Advance Ruling under the Income Tax Act

Background

Current business scenario is a tough take up for most of the business entities especially Multinational Corporations. MNC’s are facing a tough competition by rapidly rising uncertainties in business environment. And to add in the list of issues to tackle with is the “Uncertainty in the Tax Related Matters".

To address this issue, the Central Board of Direct Taxes (CBDT) in India, issues clarifications & circulars to clarify a particular provision which is non specific & more general in nature.

And to address the uncertainty in case of a specific transaction related to a particular taxpayer, a Quasi Judicial Body known as Authority for Advance Rulings (AAR) is formed to provide Advance Rulings in respect of the transactions undertaken or proposed to be undertaken by applicant coming under the scope of Advance Ruling Mechanism. AAR functions independent of the Income Tax Authority in India.

The Advance Ruling Mechanism was incorporated under Income Tax Act on the recommendations of Wanchoo Committee. This Committee recommended this system particularly for Foreign Collaborations that would provide certainty & reduce disputes and controversies. It also suggested that this mechanism would reduce the workload of the Income Tax Authority.

Scope of Advance Ruling

However, the AAR is not allowed to admit the application in respect of the following questions raised:-

1) Determination of Fair Market Value (FMV) of any Property

2) Transaction or issue designed prima facie for the avoidance of tax (except in case of Resident PSU & where ruling is sought in respect of impermissible Avoidance Arrangement)

3) Issue is already pending before any Income Tax Authority, Appellate Tribunal or any Court (except in case of Resident PSU)

Some Other Points:

1) Nothing in law can prevent the assessee to obtain Advance Ruling merely because the Appellate Tribunal, in another case, has decided a similar issue in favour of the Revenue - Burmah Castrol Plc [2008] (AAR New Delhi)

2) Application for Advance Ruling is to be admitted which is filed prior to the issue of scrutiny notice under section 143(2) of the Income Tax Act - Sin Oceanic Shipping ASA Norway vs AAR [2014] (SC)

Structure & Powers of AAR

The Quasi Judicial AAR functions independently & has its members exclusively to cater its purpose. AAR consists of a Chairman & such number of Vice Chairman & members (revenue & law) as government may notify.

The post of Chairman and Vice Chairman are held by Supreme Court & High Court Judges. And other members are appointed from senior administrative positions of the government.

Presently, there are 3 working benches of AAR (Two in New Delhi & One in Mumbai).

The Authority shall have the following powers vested in Civil Court:

1) Discovery and Inspection
2) Enforcing attendance of any person (including officer of any Banking Company) and examining him on oath
3) Issuing Commissions
4) Production of Books of Accounts and other records

Procedural Aspect

1) Time Limit

• The Statue has provided a time limit of 6 months for the pronouncement of the advance ruling from the date of receipt of application.

• However, there is a serious non compliance to this part as usually AAR takes up to 2-3 years to pronounce its ruling. This delay has actually defeated the purpose of this mechanism up to a major extent. The delay is generally caused due to the unfilled positions of the Authority.

• The disposal rate varies from as low as 7% (2017-18) to as high as 80 % (2006-07). This has also led to piling up of pending cases in the AAR.

• A Major issue which comes in the light of delay in the pronouncement is the interest liability of the Applicant.

2) Fees

• The fee to apply ranges from INR 10 Thousand to INR 1 Million which depends upon the amount of transaction & category of the applicant.

3) Confidentiality

• As Advance Ruling is private in nature, the proceedings are not open to public. The Chairman can release a ruling for publication. However, the applicant can choose to keep his name anonymous in such a case.

4) Binding Nature & Appeals

• The Advance Ruling is binding on both Taxpayer & Tax Authority.

• However, Supreme Court held that Writ Petition can be filed against the Advance Ruling in the High Court – Columbia Sportswear Co. Vs DIT [2012] (SC)

• With all the due respect to the above Apex Court Ruling, this judgement will further defeat the purpose of this mechanism to resolve the uncertainty on the Tax related issues expeditiously.

• Another important point to note is that ruling does not form a precedent for other tax payers but do have a persuasive value.

5) Other Points

• The Authority can pronounce the ruling ex-parte if assessee or the Tax Authority doesn’t show up when called for hearing. However, both can provide sufficient cause for non appearance with 15 days of receipt of order to restore the proceedings.

• The Authority can suo-moto or when the mistake apparent from record is brought to its notice by applicant or Tax Authority amend the order passed by it, before such ruling has been given to its effect by the Tax Authority.

Conclusion

Authority for Advance Rulings (AAR) in general was formed to address the tax uncertainties of the Non Resident Tax Payers, but others classes of tax payers are also included in the scope.

With regards to one of its main purpose of providing tax certainty, it can be said it is addressing the issue. But as regards to its other purpose of timely disposal (6 months from the date of application) of the tax payer issues, it is lagging behind and cases are piling up in AAR as any other Litigation Procedure in India. Cases with AAR are quite high in pendency as pending cases are around 500.

There are certain concrete steps pending on the part of the government which can actually help the AAR to achieve its true purpose efficiently:

A) The Government should increase the number of benches & members to ensure timely pronouncements of rulings.

B) The Government should emphasize on strategizing the timeline of Ruling & making Authority accountable for the delay in pronouncements.

C) The Government should include Industry & Profession Experts on the Authority Panel.

A Strong functioning of Authority for Advance Ruling can make India a viable place to invest for Overseas Investors. Certainty in Tax Environment is always a bonus for investors as it enables them better to access the viability of projects.

Also there is no need to mention that a strong Advance Ruling Mechanism will promote India’s agenda of “Ease of doing Business".