Mr. Sanjay Sanghvi (Partner Khaitan & Co.)
Authority for Advance Rulings - Impact of significant changes proposed in Finance Bill 2017


In tax matters, it is a cardinal principle that there should be 'certainty' and 'predictability' of tax implications in any host Country for foreign investors / non-residents (and also for resident tax payers).  Keeping this in view, the Government of India in early 1990's pursuant to opening up of the Indian economy to foreign investments, had set up the Forum of 'Authority for Advance Rulings' (AAR) primarily for non-residents / foreign companies to have clarity on their tax implications in India.  AAR is headed by a retired judge of the Supreme Court of India. As its name suggests, an applicant can approach the AAR to ascertain its taxability in India in relation to a proposed or a completed transaction in advance which will bring in certainty and avoid litigation with the Tax Authorities.

A key advantage of this forum is that the AAR is mandated to pronounce its ruling in a time bound manner (within 6 months of the application) and such a ruling is binding both on the Tax Authorities and on the Applicant who sought the ruling concerning the transaction. An advance ruling can be obtained for a completed transaction or for a proposed transaction (but not for a 'hypothetical transaction'). This brings a lot of certainty and helps non-residents / foreign companies in ascertaining their tax position in India.

A similar fora is also available for eligible applicants applying for advance rulings in the Indirect Tax field for seeking clarity on applicability of Central Excise, Customs & Service Tax. In the proposed Finance Bill, 2017 (Bill), the Government has proposed unification of the two by combining the AAR for Direct and Indirect Taxes. Once unified, the AAR will be like a one stop forum for all tax related questions that a non-resident may have and will accordingly go a long way in enhancing the ease of doing business in India.   

What constitutes an AAR:

As stated above, AAR needs to be chaired by a retired Judge of the Supreme Court of India (known as the Chairman). He can be assisted by Vice- Chairman (who has been a High Court judge), a Revenue Member (who is a high ranking officer from the Indian Revenue Service) as well as a law member (a high ranking officer from the Indian Legal Service). A Bench that hears the matters needs to consist of either the Chairman or Vice-Chairman and a Revenue Member and a Law Member.

Presently there is only one bench of the AAR which sits in New Delhi and is being presided by the In-Charge Chairman (the Hon'ble Law Member) in view of a Patna High Court Ruling passed in relation to a writ petition filed by one Mr Rajeev Kumar. 

One of the Rules of the Advance Rulings Procedures (Rules), 1996 (Rules) requires the that a hearing can be taken by a Bench atleast consisting of two members, one of whom is the Chairman, the Rules further provide that in case no other member is available, the Chairman alone will function as the Authority. There have been instances of vacancy in the post of Chairman of the AAR which has resulted in the forum coming to a standstill for certain period. Taking into consideration these practical issues, the Bill proposes to amend the qualification criteria by allowing a former Chief Justice of a High Court or a High Court judge (who has served as a High Court judge for atleast seven years) to become a Chairman of the AAR. To ensure smooth functioning and to avoid a vacancy in the office of Chairman, it is also proposed that if the Chairman is unable to discharge his functions owing to absence, illness, etc. or if his office is vacant, the Vice-chairman will discharge the functions of the Chairman of AAR.  This is a welcome move.

This has been done with a view to address large number of pending cases at the AAR, especially since the prescribed time limit for pronouncement of Advance Ruling by the AAR is 6 months. As per data available on the AAR's website, there are over 400 cases pending for ruling as on date. Considering the pendency as well as the interest shown by the applicants in this fora, it is imperative that the Government takes all necessary steps to constitute the Bench in Mumbai as well as gradually in other major cities. This relaxation in eligibility criteria for Chairman appointment as well as functioning of the AAR even if the AAR even if the post of Chairman is vacant are very welcome and steps in right direction. The focus of the present Government has been to reduce litigation, bring down pendency of cases as well as usher in certainty and a non-adversarial tax regime in India.

Who can apply and when?

An application for advance ruling can be made by a non-resident, a resident concerning the taxability of a non-resident, a resident for a transaction of INR 100 Crores or more (introduced in 2014), a notified public sector company or any person who needs clarity on whether a proposed transaction will attract the rigours of 'General Anti Avoidance Rules' (GAAR).

A  pre-requisite for filing an AAR application is that a 'question' raised by the Applicant must not be pending before any Income Tax Authority / Appellate Tribunal or any Court. In certain rulings pronounced by the AAR, it was held that an application for an AAR filed after filing of return of income will be invalid as the question will then be pending before the Tax Authorities. However, in later cases including one from the Supreme Court[1] it has been held that mere filing of return of income before the AAR application would not make the application invalid.

