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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<\/strong> <\/p>\n Background <\/u><\/strong><\/p>\n 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).<\/p>\n <\/p>\n 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’).<\/p>\n The aim of this article is to evaluate and consider the legal issues arising out of the provisions and decisions dealing with the Authority.<\/p>\n Whether the Authority is a Court or a Tribunal <\/u><\/strong><\/p>\n 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 <\/em><\/strong>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. <\/p>\n 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)<\/em><\/strong>. <\/p>\n The eligibility criteria and transactions to apply for an advance ruling <\/u><\/strong><\/p>\n The clause (a) and (b) of section 245N defines the term ‘Advance ruling’ <\/em>and ‘Applicant’ <\/em>respectively. In sum and substance, the clauses determine as to who can approach the Authority and the kind of<\/p>\n transactions on which the Authority can render its ruling. On combined reading of the provisions, the following persons can apply: <\/p>\n (a) A non-resident who has entered or proposes to enter into a transaction.<\/p>\n (b) A resident who has entered or proposes to enter into a transaction and relates to the tax liability of the non-resident. <\/p>\n (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<\/em> has notified resident whose tax liability arising out of one or more transactions is valuing rupees 100 crores or more. <\/em><\/p>\n (d) A resident falling within any such class or category of persons as the Central Government may notify in the Official Gazette, in<\/span> 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. <\/em><\/p>\n (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).\n<\/p>\n 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)<\/em><\/strong> and Monte Harris v\/s Commissioner of Income Tax 218 ITR 413(AAR))<\/strong>. <\/em><\/p>\n A not ordinary resident <\/em>within the meaning of clause (6) of section 6 of the Act, would fall within the definition of Non-Resident<\/em> under section 2(30) of the Act, thereby the eligibility criteria for non-resident would apply. <\/p>\n Transaction that can apply for advance ruling <\/u><\/strong><\/p>\n 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. <\/p>\n (1) The transaction should<\/u><\/strong><\/span> involve more than one party. <\/u><\/strong><\/p>\n 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.<\/p>\n Shirishkumar Kulkarni., In re 288 ITR 530 (AAR) <\/em><\/strong><\/p>\n 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.<\/strong><\/p>\n Nuclear Power Corporation of India Ltd., In Re<\/em><\/strong> 343 ITR 220 (AAR) <\/em><\/strong><\/p>\n 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. <\/p>\n Direct nexus with the transaction <\/u><\/strong><\/p>\n Y Ltd., In re 221 ITR 172(AAR) <\/em><\/strong><\/p>\n 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. <\/strong><\/p>\n (3) Tax liability restricted in the hands of non-resident <\/u><\/strong><\/p>\n Hindustan Powerplus Ltd., In re 267 ITR 685 (AAR) <\/em><\/strong><\/p>\n The <\/strong>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. <\/p>\n Connecteurs Cinch, S.A., In re 268 ITR 29 (AAR) <\/em><\/strong><\/p>\n 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.<\/p>\n In the case of Jay Shree Tea and Industries Ltd., In re, 274 ITR 97 (AAR)<\/em> <\/strong>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)<\/em><\/strong> 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.<\/p>\n Umicore Finance., In re 318 ITR 78 (AAR) <\/em><\/strong> <\/p>\n 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. <\/p>\n Trade Circle Enterprises LLC., In re 361 ITR 673(AAR) <\/em><\/strong><\/p>\n 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)<\/em> <\/strong>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. <\/p>\n 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. <\/p>\n The restriction of filing an application <\/u><\/strong><\/p>\n 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:<\/p>\n 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. <\/p>\n 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<\/em><\/strong>.<\/em> <\/p>\n The issues are already pending before any Income Tax Authority or Appellant Tribunal or any Court. <\/u><\/strong><\/p>\n 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. <\/p>\n 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 <\/em><\/strong>affirming the decision of the Delhi High Court. <\/strong>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. <\/em><\/strong>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. <\/strong> <\/p>\n\n