An Introduction To The Authority For Advance Rulings

By Pitamber Yadav

Introduction

This paper will discuss the topic of the authority of advance rulings, an independent adjudicatory body formed by the Central government for preventing disputes. The paper will first delve into the background on why such a body was needed, and the objectives of having such a quasi-judicial body for expedient settlement of disputes.

Then the paper will further delve into the scope of such an authority, by analyzing on what matters such advance rulings can be sought, as well as situations in which application of advance rulings are absolutely barred. The paper will also discuss the procedural aspects of the authority, in addition to looking at the biding nature of such an authority. Lastly, the paper would be addressing the question whether the civil courts, i.e. High courts and Supreme court can be approached by means of writ jurisdiction to challenge the orders passed by the AAR, and whether this undermines the independence of the authority or not, covering the controversy around the Columbia Sportswear Company[1] decision.

Meaning of AAR

In this modern era of globalization, international boundaries are shrinking faster than ever before, and trade barriers between nations are fast disappearing. There is growing competition between countries with respect to attracting more and more investments from businessmen and multinationals of other countries. Such trade liberalization and shrinking of international boundaries has resulted in an increasing number of international taxation issues, namely unavoidable misuse in tax planning, conflicts between domestic laws and double taxation avoidance agreements, taxation of international mergers and acquisitions, transfer pricing etc. Such individuals and institutions thus require clarity as to their liability with respect to taxes under the Indian regime, providing the interested foreign investor with the correct and accurate information that he needs. Thus, one of the major demands of such foreign investors was provide them with a system of advance rulings, to enable them to ascertain their tax liabilities in India. Thereby the scheme of advance rulings was introduced by the finance act, 1993, Chapter XIX-B of the Income Tax Act. Under such a scheme, the power of giving advance rulings has been entrusted to an independent adjudicatory body.

Who constitutes the Authority for Advance ruling

Under Section 245O of the Income tax Act, the AAR constituted by the Central Government shall consists of a chairman, who is a retired judge of the Supreme Court, an officer of the Indian revenue service who is qualified to be a member of, the Central Board of Direct taxes, and an officer of the Indian Legal Service, who is qualified to be an Additional Secretary to the Government of India. Also, the office of the Authority shall be located in New Delhi.[2]

Eligibility to seek an Advance ruling? 

All individuals are not eligible to apply for an advance ruling and may be availed as under Section 245N(b) only by a non-resident whose tax liability is being determined, a resident entering into or proposing to enter into a transaction with a non-resident, a resident falling into a class notified by the Central Government (PSUs) in respect of his tax liabilities, and such determination shall include the determination of any question of law or of fact specified in the application, and a notified resident in respect of computation of total income pending before any income tax authority or appellate tribunal.[3]

AAR Procedure

Section 245R[4] of the Income Tax Act provides for the procedure to be followed by the AAR after receipt of an application. After the application is received in the office of the AAR, the concerned Commissioner of Income tax has to furnish the relevant records of the applicant, and also accord his views on the issues raised in the application as well as the answers suggested by the applicant. The Commissioner can also nominate a person to represent him if he wishes to be heard. After screening the application, if the authority is satisfied that the application is to be rejected, it may only do so after giving the applicant a reasonable opportunity to be heard. In addition, the authority while rejecting the application must also set out the reasons for doing so, in order to comply with principles of natural justice. If there is no such objection, then the application is admitted without a formal hearing, and a date is fixed for hearing on merits. Such an authority has the powers of a civil court to obtain any further information as it may consider necessary. Also, the AAR shall pronounce its rulings within six months of the receipt of the application and a copy of the advance ruling shall be sent to the applicant and to the Commissioner after such pronouncement.

Section 245S[5] states that an advance ruling is binding on the applicant who had sought the ruling with respect to the specific transaction, on the Commissioner and the income tax authorities subordinate to the Commissioner. Also, when the proposition on which the ruling has been given adjudicates a general question of law or a principle, it will, as a matter of judicial propriety be followed in other cases as well, provided that the material facts are similar. However if there were any change in law or facts on the basis of which the ruling was pronounced, then the ruling would lose to have its force.

Conclusion

Broadly speaking, the main objective of the AAR is to enable a taxpayer to ascertain his tax liability in advance so that he can make a wise decision whether or not to go ahead with the transaction he intends to undertake. Overall, the Indian system has proved to be greatly successful in this regard by providing speedy and efficient adjudication to its applicants. However there still exist a few impediments to its functioning. As discussed above, adding another layer of appeal by imposing writ jurisdictions of the High Courts and Supreme Court would be perfectly acceptable, provided such courts exercise such a jurisdiction in a discretionary and an expeditious manner, thereby not undermining the independence of the AAR. Also on an average, matters before the AAR have now started to take twelve to eighteen months for their disposal, which undermines the purpose of speedy disposal for which it was formed. With an increasing number of applications pending for disposal before the tribunal, there is a growing need to increase the capacity of the institution by increasing the number of benches to deal with the backlog as well as appointing experts in taxation as members, or else the AAR would prove to be another overburdened institution in the Indian legal system.


Pitamber Yadav is a fourth year student at Jindal Global Law School


endnotes

[1] Columbia Sportswear Company V. DIT, Bangalore, A.I.R. 2012 S.C. 3038.

[2] Section 245-O, Income tax Act, 1961

[3] Section 245N(b), Income tax Act, 1961

[4] Id. at 7

[5] Section 245S, Income tax Act, 1961

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