The disputes between the tax administration and the taxpayers are a perennial phenomenon. Investors/businesses always prefer certainty in their tax liabilities so that the same can be adequately budgeted for, in the cost of business/investment transactions.
Keeping this in mind, the Authority for Advance Rulings (‘AAR’) was constituted with an intent to provide a platform for non-residents to approach and determine their tax liability in advance, to avoid long drawn and expensive litigation. Provisions for AAR were introduced by the Finance Act, 1993 specifically for the non-resident taxpayers in India.
The initial confidence generated by the AAR made it popular amongst the non-resident investors and its resultant benefit was also extended to resident taxpayers as well as for excise and customs cases.
The purpose of this article is to highlight the benefits of approaching AAR along with highlighting the cases where it may be futile to approach AAR.
AAR can be approached by the following people/entities to seek an advance ruling in the cases mentioned below:
Where an application is filed and is admitted, the AAR pronounces its advance ruling on the question specified in the application. A time limit of 6 months is provided for the pronouncement of advance ruling, after the receipt of the application by authority. However, said time limit is directory in nature and it generally takes 12-18 months.
There are certain and clear benefits of obtaining an advance ruling:
An 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. However, as per the first proviso to Section 245R (2), an advance ruling cannot be sought where the question:
Generally, AAR is best suited to sort out complex issues of taxation including those concerning the interpretation of Double Taxation Avoidance Agreements (DTAAs) which arise consequently due to the difference in opinion between the tax collectors and the taxpayers.
Till date, AAR has given more than 350 rulings. Most of them have been on the issues mentioned below:
Advance rulings are a good mechanism to provide tax certainty on complex business transactions undertaken by non-resident investors. This creates a conducive environment for attracting foreign investments in India. This concept, based on the canon of certainty, is intended to overcome the obvious disadvantage of an uncertain tax position, so that the taxpayer is fore-warned about the tax ramifications of the action it proposes to undertake.
However, there have been instances where despite a favourable advance ruling, the taxpayer must undergo a detailed scrutiny with tax authorities. This largely happens in cases where the AAR decides the matter on facts which are yet to happen or are yet to be established, for e.g., determination of Permanent Establishment, taxability of offshore supply etc.
Since the AAR is basing its judgement on facts as envisaged by the taxpayer, it is not in a position to verify such facts. Hence, the tax authorities intervene at a later stage to verify the facts by digging deeper in the case. Invariably, in such cases, benefits of having a favourable advance ruling are nullified to a large extent.
Also, since AAR is not the final authority, a pronouncement by AAR is prone to litigation. The Supreme Court has, in the case of Columbia Sports Wear held that the orders of AAR can be challenged by filing a Writ Petition before the High Court.
Moreover, SLP against an advance ruling could also be considered by the Supreme Court if it involves a question of principle of great importance or if a similar question is already pending before the Supreme Court.
Given that the courts in India are already burdened with many cases, one would need to wait and see how the matters pertaining to AAR are taken up, and extent of time is taken for decision in these cases at the High Court level. Given the dynamic nature of the business and international trade, especially in cases where businesses are looking at fresh investment, if the overall time period for obtaining certainty is considerable, it may dilute the very purpose for which the AAR was approached.
Hence, the certainty of facts is one extremely important element while approaching AAR, considering that advance rulings are forward-looking, i.e., obtained prior to the transactions. Therefore, having clearly laid-out facts which are substantiated as much as possible becomes imperative.
Shrey Aggarwal, in collaboration with the Coinmen Research Team.