Advocate Divesh Chawla has explained the entire law and procedure relating to the Authority For Advance Rulings. He has referred to the numerous controversies that have arisen on the subject and the various judgements that have resolved the controversies. He has highlighted important aspects such as the jurisdiction of the AAR, the binding effect of its rulings, modification and rectification of the ruling etc. The article will prove invaluable for all parties who intend to file proceedings before the AAR
The System of Advance Ruling was introduced in pursuant to World Trade Organisation negotiation on trade facilitation, which required the member states to introduce an advance ruling system to encourage international trade. The Legislature by the Finance Act, 1993, with effect from June 1, 1993, constituted the Authority for Advance Ruling (‘Authority’) by inserted chapter XIX-B, consisting of section 245N to 245V of the Income Tax Act, 1961(‘Act’). The legislative has facilitated the system of Advance Ruling in the field of Direct Taxes as well as in the field of Indirect Taxes (Section 95 to 106 of the Goods and Services Tax Act, 2017).
The Central Board of Direct Tax (‘CBDT’ or ‘Board’) by Circular No 657-dated 30th August 1993 have explained the scope and effects of the chapter XIX-B. The circular stipulates that in the in the interest of avoiding needless litigation and promoting better taxpayer relations a system for giving advance rulings in respect of transactions involving non-resident is introduced. The Authority is an alternative dispute resolution mechanism. Initially, the jurisdiction of the Authority was limited to determine questions of law and/or facts in relations to a transaction undertaken or proposed to be undertaken with a non-resident. Subsequent amendments have enlarged the scope. Section 245V of the Act grants the Authority with powers to regulates its own procedure; it has prescribed the Authority for Advance Ruling (Procedure) Rules, 1996 (‘Procedure Rules’).
The aim of this article is to evaluate and consider the legal issues arising out of the provisions and decisions dealing with the Authority.
Whether the Authority is a Court or a Tribunal
It is pertinent to determine whether the Authority is a Tribunal or Court as this would aid in understanding the judicial functions, administrative powers, limitation of the Authority and whether the jurisdiction from the ruling lies only with the Hon’ble Supreme Court or even with the Hon’ble High Court. The Hon’ble Supreme Court in the case of Columbia Sportswear Company v/s Director of Income Tax 346 ITR 161 held that the Authority to be body exercising the judicial power to pronounce upon the right or liability arising out of the Act, and thereby, a Tribunal within the meaning of the expression in Article 136 and 227. Merely because the decision of the Authority is binding the same would not ought the jurisdiction of the High Court. Further, it held that the Supreme Court should not entertain a direct appeal from the ruling unless the issue raised in the Special Level Petition has a substantial question of greater importance or a similar question is already pending before the court. It also directed the division bench of the High Court to hear writ petitions expeditiously.
The Authority is created under the statute and can not pronounce upon the Constitutional validity or virus of a provision of the Income Tax Act as held in the case of Hyosung Corporation Korea., In re 357 ITR 123(AAR).
The eligibility criteria and transactions to apply for an advance ruling
The clause (a) and (b) of section 245N defines the term ‘Advance ruling’ and ‘Applicant’ respectively. In sum and substance, the clauses determine as to who can approach the Authority and the kind of
transactions on which the Authority can render its ruling. On combined reading of the provisions, the following persons can apply:
(a) A non-resident who has entered or proposes to enter into a transaction.
(b) A resident who has entered or proposes to enter into a transaction and relates to the tax liability of the non-resident.
(c) A resident who has entered or proposes to enter into a transaction, in relation to the tax liability of such applicant that falls within any such class or category of person as the Central Government may notify in the Official Gazette. Notification No 73/2014 dated 28/11/2014 has notified resident whose tax liability arising out of one or more transactions is valuing rupees 100 crores or more.
(d) A resident falling within any such class or category of persons as the Central Government may notify in the Official Gazette, in respect of an issue relating to computation of total income which is pending before Income-Tax authorities or the Income Tax Appellant Tribunal (‘Appellant Tribunal’). Notification No So. 725 (E) dated 3/08/2000, has notified public sector companies, as defined in section 2(36A) of the Act.
(e) Any person whether resident or non-resident, determining whether an arrangement proposed to be undertaken by him is an impermissible avoidance arrangement as referred to in Chapter X-A or not (General Anti-Avoidance Rules).
In determining the residential status of the person, it would be reasonable and practical to look at the fiscal year immediately preceding the financial year in which the application is filed. The principle has been applied in the case of Robert W. Smith v/s Commissioner of Income Tax 212 ITR 275(AAR) and Monte Harris v/s Commissioner of Income Tax 218 ITR 413(AAR)).
