Authority for Advance Rulings (Income-tax) – FAQs

The Advance rulings 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. Even a resident applicant may seek rulings regarding tax liability of a non¬resident in relation to a transaction with the resident applicant. In case of a public sector undertaking advance rulings may be sought on an issue of fact or law relating to computation of total income, pending before an Income-tax Authority or the Appellate Tribunal.

Some of the issues on which rulings are frequently sought are :-

I. Application of DTAAs entered into by India and their use in tax planning, conflicts between DTAAs and domestic tax legislation, e.g. determination of tax residence on the basis of facts of a particular case.

II. Determination of permanent establishment, particularly in relation to cases involving Business Process Outsourcing (BPO), Liaison offices.

III. Taxation problems in India of International partnerships.

IV. Transfer of assets into and out of tax jurisdictions vis-à-vis Indian taxation.

V. Taxation of services, royalties, technical fees and income from supply of labour, equipments etc.

VI. Taxation of Foreign Investment Institutions, investment funds, venture capitalfunds, offshore funds, financial instruments and derivatives, cross-border leasing.

VII. Taxation of e-commerce.

VIII. Problems relating to withholding of tax.

On the scope of the AAR and related procedural issues the questions that often arise are:-

Q. What is the scheme of “Advance Rulings”?

Ans. With a view to avoiding disputes in respect of assessment of income-tax liability in the cases of non-residents, residents having transactions with non-residents, and public sector companies, a Scheme of Advance Ruling is currently in force in India. Chapter XIX-B of the Income-tax Act, 1961 contains statutory provisions in this behalf. The scheme enables the aforesaid categories of applicants to obtain, in advance, a binding ruling from the Authority for Advance Rulings on issues which may arise in determining their tax liabilities. Time consuming and expensive litigation can, thus be avoided.

Q. Who can apply for Advance Ruling?

Ans. Under section 245N of the Income-tax Act, 1961, a request for advance ruling can be made by an applicant. Section 245N(b) of the Income-tax Act lays down various categories of applicants.

(i) Non-resident applicants: Undersection 2(30) of the Income-tax Act a non-resident is one who is not a resident in India. Section 6 of the Income-tax Act, 1961 contains statutory provisions to determine the residential status of various tax entities, namely, individual, Hindu Undivided Family, a company, a firm, an association of persons, localauthority and others.

(ii) Resident applicants: A resident can also make an application for advance ruling in relation to a transaction undertaken or proposed to be undertaken by him with a non-resident. According to section 2(42) of the Income-tax Act, a “resident” means a person who is resident in India within the meaning of section 6 of the Income-tax Act. As already mentioned above, section 6 of the Income-tax Act contains statutory provisions to determine the residentialstatus of various tax entities.

(iii) Public sector companies: As per notification issued by the Government of India, public sector companies have also been notified to be eligible for making application for seeking advance ruling under Chapter XIX-B of the Income-tax Act. According to section 2(36A) of the Income-tax Act, 1 961 a “public sector company” means any corporation established by or underany Central, State, or ProvincialAct ora Government Company as defined in section 61 7 of the Companies Act, 1956.

Q. What are the advantages in seeking advance rulings?

Ans. The principal advantages in seeking advance ruling are as under:

(i) It helps the non-residents and residents having transactions with a non-resident, in planning their income-tax affairs well in advance. It also helps the public sector companies in resolving their disputes relating to computation of totalincome pending before any income-tax authority or the Income-tax Appellate Tribunal.

(ii) It brings certainty in determination of income-tax liability. (iii) It helps avoid long-drawn and expensive litigation.

In short, the scheme of advance ruling provides inexpensive, expeditious and binding solutions to the income-tax problems.

(At times, the parties may exercise their constitutional right to file a writ or a SLP before the High Court or the Supreme Court.)

Q. Is advance ruling binding on the applicant and the Income-tax authorities?

Ans. The Advance ruling pronounced by the Authority is binding on the applicant in respect of the transaction in relation to which the Ruling had been sought. The Ruling is also binding on the Commissioner, and the Income-tax authorities subordinate to him, in respect of the applicant who had sought it and the transaction in relation to which it had been sought. The advance ruling so pronounced continues to be binding unless there is a change in law or facts on the basis of which the advance ruling was pronounced.

Q. Can application of advance ruling be made at any time?

Ans. Non-resident applicants and resident applicants having transactions with a non-resident can apply for advance ruling even before taking up a transaction in India (i.e. proposed transaction) or in respect of a transaction, which has already been undertaken by them. In terms of section 245R(2) of the Income-tax Act, a non-resident as well as a resident having transactions with a non-resident cannot make an application for advance ruling in case the question raised by them is already pending before any income-tax authority or the Income-tax Appellate Tribunal or any Court. As a matter of caution, non-resident applicants as well as resident applicants having transaction with non-resident should apply for advance ruling before the submission of their return of income.

