Authority for Advance Ruling (AAR) – an Outline

In order to avoid needless litigations and to aid the non-residents and seeking clarifications on the Indian income-tax related matters, the Central Government has set up an Authority for Advance Ruling (AAR), through which the non-residents can make application for clarifications regarding their tax liability and any other connected aspects arising out of any past or future transactions undertaken or proposed to be undertaken by them in India. However, the CG has also extended the applicability of AAR to notified residents.

What is advance ruling?

As per s.245N, determination by the authority of a transaction:

1. undertaken or proposed to be undertaken by a non-resident; or

2. undertaken or proposed to be undertaken by a resident with such Non-Resident or in relation to his tax liability arising out of transaction(s) involving an amount of Rs. 100 crore or more.

3. Of a public sector company, in respect of issue(s) relating to computation of total income that are pending before an Income Tax Authority or ITAT.

Constitution of AAR:

U/s 245O, the central government shall constitute the AAR comprising of:

a. Chairman: Judge of the Supreme Court or the Chief Justice of a High Court or for at least seven years or a Judge of a High Court

b. Vice Chairman: Judge of a High Court

c. Members:

(i) Revenue Member: A qualified member from:

      • The Indian Revenue Service
      • The Central Board of Excise and Customs

(ii) Law Member: Who has, for a combined period of 10 years, been a District Judge and Addl. District Judge

Application and Fee:

  • U/s 245Q, the application has to be made in the prescribed form in quadruplicate along with prescribed fees (tabulated below).
  • However, application can be withdrawn by the applicant within 30 days from the date of filing (it is possible to withdraw even after 30 days, if the AAR permits).
  • The relevant forms and fees are:
    • Applicant other than public sector company:
      • For transactions involving an amount of up to Rs.100 cr., fee is Rs.2 lakhs
      • For transactions involving an amount exceeding Rs.100 cr. and up to Rs.300 cr., fee is Rs.5 lakhs
      • For transactions involving an amount exceeding Rs.300 cr., fee is Rs.10 lakhs
    • Applicant being a public sector company: Fee is flat Rs.10,000/-

Procedure (s.245R):

1. Upon receipt of application from assessee, one copy thereof will be forwarded by AAR to the concerned CIT having jurisdiction over the case,

2. If found necessary, CIT will be asked to furnish the relevant records

3. After scrutiny of the application and verifying the records received from CIT, AAR will either allow or reject the application by passing an order in writing.

4. In case of rejection of application, an opportunity of being heard shall be given to the applicant, unless:

a. The application was made in respect of a transaction already pending before an Income Tax Authority or Income Tax Appellate Tribunal (ITAT), or any Court;

Note: A public sector undertaking can seek for advance ruling even if the question so raised is pending before an income-tax authority or ITAT.

b. The matter involves computation of fair market value of any property including fair market rate of interest,

c. In relation to a transaction, which is prima facie designed for avoidance of tax.

5. If the application has been allowed to be proceeded further, then AAR shall, after examining any further material placed before it, would pronounce its ruling within a period of 6 months from the date of receipt of application from the assessee and a copy of such ruling duly signed and certified by the members shall be sent to the applicant and the PCIT/CIT.

Ruling pronounced shall be binding (s.245S):

Unless there are changes in the facts or circumstances or law, based on which the ruling was pronounced, the ruling pronounced by AAR, shall be binding on:

  • The Applicant;
  • The transaction; and
  • The concerned Commissioner of Income Tax (CIT) and all the Income Tax Authorities subordinate to him, in relation to the said applicant and the said transaction.

Ruling to be declared Void (S.245T):

However, if it subsequently comes to the knowledge of AAR, that the ruling pronounced by it was obtained by applicant by fraud or misrepresentation of facts, then AAR may by an order in writing, declare its earlier ruling to be void-ab-initio.

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September 2021