A not ordinary resident within the meaning of clause (6) of section 6 of the Act, would fall within the definition of Non-Resident under section 2(30) of the Act, thereby the eligibility criteria for non-resident would apply.
Transaction that can apply for advance ruling
An application for advance ruling can be filed only on a transaction that is undertaken or proposed to be undertaken. The following case laws would be of interest to comprehend on what transaction an application can be filed.
(1) The transaction should involve more than one party.
The transaction would mean an instance of buying or selling something to generate income, between two parties. A transaction involves more than one party as the liability to tax under the Act will arise if one earns an income from another.
Shirishkumar Kulkarni., In re 288 ITR 530 (AAR)
The applicant sought the determination of the Authority on whether the withdrawal from the individual retirement account set up abroad or on his death the distribution to his beneficiary would be exempt from tax in India. The Authority dismissed the application, as withdrawing of once own money was neither generating any income nor undertaking any transaction with a person in India.
Nuclear Power Corporation of India Ltd., In Re 343 ITR 220 (AAR)
The applicant sought an advance ruling on the obligation to deduct tax at source on payments made to a non-resident entity. The non-resident entity was already taxed in India. The Applicant urged that the ruling sought was to determine the obligation to deduct tax at source, and the non-resident assessed to tax is of no consequences. The Authority held that it is not possible to separate an applicant from a transaction since the decision relates to a transaction undertaken or proposed to be undertaken. The ruling is not only applicant specific, but, also transaction specific. The non-resident already being assessed to tax the application was not allowed.
Direct nexus with the transaction
Y Ltd., In re 221 ITR 172(AAR)
The Applicant sought an advance ruling relating to the liability to interest under section 234B and 234C that accrues on account of the transaction (capital gains on the sale of shares and debentures). The Authority held on facts that the there was a direct nexus between the transaction and charging of the interest. Therefore, the application was to be allowed.
(3) Tax liability restricted in the hands of non-resident
Hindustan Powerplus Ltd., In re 267 ITR 685 (AAR)
The applicant filed an advance ruling to determine the liability to tax under the Act on the remuneration received by a resident employee outside India. The Authority rejected the application as the advance ruling has to be in relation to the tax liability of a non-resident and not a resident.
Connecteurs Cinch, S.A., In re 268 ITR 29 (AAR)
The Authority ruled that the entitlement to tax exemption under section 10A of the Act in the hands of the Indian subsidiary would not be any consequence of a transaction undertaken or proposed to be made by the non-resident applicant hence the application was not allowed.
In the case of Jay Shree Tea and Industries Ltd., In re, 274 ITR 97 (AAR) the Applicant was to make interest payments to a non-resident bank and the tax liability was to be borne by the Applicant. The applicant sought an advance ruling to determine the tax liability of the non-resident bank. The Authority distinguishing the decisions in the case of Hindustan Powerplus Ltd (supra) as the issues involved were on the determination of the tax liability of the non-resident entity. There is no liability attached to the applicant under the Act, and it was merely discharging the liability of a non-resident.
Umicore Finance., In re 318 ITR 78 (AAR)
The Authority interpreted the provisions of section 245N(a)(i) of the Act as being wider than the sub-clause (ii) of the Act held that, there is no specific requirement under sub-clause (i) that the determination should relate to the tax liability of a non-resident. It ruled that tax implication would be in the Indian company hands as the capital gain tax would be chargeable due to the share purchase agreement, but there is a direct and substantial impact on the applicant (non-resident). Accordingly, the application was allowed.
Trade Circle Enterprises LLC., In re 361 ITR 673(AAR)
The Applicant a non-resident was to form a consortium involving a proposed subsidiary company along with another Indian company. The consortium was to claim deduction under section 80IA of the Act. The Authority did not follow the ruling in the case of Umicore Finance (supra) as there was no transaction between the Indian company and the applicant. The issues raised were for determining the tax liability arising in the Indian entity hence the application was dismissed.
If the facts permit, some of the decision above may require reconsideration post the introduction of the Notification No. 3014 dated 28/11/2014 under section 245N(a)(iia) of the Act, permitting applications from residents whose tax liability arising out of one or more transaction is valuing Rs 100 crores or more.
