Concept of Advance Ruling under Income Tax Act' 1961

Advance ruling has been internationally recognized as 'A more or less binding statement from the revenue authorities upon the voluntary request of a private person, concerning the treatment and consequence of one or series of contemplated future actions or transactions.”

In India, the scheme of advance rulings was introduced by the Finance Act, 1993. Chapter XIX-B (Section 245N to 245V) of the Income-tax Act, which deals with advance rulings, came into force with effect from 1-6-1993. Advance Ruling means written opinion or authoritative decision by an Authority empowered to render it with regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto.

Reasons for Introduction of the Concept of Advance Rulings:

The Non-Resident investors always want to gauge their liability under the Indian tax laws in connection with their proposed transactions. Considering the complexities in the Indian tax laws, the government introduced the concept of Advance Ruling.

Whenever taxpayer has doubt regarding tax liability in respect of proposed transactions, he can seek advance ruling from the authority. Advance ruling helps in settling disputes in advance. It helps foreign investors in determining their tax liabilities in advance so that they can assess the transaction that they propose to undertake.

It also brings certainty in determining the tax liability, as the ruling given by the Authority for Advance Ruling is binding on the applicant as well as Government authorities.

Benefits of Scheme of Advance Ruling:

• Determination of Tax Liability in Advance.
• Reducing Litigation.
• Attract Foreign Direct Investment.
• It is inexpensive.
• Rulings are binding on the applicant as well as the department.
• Rulings are pronounced within six months from the date of receipt of application.

Thus, in order to provide the facility of ascertaining the Income-tax liability of a non-resident, to plan their Income-tax affairs well in advance and to avoid long drawn and expensive litigation, a scheme of Advance Rulings has been introduced under the Income-tax Act, 1961.

Chapter XIX-B, consisting of section 245N to 245V, provides a scheme for giving advance rulings in respect of transactions involving non-residents and specified residents, with a view to avoid needless litigations and promoting better tax-payer relations.

Who can seek Advance Ruling:

As per Section 245N following persons can be applicant:

1. a non-resident.
2. a resident-undertaking proposing to undertake a transaction with a non-resident can obtain advance ruling in respect of any question of law or fact in relation to the tax liability of the non-resident arising out of such transaction.
3. a resident who has undertaken or proposes to undertake one or more transactions of value of Rs.100 crore or more in total [vide Notification No. 73, dated 28-11-2014] can obtain advance ruling in respect of any question of law or fact in relation to the tax liability of the resident arising out of such transaction.
4. a notified public-sector company.
5. any person, being a resident or non-resident, can obtain an advance ruling to decide whether an arrangement proposed to be undertaken by him is an impermissible avoidance arrangement and may be subjected to General Anti Avoidance Rules or not.

Important Note:

With a view to promote ease of doing business, it has been decided by the Government to merge the Authority for Advance Ruling (AAR) for income-tax, central excise, customs duty and service tax. Accordingly, necessary amendments, have been made to Chapter XIX-B to allow merger of these AARs.

Thus, below are also added under definition of applicant by amendment carried out via Finance Act'2017 in Section 245N:

1. an applicant as defined in section 28E(c) of the Customs Act, 1962.
2. an applicant as defined in section 23A(c) of the Central Excise Act, 1944.
3. an applicant as defined in section 96A(b) of the Finance Act, 1994.

Composition of Authority for Advance Rulings:

The authority shall be constituted by the Central Government for giving advance rulings, to be known as "Authority for Advance Rulings"

The Authority shall consist of a Chairman and such number of Vice-chairmen, revenue Members and law Members as the Central Government may, by notification, appoint.

Qualification for Appointment:

Important Note:

Finance Act'2017 has inserted below subsections in section 245-O, after sub-section (6), namely:

• (6A) In the event of the occurrence of any 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 the date on which a new Chairman, appointed in accordance with the provisions of this Act to fill such vacancy, enters upon his office.
• (6B) In case the Chairman is unable to discharge his functions owing to absence, illness or any other cause, the senior-most Vice-Chairman shall discharge the functions of the Chairman until the date on which the Chairman resumes his duties.

Further Finance Act' 2017 has inserted section 245-OA to govern the Qualifications, terms and conditions of service of Chairman, Vice-Chairman and Members.

The qualifications, appointment, term of office, salaries and allowances, resignation, removal and the other terms and conditions of service of the chairman, Vice-Chairman and other members of the authority appointed after 26.05.2017, being the date on which the provisions of part XIV of chapter VI of the Finance Act'2017 came into force, would be governed by the provisions of section 184 of Finance Act'2017.

However, the chairman, Vice-Chairman and member appointed before 26.05.2017 would continue to be governed by the provisions of the Income Tax Act'1961 and the rules made thereunder as if the provisions of section 184 of the Finance Act'2017 had not come into force.

Vacancies, etc., not to invalidate proceedings:

No proceeding before, or pronouncement of advance ruling by, the Authority shall be questioned or shall be invalid on the ground merely of the existence of any vacancy or defect in the constitution of the Authority.