Public sector companies can seek advance ruling only when an issue relating to computation of their total income is pending before any income-tax authority or the Income-tax Appellate Tribunal. Thus, the pendency of an issue before any income-tax authority or the Income-tax Appellate Tribunal, on which advance ruling is sought is a pre¬condition for public sector companies for making an application for advance ruling. Public sector companies are also precluded from seeking advance ruling on a question, which is already pending before any court.

Q. Can ruling already pronounced by the Authority for Advance Rulings be revoked?

Ans. Section 245T of the Income-tax Act, 1 961 provides certain  circumstances under which advance ruling pronounced by the Authority for Advance Rulings becomes void. Under the said provisions, an advance ruling becomes void where the Authority finds, on a representation made to it by the Commissioner of Income-tax or otherwise, that an advance ruling pronounced by it has been obtained by the applicant by fraud or misrepresentation of facts. In such a situation all the provisions of the Income-tax Act shall apply as if such advance ruling had never been made. The applicants are advised to ensure that there is full and true disclosure of all material facts while seeking ruling from the Authority.

In terms of the provisions of sub-section (2) of section 245S of the Income-tax Act, the advance ruling shall cease to be binding where there is a change in law or facts on the basis of which the advance ruling was pronounced.

Q. Is there any period prescribed during which ruling remains valid? If no, can ruling already pronounced remain valid indefinitely?

Ans. The ruling is valid only in respect of the transaction/transactions, in relation to which the Ruling had been sought forthe period of that transaction.The ruling remains valid and in force unless there is a change in law or facts of the basis of which the advance ruling had been pronounced.

Q. What is the procedure for making application for advance ruling?

Ans. Procedure for making application for advance ruling has been prescribed under the Authority for Advance Rulings (Procedure) Rules, 1996. An application for advance ruling should be made in the prescribed form duly signed by the applicant or a person duly authorized in accordance with the provisions of Rule 44E of the Income-tax Rules, 1 962 as amended from time to time. Application should be made in quadruplicate and be accompanied by bank draft of Rs.2500 in favour of the Authority for Advance Rulings payable at Delhi.

Three different forms have been prescribed for different categories of applicants. While Form No. 34C has been prescribed for non  resident applicants, Form No. 34D has been prescribed for residents having transactions with a non-resident and Form No. 34E for public sector companies.

Applications are required to be accompanied by two Annexures. While Annexure-I is a statement of the relevant facts having a bearing on the question(s) on which advance ruling is required, Annexure-II is a statement containing the applicant’s interpretation of law or facts, as the case may be, in respect of the question(s) on which advance ruling is required.

Application forms are incorporated in this Handbook, they are also available online on the website of AAR www.aar.gov.in

Application may be delivered either personally or sent through Registered Post at the following address ?

Authority for Advance Rulings

5th Floor, NDMC Building,

Yashwant Place, Satya Marg,

Chanakyapuri,

New Delhi- 110 021 (INDIA)

Q. What is procedure for hearing of the application etc.?

Ans. Section 245R of the Income-tax Act, 1961 lays down the procedure required to be followed on receipt of the application. Under the said provision a copy of the application is forwarded to the jurisdictional Commissioner of Income-tax calling upon him to furnish the relevant records. The Authority may, after examining the application and the records called for, by order, either allow or reject the application. However, no application can be rejected unless an opportunity has been given to the applicant of being heard. Statutory provisions further require the reasons for rejection to be given by the Authority where the Authority decides to reject the application.

In case the Authority decides to proceed with the application, an opportunity of hearing is given both to the jurisdictional Commissioner of Income-tax as well as to the applicant. The applicant may himself attend before the Authority or may appoint an authorized representative to represent him before the Authority.

Q. Can an applicant challenge the ruling pronounced by the authority before any Court?

Ans. The advance ruling is binding on the applicant who had sought it and in respect of the transaction in relation to which it had been sought. Thus, the applicant cannot challenge the advance ruling pronounced by the Authority. However, the applicant can invoke, in appropriate cases, the writ jurisdiction of the High Courts in terms of Articles 226 and 227 of the Constitution. Similarly, extraordinary jurisdiction as conferred upon the Supreme Court of India under Article 136 of the Constitution of India can also be invoked in appropriate cases.

Q. How can the applicant be sure that his application is in order?

Ans. In order to ensure that the application is in order, the applicants are advised to check the following points before submitting the application to the Authority:

(i) Whether application is in the prescribed form.

(ii) Whether verification and the annexures/statements accompanying the application are duly signed by the applicant himself or a competent person [Rule 44E(2) of Income-tax Rules].

(iii) Whether Power of Attorney is enclosed by the authorized signatory together with affidavit in terms of proviso to sub-rule (2) of rule 10 of the Authority for Advance Rulings (Procedure) Rules, 1996.

(iv) Whether basis of claim for being a non-resident is properly documented, viz., details of stay of individual applicant in India duly supported by authenticated photocopy of passport; in case of non-resident company, authenticated copy of certificate of incorporation etc.

(v) Whether the English translation of a document is enclosed, if the document is in any language other than Hindi or English.

(vi) (a) Whether the questions framed by the applicant are based on actual or proposed transactions.