The restriction of filing an application
Section 245R provides for the procedure which the authority is required to adopt in deciding the questions posed before it. The applicant shall present its application in the prescribed Form, as per Rule 10 of the Procedure Rules and Rule 44E of the Income Tax Rules, 1962. The proviso to Section 245R (2) of the Act provides a restriction over the Authority for the entertaining application at the admission stage. The proviso provided as under:
- Already pending before any income-tax authority or the Appellant Tribunal or any Court.
- Involves determination of the fair market value of the Property.
- Relates to a transaction or issues which are designed for the avoidance of income tax.
The power to reject the application is subject to twin conditions (i) giving an opportunity to the applicant of being heard and (ii) giving reasons for such rejection. The proviso leaves no option with Authority except to dismiss the application, where the question raised in the application fall under any of the clauses. There is a discretion outside the bar created by the proviso to section 245R(2) of the Act, like delay, launches, abuse of process and so on.
At the admission stage, there is no requirement for the commissioner or his representative to be heard and to recorded reasons for admission unless the application is rejected as held by the Andhra Pradesh High Court in the case of Director of Income Tax (International Taxation) v/s Authority for Advance Ruling 352 ITR 185.
The issues are already pending before any Income Tax Authority or Appellant Tribunal or any Court.
Section 245R(2)(i) of the Act, bars issues already pending before any Income Tax Authority or Appellant Tribunal or any court. The provision restricts the assessee from having multiple proceedings before the Authority and regular assessment proceedings.
The statute requires that a return of income to be filed within a prescribed time and failure to do so may lead to the consequence of a penal nature. No applicant can afford to ignore the mandatory provisions merely because he has filed an application before the Authority. The issues that arose whether the filing of the return of income before or after the submission of the application would create a bar to the applicant. The Authority had taken contrary views that application is allowed or rejected when the return of income filed or merely notice under 143(2) were issued. The issues have now been settled by the Hon’ble Supreme Court in the case of Commissioner of Income Tax V/s Hyosung Corporation 244 Taxman 286 affirming the decision of the Delhi High Court. The Court held that issue of the notice under section 143(2) asking for certain information before the filing of the application would not be sufficient to attract rejection. The Supreme Court has taken a similar view in the case of Deputy Commissioner of Income Tax v/s Saga Publications 246 Taxman 57. Considering the decisions of the Hon’ble Supreme Court neither the filing of the return of income nor the mere issue of a notice u/s 143(2)would bar the application.
The maintainability of the application cannot be made to depend on the pendency of the issue before the income-tax authorities on varying date. Hence the word is “already pending” shall be interpreted to mean already pending at the time of the application and not concerning future date as held by the Authority in Monte Harris (supra)
Section 195 or 197 application would not create a bar from the application
Sepco III Electric Power Construction Corpn., In re 340 ITR 225 (AAR)
The Authority held that mere pendency of the application under section 195 or 197 or the order under section 197 or even the pendency of the revision application under section 263 on the date of filing the application would not bar the jurisdiction of the Authority.
Issues involve the determination of the fair market value of the Property
Section 245R(2)(ii) of the Act, bars question raised relating to the determination of the fair market value. In the case of Instrumentarium Corpn., In Re 272 ITR 499(AAR) the Authority has taken the view that benchmarking of the transaction as arm’s length price is also the determination of fair market value.
Relate to a transaction or issues which are designed for the avoidance of income tax.
Section 245R(2)(iii) of the Act, bars question raised relating to a transaction which on the face of it, would appear to be designed to avoid tax. The use of the expression ‘prima facie’ is significant. In the Black’s Law Dictionary defines ‘at first sight, on the first appearance; on the face of it.’ and the Oxford Dictionary defines as ‘law based on the first impression; accepted as correct until proved otherwise’. Whether the transaction is prima facie for the avoidance of tax is a discretion left to the authority. The Authority shall not exercise the discretion arbitrarily.
In the case ABC International Inc. USA, In re 241 CTR 289, the Authority held that it has powers to determine whether the transaction is designed for the avoidance of tax not only at the admission stage but also at the final hearing.
The Bombay High Court in the case Mahindra BT Investment Co (Mauritius) Ltd v/s Director of Income Tax 359 ITR 485 held that the authority could exercise its discretion not to give a ruling only in the case where the fraud and/or illegality are ex facie evident, or the fraud or the illegality has been established in some proceedings. Such a discretion shall not be exercised on a mere suspicion.
Canoro Resources Ltd., In re (AAR) 313 ITR 2 (AAR)
The Authority held that the applicant has, prima facie, given a convincing explanation for restructuring its business. The revenue cannot complain when a taxpayer resorts to a legal method available to him to plan his tax liability, as a result, would be more beneficial to the taxpayer. The decision may require reconsideration post the introduction of the Section 245N(iv) of the Act dealing with impermissible avoidance arrangement.