  • Sin Oceanic Shipping ASA Norway vs AAR [2014] 41 taxmann.com 444 (SC)
  • Hyosung  Corporation, Korea AAR No. 1138, 1140- 1144, 1150 of 2011 (AAR), later upheld by Delhi High Court
  • LS Cable & System Limited, Korea Hyderabad Project A.A.R. No. 1321 of 2011

Procedure to be followed:

An application needs to be filed in the prescribed form along with the requisite filing fees. A copy of the application is served on the jurisdictional Commissioner of Income Tax and relevant records may be called from them (if required). Once an application is filed, the AAR considers its maintainability by passing an admission order. In the said proceedings, the AAR needs to ascertain whether the 'question' raised by the Applicant is already pending as discussed above, whether the 'question' involves determination of fair market value of any property or does the 'question' relate to a transaction or issue which is designed prima facie for the avoidance of Income Tax. If the answer to any of the above 'questions' is in the affirmative, then the AAR will reject the application and pass a rejection order (after hearing the concerned parties).

If the answer to these 'questions' is in the negative, then the AAR may admit the application and list the application for a final hearing on merits of the case under Section 245R(4). Whilst the 'question' is pending before the AAR, the normal assessment proceedings or any proceedings will be automatically stayed and the time taken for the AAR proceedings will be excluded from or added to the statutory time limits available for various tax appearances.

The proceedings before the AAR are judicial proceedings and the AAR has all the powers of a Civil Court as prescribed under the Code of Civil Procedure. A ruling obtained by fraud or misrepresentation of facts will be void ab initio.

Advance Ruling pronounced - What next?

A ruling of the AAR is binding on the applicant as well as the Tax Authorities and accordingly, once an advance ruling is pronounced, the Tax Authorities will pass an assessment order giving effect to the said ruling. There is no statutory right of appeal available under Income Tax Act against an advance ruling, if one of the parties is aggrieved by the ruling. In such a situation, it has been seen that the aggrieved parties have approached the High Courts under Article 226 and 227 of the Constitution of India by way of a writ petition or the Supreme Court by way of a Special Leave Petition. At the time of hearing the case of Columbia Sports, the Hon'ble SC raised a question regarding legal maintainability of SLPs filed against the rulings pronounced by the AAR. The Hon'ble SC has held that unless an SLP raises 'substantial questions of general importance' or 'a similar question is already pending before the SC for a decision', it would not entertain SLPs directly against rulings of the AAR and the parties should first approach the High Court by way of a Writ Petition filed under Article 226 / Article 227 of the Constitution, if they so desire. There have also been instances in the past when the Supreme Court had entertained SLPs against rulings of the AAR and ruled on the issues involved.

Concluding Comments:

There are a number of rulings pronounced by the AAR concerning major issues like eligibility of treaty benefits (especially in case of Capital Gains exemption in case of sale by Mauritius, Singapore entities), taxability of income streams like royalties, Interest, buy-back, applicability of MAT on foreign companies, etc. These rulings (though not binding on others) do have a persuasive value and go a long way in bringing in certainty in doing business especially for non-resident tax payers. Recent amendments proposed in the Bill, unifying both AAR's, relaxing the eligibility criteria for its Chairman as well as the Rules for functioning of the AAR show that the Government is actively looking at this fora to reduce litigation and bring in certainty in tax laws.

The forum of AAR is meant for giving a certainty to non-residents / foreign investors in terms of knowing their tax position in India for a proposed / an actual transaction with a view to avoid any surprise later on and thereby avoid the tax litigation.  However, given the lack of sufficient infrastructure and the fact, there is only Bench (stationed in New Delhi to deal with all advance ruling applications), naturally it impacts its ability to dispose of applications at the earliest.  This has led to a significant pendency and old applications are yet to be decided by the AAR even though the law provides that a ruling is to be pronounced within 6 months from the date of receipt of the application by the AAR.  Some serious efforts need to be made by the Government to enable this very useful Forum to pronounce advance rulings within the prescribed time frame.  While in July 2014, the Government of India had announced that it will set up 'additional benches' of AAR in other metro cities (Mumbai, etc.), this decision is yet to be implemented. It is earnestly requested that the Government will implement this very important announcement at the earliest without any further delay so that pending applications can be dealt with and disposed of by the Hon'ble AAR expeditiously so that the laudable objective behind the setting up this Forum is achieved.