRS), who is qualified to be a member of the Central Board of Direct Taxes or member from the Indian Customs and Central Excise Service, who is, or is qualified to be, a member of the Central Board of Excise and Customs; and
- Member from the Indian Legal Service (ILS) who is, or is qualified to be, an Additional Secretary to the Government of India.
LOCATION OF THE AAR (Authority for advance rulings)
The Authority shall be located in the National Capital Territory of Delhi and its benches shall be located at such place as the central government may, by notification specify.
The salaries and allowances payable to, and the terms and conditions of service of the Members have been prescribed by the Government of India.
The Authority functions as an independent quasi-judicial body deemed to be a Civil Court for the purposes of section 195 of the Code of Criminal Procedure, 1973.
WHO CAN MAKE AN APPLICATION – NON RESIDENTS
Non-residents can make application in order to determine the tax implications of transaction undertaken or future transactions.
There is no threshold limit for approaching AAR when an application is made by a NR.
Further, residents can also approach AAR for determining the tax liability of a non-resident arising out of transaction undertaken by such resident.
WHO CAN MAKE AN APPLICATION – RESIDENTS
A resident applicant can approach AAR (Authority for advance rulings) for determining his tax liability on transactions entered by him either with Resident or Non-Resident.
The threshold limit for approaching AAR for resident is transaction valuing INR 100 Crores or more.
WHO CAN MAKE AN APPLICATION – PUBLIC SECTOR UNDERTAKINGS (PSU)
PSUs can approach AAR in respect of an issue relating to computation of total income which is pending before the tax authority or the appellate authority.
However, an application for Advance Ruling cannot be made for the purpose of determination of Fair Market Value.
GAAR TRANSACTIONS COVERED WITHIN THE AMBIT OF MEANING OF “ADVANCE RULING”
An applicant, being resident or Non-resident, may approach Authority for advance rulings for the transaction to be undertaken to determine whether the same is an impermissible avoidance arrangement.
QUESTIONS IN AN ADVANCE RULING
i. Even though the word used in the definition is `question’, the applicant can raise more than one question in one application.
ii. The questions may be on points of law as well as on fact pertaining to the income-tax liability (i.e. considering the provisions of the Act and/or the relevant DTAA).
iii. The question should arise out of the statement of facts given with the application.
iv. Mixed question of law and fact can also be included in the application.
v. Complex question may be divided into two or more simple questions.
vi. The questions should be so drafted that each question is capable of a brief answer.
vii. No ruling will be given on a purely hypothetical or academic question.
viii. Questions not specified in the application cannot be urged.
ix. Normally, a question is not allowed to be amended but in deserving cases the Authority may allow amendment of one or more questions.
WHEN AN ADVANCE RULING CANNOT BE SOUGHT?
QUESTION IS PENDING BEFORE OTHER AUTHORITIES
In case the question raised in the application is already pending before any income-tax authority, tribunal or any court, the Authority cannot allow application.
For e.g. a notice for initiation of assessment proceedings may be regarded as pendency of proceedings and may create an application invalid before AAR.
QUESTION INVOLVES DETERMINATION OF FAIR MARKET VALUE OF ANY PROPERTY
The second prohibition is on questions relating to the determination of fair market value of any property, movable or immovable.
TRANSACTION IS DESIGNED PRIMA FACIE FOR TAX AVOIDANCE
The application would not succeed if it relates to a transaction which is designed prima facie for the avoidance of income-tax.
WHAT CAN BE SAID TO BE PRIMA FACIE AVOIDANCE OF INCOME-TAX?
Only the prima facie impression created in the mind of the Authority on the facts stated before it that transaction is undertaken to avoid income tax is sufficient cause for rejecting the application.
It is not necessary to refer the detailed facts of the case to determine whether a particular transaction is designed to avoid income tax.
Questions cannot be raised with respect to quantification of income of a taxpayer and for determination of arm’s length price under Indian Transfer Pricing regulations.
APPLICATION FOR ADVANCE RULINGS
- Application for advance ruling should be in prescribed form and manner stating the question on which the advance ruling is sought
- Applicant can withdraw his application within 30 days of the date of application
APPLICATION FOR ADVANCE RULINGS
Application shall be in quadruplicate and accompanied by following fees:-
Step I: AAR(Authority for advance rulings) shall forward a copy of application to Commissioner to ascertain whether the case is pending or not, and if necessary call for the records.
Step II: AAR may allow or reject the application. In case application is rejected following points are worth noted: –
- Before rejecting the application, an opportunity of being heard shall be given to the applicant.
- Reason for rejection shall be given in the order.
- Copy of order shall be sent to the applicant and to the CIT.
- No appeal is possible against order of rejection
Step III: After allowing application and examining the information placed before it, AAR pronounces its Advance Ruling on the question specified in the application.
Step IV: On request of applicant before pronouncing its Advance Ruling, AAR shall provide an opportunity of being heard either in person or through a authorized representative.
Step V: AAR shall pronounce its Advance ruling in writing within 6 months from the date of receipt of application.
Step VI: A copy of the Advance Ruling pronounced by AAR shall be sent to applicant and to the Commissioner.
- On occurrence of vacancy in the office of the chairman by reason of his death, resignation or otherwise, the senior most Vice-Chairman shall act as the Chairman until new chairman enters upon his office to fill such vacancy in accordance with provisions of the Act.
- In case Chairman is unable to discharge his functions owing to absence, illness or any other reason, the senior most Vice-Chairman shall discharge the functions of chairman until the chairman resumes his duties.
- On the account of vacancy or defect in the constitution of authority, no advance ruling or proceedings shall be questioned or shall be treated invalid.
- No income tax authority or ITAT shall proceed to decide any issues in respect of which an application has been made by the Applicant.
- The advance ruling pronounced by Authority is binding on
- The applicant who had sought it in respect of the transaction in relation to which the ruling had been sought; and
- On the Commissioner and authorities subordinate to him.
- Where the AAR finds that Advance Ruling sought by applicant by fraud or misrepresentation of facts, then it may by order declare such ruling to be void-ab-initio and all the provisions of the Act shall apply as if such advance ruling has never been made.
- The order of AAR giving its opinion is a final order and no appeal is possible against such an order.