Whether question of law before the Authority can be amended
Application made before the Authority is voluntary exercise and not based out of compulsion, thereby the applicant would be allowed to reframe the question at the admission stage. Depending upon the facts of the case the Authority may permit the Applicant to reframe the questions at the final disposal of the Application.
In the case of Fidelity Advisor Series VIII., In re 271 ITR 1 (AAR) the Authority held that the applicant could amend the question but not to change the very complexity of the application. It further held that if the applicant wanted to confine a question to only some of the items/aspects mentioned therein and/or give up some parts of the question, there could be no objection. The authority in a subsequent decision ZD., In re 348 ITR 351 (AAR) held that seeking a ruling only on the part of the transaction or on a truncated transaction cannot be said be proper and in any event in not a practice that ought to be encouraged. The Authority has to pronounce on the question raised in the application. Both the decisions were at the final hearing stage. The issues put forward in the decision of ZD were interlinked and could not be separated.
Hypothetical question, not to be entertained
For the Authority to consider an application the full facts, documentation, and relevant issues in deciding the ruling shall be placed on the record. Where the relevant factual information is not available or incomplete, the Authority can dismiss the application. In the case of Royal Bank of Canada, In re 323 ITR 380 (AAR) the applicant sought an advance ruling on a proposed activity of purchase and sale of equity shares. The Authority held that no doubt that the advance ruling can be in respect of a proposed transaction. However, where the determination is base on certain crucial facts, the actual pattern of dealings or the modus operandi of the transaction, were not known, it would not be appropriate to undertake the task of giving a formal ruling on a hypothetical basis. In another case, Ms Meenu Sahi Mamik., In re 287 ITR 514 (AAR)theAuthority held that the basic facts dealing with the nature of the business nor the agreement were placed on the record. Dismissing the application as being as premature and not maintainable as the question raised could not be answered hypothetically.
Determination by the Authority is not just advisory but also binding
Section 245S expressly provides, that the advance ruling pronounced by the Authority shall be binding on the Applicant who has sought it and the principal commissioner and the authorities subordinate to him, and shall be binding only in respect of the transaction to which it was sought. The ruling shall be binding subject to any change in law and/or facts on which the advance ruling was pronounced (section 245S(2)). Thereby the decision issued by Authority is not only an advisory but also binding on the parties.
In the case of Columbia Sportswear Company (supra), the Hon’ble Supreme Court held that the ruling issued are binding upon the parties in respect of the transaction sought and for others, the decision will hold persuasive value on principles of law. In the case of Prudential Assurance Co Ltd v/s Director of Income Tax (International Tax) 324 ITR 381 (Bom) the Assessing Officer passed an order following the ruling in the Petitioner case. The Commissioner issued a notice under section 263, seeking to set aside the order on the ground of subsequent decision of the Authority. The Hon’ble High Court held that the commissioner had manifestly exceeded his jurisdiction and the notice is contrary to section 245S of the Act. The Commissioner cannot rely upon the subsequent ruling while ignoring the clear mandate provided by the statutory provision. In another case before the Bombay High Court Director of Income-tax (International Taxation) v. Dun & Bradstreet Information Services India (P.) Ltd. 338 ITR 95 wherein the court held the assessee not liable to deduct tax at source, by following the decision of the Authority on similar facts in the same subject matter.
Limited jurisdiction of the Court against the Ruling
The remedy of the writ petition available in the High Court is not against the “decision” of the Authority, but it is in the “decision-making process”. In the decision-making process, if the authority deciding the case, has ignored vital evidence, and thereby arrived at erroneous conclusion or has misconstrued the provisions of the relevant Act, the constitutional power of the High Court under section 226 and 227 can be invoked to set right such errors and prevent gross injustice to the party complaining. In the case of Anurag Jain v/s Authority for Advance Ruling, 308 ITR 302 the Madras High Court held that the authority had considered the factual issues in the best possible way and there were no reasons to interfere. It would not be open for the writ court to go into the correctness of the ruling.
Modification and Rectification of the order
Rule 18 of the Procedural Rules, provides for the modification of the ruling when there is a change in law and/or fact on which the decision had been pronounced. Rule 19 of the Procedural Rules, provides for rectification of the order on a mistake apparent from the record. The Authority may modify or rectify the order suo moto or on application made by the parties to the ruling. No prescribed time has been given to modify or rectify the order except that the AO should not have given effect to the ruling.
