Advances need to be made in the field of ‘Advance Rulings’

Ramesh Chander
Commissioner of Income Tax ,AAR,
New Delhi
rchander_irs1990@yahoo.co.in

Sh. Ramesh Chander, is an IRS officer of 1990 batch and is currently posted as Commissioner of Income Tax (Authority for Advanced Rulings), Delhi. He had worked extensively in the field of International Taxes, Transfer Pricing, Alternate Dispute Resolution and other direct taxation fields. The views are personal.

Introduction:

Most ideal situation which one can contemplate is to ensure that there are absolutely no disputes. Disputes always block the smooth evolution and hence dispute management had always been the priority of any Administration. Conventional methods of dispute resolution of having Consensus or Adjudication have failed to ensure smooth dispute management. Most ideal situation in any dispute management is to ensure removal of the possibilities which give rise to disputes. India which is just a budding economy can hardly afford to have time consuming and protracted litigations because it just frustrates the efforts made to uplift the growth of the economy. Thus, like other countries India has also tried to introduce faster and conclusive methods to manage disputes and creation of Authority for Advance Ruling(for short ‘the Authority) under the Income Tax Act way back in the year 1993 is a step in that very direction. The Finance Act, 1993 inserted s new Chapter XIX-B to the Income Tax Act, 1961 titled as ‘Advance Rulings’. The object to be achieved, as explained by the Finance Minister in his Budget Speech for 1992-93, is to avoid needless litigation and promote better tax payer relations. The procedure for any tax payer in seeking advance ruling, in short, is to have formal confirmation from the tax authorities in advance of entering into specific transactions, of the tax related consequences.

2. Appraisal of the functioning of the Authority:

2.1 Authority for Advance Ruling has been in existence for the last 25 years. Initially, the Authority started with one Bench at Delhi with the constitution of a Chairman who had been a Judge of the Supreme Court and two other members drawn from the Indian Revenue Service and Indian Legal Service. Thereafter, two additional Benches have been created one at Mumbai and another additional Bench known as NCR Bench at New Delhi. As on date there are three Benches i.e. one Principal Bench and two additional Benches.

2.2 Though the Authority has been in existence for the last 25 years now, as a mechanism of dispute management it has yet to establish itself. Below mentioned statistics will show that potential of the Authority has either not been exploited by the tax payers or that it has not enthused the confidence of the tax payers as a conclusive forum of dispute management.

Filing of fewer applications in the Authority as well as very few pronouncements of the Rulings coupled with the disproportionate withdrawal of applications indicates that there are definitely issues which are impacting the performance of the Authority adversely. In the subsequent discussion that follows few of such issues are discussed.

3.0 Issues impacting the performance:

3.1 Delay in disposal:

Above extracted data goes to show that the potential of the Authority as a forum for dispute management, is not getting fully exploited. One of the reasons for very few tax payers approaching the Authority for advance rulings is clearly the delayed recruitment of Members in the Authority because of which it goes non-functional for a substantial period. Unfortunately, since its inception the Authority has never functioned to its full strength. To ensure that there is not much gap in between the occurance of the vacancy in the cadre of Members of the Authority and deployment of the new Members, it will only be a good idea for the Government to be pro-active and to draw an approved panel of four or five persons at a time so that whenever the vacancy occurs there are persons in advance to be deployed. In this very context, it will be relevant to ensure that the person being selected as a Member should, irrespective of the age, have a full tenure of 02 years. It is believed that such a step would also stabilize the uninterrupted working of the Authority.

3.2 Issue of pendency:

3.2.1 Clause (i) of the Proviso to sub-section (a) of Section 245R of the I.T. Act, 1961 acts as a bar on the Authority to not to allow the application where the question raised in the application is already pending before any Income-tax Authority or Appellate Tribunal or any Court. However, the Act does not specify as to what is the import of the phrase ‘pending before any income-tax authority’. As a matter of fact this is one of the most litigated points in the context of the Authority for Advance Rulings which is in a way acting as an impediment for the Taxpayers especially the Non-Residents to seek redressal through the Authority.

3.2.2 View of the Authority had been that if in the case of the applicant notice u/s 143(2) of the Income Tax Act has been issued the proceedings should be treated to be pending before the Income Tax Authority because while undertaking scrutiny of a return of income the Income-tax authority gets the authority to have look at the global affairs of the taxpayers which may inter alia include the issue agitated in the application. However, this view of the Authority has been challenged by the applicants repeatedly before the High Court by filing Writ under Article 226 of the Constitution. Repeated view of the Delhi High Court (refer for illustration Hyosung Corporation reported in 382 ITR 376) has been that in the absence of an issue specifically raised mere issuance of notice u/s 143(2) by the Assessing Officer will not make the issue pending. Since, this issue is of vast importance and especially when there is no clarity in the provisions of law, it is felt that Legislature should immediately undertake fine-tuning of the provisions so as to specifically provide, may be by way of Explanation, as to under what circumstances issue involved can be said to be pending. By way of Explanation it can very well be provided that if the proceedings i.r.to the period relevant to the year in which the transaction is already undertaken is pending before the Assessing Officer whether or not the transaction has been made part of the return of income already filed all issues will be deemed to be pending irrespective of whether or not the AO has specifically raised a specific question to be answered by the taxpayer.

