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. Authority for Advance Rulings has been constituted. A non-resident or certain categories of resident can obtain binding rulings from the Authority on question of law or fact arising out of any transaction/proposed transactions which are relevant for the determination of his tax liability.
WHAT IS THE SCHEME OF ADVANCE RULINGS?
With a view to avoiding a dispute in respect of assessment of income-tax liability in the case of a non-resident (and also specified categories of residents), a Scheme of Advance Ruling was incorporated in Chapter XIX-B of the Income-tax Act. The Authority for Advance Rulings ( AAR ) pronounces rulings on the applications of the non-resident/residents submitted in the prescribed form following prescribed procedure and such rulings are binding both on the applicant and the income-tax department. Thus, the applicant can avoid expensive and time consuming litigation on any question of law or fact which might arise from normal income-tax assessment proceedings. AAR (Procedure) Rules, 1996 provide detailed procedure for obtaining advance rulings.
WHAT IS THE COMPOSITION OF THE AUTHORITY?
The Authority for Advance Rulings consists of a Chairman , who is a retired Judge of the Supreme court and two members of the rank of Additional Secretary to the Government of India, one each from the Indian Revenue Service and the Indian Legal Service.
WHO CAN SEEK ADVANCE RULING?
Any non-resident person whether individual, company, firm, association of persons or other body corporates can make an application for seeking an advance ruling in regard to his/its tax liability. Similarly, certain category on residents can also seek advance rulings:
For Non-resident
For determination, in relation to a transaction which has been undertaken or is proposed to be undertaken by a Non-resident applicant, on any question of law or fact specified in the application.
For Resident
- A resident who has undertaken or proposes to undertake a transaction with a non-resident may seek a ruling for determination on any question of law or fact in relation to such transaction involving the tax liability of the non resident.
- A resident falling within notified categories may seek determination or decision by the Authority in respect of an issue relating to computation of total income which is pending before any Income-tax Authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or fact relating to such computation of total income.
(Central Government vide Notification No. 11456 dated 3.8.2000 as specified public sector company as defined in clause (36A) of section 2 of the Income-tax Act being such class of persons under section 245 N(b)(iii) of Chapter XIX B of the Act.)
WHO IS A NON RESIDENT?
• Under the existing provision of the Income Tax Act, 1961(Section 6) the taxable entities are broadly divided into three groups, viz. , Individual , Company and all other persons such as Hindu Undivided Family , Firm, Association of Persons, etc.
• These taxable entities are divided into three categories depending upon their residential status. These categories are :-
• Resident,
• Resident but not ordinary resident and
• Non – Resident
• As already explained above, the benefit of seeking advance ruling is now also available to certain residents :-
An individual is a ‘ resident ‘ in any previous year:
1. If he has been in India during the previous year for 182 days or more.
2. If the individual (not being one of the categories mentioned in para 3 below ) has been in India during the previous year for less than 182 days but has been in India for an aggregate of 365 days or more in the four years preceding the previous year and his stay in India during the previous year is 60 days or more.
3. The categories of person mentioned above are :
a) a citizen of India who has left India during the previous year as a member of the crew of an Indian Ship or for the purpose of employment outside India , and
b) a citizen of India or a person of Indian origin* who, being outside India , has come to India on a visit during the previous year.
4. Persons falling under para 3 are resident only if their stay in India during the previous year is 182 days or more even where the duration of their stay in India during the earlier four years is 365 days or more.
* A person of Indian origin is one if he, or either of his parents or any of his grand parents, was born in undivided India .
Individuals, who are not resident in accordance with the above, are treated as non resident under the Income Tax Act.
• COMPANY :
A company is a non resident if it is neither an Indian company nor a company the control and management of whose affairs during the previous year, is situated wholly in India .
• EVERY OTHER PERSON :
Every other person is a non resident if, during a previous year, the control and management of its affairs is wholly situated outside India . In respect of any source of income in any previous year, he shall be deemed to be resident in India in respect of his other sources of income in the previous year.
WHAT ARE THE BENEFITS OF ADVANCE RULING?
- Helps the applicant in planning his income-tax affairs well in advance.
- Brings certainty in determining the tax liability.
- Helps avoiding long drawn and expensive litigation.
- It is inexpensive, expeditious and binding.
QUESTIONS ON WHICH ADVANCE RULING CAN BE SOUGHT?
The advance ruling can be sought on any question of law or fact specified in the application in relation to a transaction which has been undertaken, or is proposed to be undertaken, by the non-resident applicant.
However, an advance ruling cannot be sought where the question.
- is already pending in the case of the Non-resident applicant before any income-tax authority, the Appellate Tribunal or any court;
- involves determination of fair market value of any property; or
relates to a transaction which is designed prima facie for avoidance of income-tax.
HOW TO SEEK ADVANCE RULING?
The applicant may seek advance ruling by making an application to the Authority in the prescribed form i.e. Form No. 34C, 34D or 34E, as the case may be in the manner indicated therein and following the procedure as prescribed in AAR (Procedure) Rules, 1996.
SIGNING OF APPLICATION
The application including the documents annexed thereto shall be signed in the manner indicated in the prescribed form. Where a person signing the application and other documents claims to have been duly authorising to do so, the application must include a power of attorney, authorising him to sign and an affidavit setting out the unavoidable reasons which entitle him to sign it.
AUTHORISED REPRESENTATIVE
The applicant is entitled to represent his case before the Authority either personally or through an authorised representative e.g., a Chartered Accountant, Advocate, any other tax practitioner etc. If the applicant desires to be represented by an authorised representative, a power of attorney authorising him to appear for the applicant should be enclosed in original.
PAYMENT OF FEE
The application should be accompanied by a fee of Rs 2,500/- (Two Thousand Five Hundred Indian rupees) through a bank draft drawn in favour of the ‘Authority for Advance Rulings’ payment at New Delhi .
WITHDRAWAL OF APPLICATION
The applicant may withdraw his application within 30 days from the date of filing the application, thereafter only with the leave of the Authority.
TIME LIMIT FOR PRONOUNCING THE RULING?
The advance ruling is required to be pronounced by the Authority within six months of the receipt of a valid application.
IS ADVANCE RULING BINDING?
Advance ruling pronounced by the Authority would be binding in respect of the transaction(s) in relation to which ruling has been sought :
- on the Commissioner and the income-tax authorities subordinate to him in respect of the applicant; and
- on the applicant who has sought it.