(b) Whether the questions are framed in such a manner that their reply can be given in affirmative (“Yes”) or negative (“No”).

(vii) Whether the applicant has stated in detail the relevant facts and also disclosed the details/nature of transactions as also his business or profession.

(viii) Whether the applicant has clearly stated his interpretation of law or facts in respect of questions on which ruling is sought.

(ix) Whethercomplete details of assessmentviz., details of Assessing Officer having jurisdiction over the applicant, Permanent Account Number (PAN) etc. have been stated wherever possible.

(x) Whether, in case of resident having transaction with non¬resident, basis of claim of the related person to be treated as a non-resident is spelt out.

(xi) Whether, in case of public sector company, the questions of law or of fact arise out of computation of total income and whether such questions are pending before any income-tax authority or the Income-tax Appellate Tribunal.

(xii) Whether copies of assessment order or appellate order (in case they have been passed) are enclosed along with application in the case of a Public Sector Company.

Q. Can the applicant withdraw the application once made?

Ans. In terms of sub-section (3) of section 245Q of the Income-tax Act, an applicant may withdraw the application within 30 days from the date of the application. However, traditionally, the Authority has been permitting withdrawal of application even thereafter in appropriate cases.

Q. What is the time generally taken by the authority to pronounce the ruling?

Ans. Sub-section (6) of section 245R of the Income-tax Act requires the Authority to pronounce its advance ruling in writing within six months of the receipt of the application. The aforesaid time limit is however, directory in nature. Efforts are made to pronounce the rulings as expeditiously as possible.

Q. Are the contents of the application or information revealed by the applicant during proceeding kept confidential?

Ans. The contents of the application or the information revealed by the applicant during the course of proceedings before the Authority are not revealed to outsider. Rule 24 and rule 25 oftheAuthorityfor Advance Rulings (Procedure) rules provide that the proceedings before the Authority are not open to the public and the order/ruling maybe released for publication on such terms and conditions as the Chairman of the Authority may specify. As a matter of policy the Authority does not reveal business/trade secrets of applicants to outsiders. Even the names of the applicants or their associates are sometimes withheld while releasing the rulings for publication in various law journals. Thus, the Authority ensures due protection of business interest of the applicant.

Q. Can ruling be sought bythe applicant in respect of Income-tax matters only or in respect of other matters such as Wealth Tax, Customs Duty, Excise Duty, Service Tax etc.?

Ans. Questions of law or facts pertaining to income-tax matters alone can be raised before the Authority for Advance rulings. AnotherAuthority forAdvance Rulings forthe indirect taxes has been established by the Finance Act, 1 999.

Q. Are the rulings pronounced by the Authority reported! published, if so where they can be seen?

Ans. Since February 2005, the AAR (IT) has introduced its website which contains all the rulings pronounced since February 2004. The website address is www.aar.gov.in.

Important rulings are released for publication in various tax law journals on such terms and conditions as may be prescribed by the  Chairman of the Authority. These rulings are generally published in Income-tax Reports (ITR), Current Tax Reporter (CTR), Taxman, Taxation, etc. Published rulings are also generally available in the form of CDs through various income-tax software providers such as Jurix, Tax-experts etc. There are many other websites of leading tax information services which report the rulings pronounced by the Authority.

Q. Can advance ruling be sought by a non-resident even after submitting his return of income?

Ans. According to first proviso to sub-section (2) of section 245R of the Income-tax Act, 1961 ,the Authority shall not allow the application of a non-resident where the question raised in the application is one which is already pending before any income-tax authority or the Income-tax Appellate Tribunal. The Authority may, therefore, decide upon the maintainability of such applications after due appreciation of the facts and issues involved in each case. As a matter of caution, a non-resident should submit his application before submission of his return of income.

Q. Can a ruling be sought on an issue which is already sub-Judice before the Income-tax Appellate Tribunal or Court in the applicant’s own case or some other cases where identical issues are involved?

Ans. A non-resident applicant and a resident having transactions with a non-resident are precluded from seeking a ruling on such questions, which are already pending before any income-tax authority or the Income-tax Appellate Tribunal, in its own case.

A public sector company can, however, seek ruling on such questions, which are pending before any income-tax authority or the Income-tax Appellate Tribunal. In no case, a question, which is already  pending before any court can be raised in the application for advance ruling.

Q. Is the applicant bound to execute proposed transactions in relation to which he had obtained advance ruling?

Ans. There is nothing in the Income-tax Act, 1961 requiring such applicants to actually execute such transactions.

Q. If I submit my income-tax return after having submitted application for advance ruling, what would be the fate of my application?

Ans. According to section 245RR of the Income-tax Act, 1961, no income-tax authority or the Income-tax Appellate Tribunal shall proceed to decide any issue in respect of which an application has been made bya resident applicant. As far as non-resident applicants are concerned, the income-tax authorities can proceed with the return and to that extent the mere submission of application for advance ruling will not have any impact on the actions to be taken by the income-tax authorities on the return of income furnished by them. As a matter of caution, non-resident applicants should submit their application for advance ruling well before the submission of their return of income.