The Supreme Court in the case of Columbia Sportswear(supra) has equalised the Authority to a Tribunal, hence, the principles applicable to the Appellant Tribunal while dealing with rectification application under section 254(2) can also be applied. In the case of Mahindra BT Investment Co (supra) the Bombay High Court ruled that rectification of an order presuppose that a ruling has been rendered. If no ruling were pronounced, no rectification application would lie. In the case of CTCI Overseas Corporation Ltd., In re 261 CTR 344(AAR) the Authority held that a rectification application does not permit the applicant to reframe or add new questions which were not originally formulated or adjudicated. While in the case of General Electric Pension Trust., In re 289 ITR 335(AAR) the Authority held that a rectification application does not give powers to the Authority to review its ruling by additional facts.
Whether a third-party aggrieved by the outcome of ruling can make an intervention
Rule 5 of the Procedural Rules provides the Authority with the powers to hear and determine the application made under section 245Q(1) of the Act, along with other application, petition, and presentations of an interlocutory, incidental or ancillary nature as may be necessary for a complete disposal of the application. Rule 28 provides that all application, petitions, and representations before the authority shall be heard and disposed of mutatis mutandis as per section 245Q(1). If a third party is affected by the outcome of the ruling, it could make an application for intervention.
Withdrawal of the application
Section 245Q(3) provides that the applicant can withdraw the application within 30 days of filing. However, in the certain case applicant have been allowed to withdraw the application after the 30 days period prescribed by law, subject to justifiable reasons. Whether to allow the applicant to withdraw the application after the time limit set by statute or not is at the discretion of the Authority. The Authority has also approved the withdrawal of the application post the final hearing but before the pronouncement.
Whether the Authority can dismiss the application ex parte
The Authority has powers to dismiss the application ex parte on merits (Rule 17 of the Procedural Rules). The aggrieved party can apply for the recall within 15 days of the receipt of the order by presenting sufficient cause for non-appearance. The Authority may set aside the ex parte order after providing an opportunity to be heard. In the case of Onmobile Global Ltd v/s Chairman, Authority for Advance Ruling (Income -Tax) 279 CTR 518 the Karnataka High Court held that Rule 17 allows the Authority to dismiss an application ex parte only on merits for non-appearances. Further, the court held that the application could not be rejected as the notice of hearing was never within the knowledge of the applicant.
When can Authority hold the ruling to be void
Section 245T provides the power to declare the ruling void ab initio if the Authority finds, on a presentation made by the commissioner or otherwise, that it is obtained by fraud or misrepresentation of facts. The provisions under section 245T are in line with section 245D(7) applicable to the proceedings before the settlement commission. Rule 23 of the Procedural Rules provides for an application accompanied by a statement of facts and evidence incorporating the fraud or misrepresentation.
Other relevant rulings
(1) Advance Ruling A. No P-12 of 1995, In Re 228 ITR 61(AAR)
The Authority is an institution under the Income Tax Act; it has no jurisdiction to give a ruling relating to taxes levied under other enactments.
(2) Eplanet Ventures Mauritius Ltd v/s Director of Income Tax (International Taxation)74 Taxmann.com 101(kar)
Once the litigate has surrendered to the jurisdiction of the Assessing Officer by not raised objections on the pendency of application before the Authority, he is proclaimed from proceedings with the application.
(3) Acers Computer International Ltd., 189 CTR 498 (AAR) when the issues raised have become of academic interest the Authority can decline to pronounce the ruling.
(4) Mahanagar Telephone Nigam Ltd., 192 CTR 321(AAR) approval of Committee on Dispute is necessary for a public-sector company before proceeding with the application.(5) Yongnam Engg. & Construction (Pte) Ltd., In Re 321 ITR 442(AAR) the applicant cannot seek repeated application on merit when the previous application was allowed to go by default.
Certain extension to the Authority
Section 245N(a)(vi) dealing with impermissible avoidance arrangements permits application only a proposed transaction and does not consider the transaction undertaken. The Authority for advance ruling can be extended to consider application undertaken, as the limitation creates a disadvantage to the applicant to wait until the outcome.
The benefits of applying to the Authority; as;
(1) Better and faster mode of determining the tax liability arising in the transaction, instead of going through the regular assessment proceedings.
(2) Bringing finality on a subject as it is binding on the Applicant and Revenue on questions of law and facts. On certain occasions, the Income Tax authorities have not challenged the legality of the ruling before the Hon’ble High Court and then the Supreme Court.
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