3.2.3 Delay on the part of the Authority in giving Rulings:

Though sub-section (6) of section 245 provides that “the authority shall pronounce its advance ruling in writing within 6 months of the receipt of application” yet in practice it is seen that this limitation is hardly adhered to and in most of the cases Authority takes years to pronounce its rulings. At times, it happens that by the time application matures for pronouncement of the Ruling the circumstances change like the transaction is already undertaken etc. as a result of which the application itself becomes infructuous. It has been observed that because of the delay on the part of the Authority in pronouncing its Rulings applicants in a big number get forced to withdraw their applications. Under the circumstances, it is suggested that in cases where the Authority decides to permit withdrawal of the application, fee deposited by the applicants should also be ordered to be refunded in very deserving cases. Such a provision will prompt the Authority as well as all others concerned to be diligent and prompt in disposal. Such a provision would otherwise also get justified on the basis of the principles of equity.

3.2.4 Need to expand the scope of the application before the Authority:

3.2.4.1 Right now under the existing law scope of the Authority for its Rulings is very limited. Because of the limited scope only a few applicants can approach the Authority for its advance Rulings. Resultantly, the institution of ‘Advance Ruling’ is not getting fully exploited so as to manage or reduce disputes. As already indicated most ideal situation is to visualize and do away with the possibilities of dispute itself. Though applicants can visualize the possible future litigation yet they are not able to plug these possibilities through the medium of ‘advance Rulings’. Because of the very restricted scope of advance Rulings, purpose of having disputes free tax regime get frustrated. As already above, on an average not even more than 100 applicants approach the Authority for obtaining ‘advance rulings’ which reflects very poorly in the context of the huge mountain of litigation confronting the taxpayers including the Income tax Department.

3.2.4.2 In the light of the discussion made above, to exploit full potential of the Authority as a medium of pre-empting the possible litigation, there is a need to expand the jurisdiction for ‘advance Rulings’. To begin with, in addition to the existing provisions, it will only be proper if irrespective of the residential status, an applicant is allowed to approach the Authority for a ruling in respect of a transaction proposed to be undertaken or a transaction already been undertaken but return of income in respect of which has not become due or filed and the time for filing the return of income u/s 139(1) has not yet expired. To ensure that the Authority is not burdened with the insignificant or frivolous transactions it can be thought to put in a cap (say of 50 crores or more) on the amount of the transaction which alone can be made subject matter of application.

3.2.5 Absence of Notification for the Resident applicants:

3.2.5.1 In exercise of the powers conferrd by sub-clause (iia) of clause (b) of section 245N of the Act, a Notification bearing No.73/2014/F.No.142/6/2014-TPL dated 28-11-2014 had been issued enabling the Resident Applicants to approach the Authority for advance Ruling if value of one or more transactions undertaken or proposed to be undertaken exceeds 100 crores or more. However, it is seen that law as contained u/s 245N(b) has undergone material change w.e.f 01-04-2017 whereby clause and sub-clauses have been renamed/renumbered in the sense that there is no sub-clause (iia) of clause (b) on the Statute Book now as a result of which the Notification of 28-11-2014 has become a dead letter. Because of the change in the law objections are being taken in the Authority to argue that by virtue of the old Notification the Authority post 01-04-2017 cannot be approached by the Resident applicants which otherwise now get covered u/s 245(A)(III). The matter very recently got flagged even in Newspapers ( Times of India of 12-04-2019). Absence of new Notification has created an atmosphere of uncertainty in the minds of the Resident applicants as well as all others and it has impacted adversely the admission and Rulings in respect of all those applications which are filed post the year 2017. It is hoped the Central Board of Direct Taxes takes a call early to issue Notification afresh so that Resident applicants start approaching Authority for Rulings.

4. Summation:

Valuable resources of the nation get wasted in pursuing the litigation in various courts of law before a final or conclusive view emerges out. Since, conventional methods of appeal and further appeals have proven to be time consuming and costly better way to manage disputes would be to have clarity in advance in which context the institution of ‘Advance Ruling’, needs to be fine tuned and strengthened on the above suggested lines which if done will go a long way in improving the dispute management.

[The author is Commissioner of Income Tax (Authority for Advanced Rulings), Delhi and views are personal.]

Source- CBDT Taxalogue Magazine Jul – Oct 19 | Volume 1 | Issue 1