Provisions related to advance rulings under Income Tax Act, 1961

Chapter XIX-B consists of sections related to Advance Rulings. Section 245N to 245V provide a scheme for giving advance rulings. These rulings are for transactions involving non-residents and specified residents. These provisions are necessary to avoid litigations and promote better taxpayer relations. Below are links to sections related to Advance Rulings –

What does this section provide?

This section provides relief to non-residents and specified residents. It lets them obtain advance rulings to eliminate scope of later litigations. Advance Rulings let them get clarity for calculation of income taxes. Decisions made under Advance Rulings are final. Assessees who request such advance rulings cannot question the determination or decision by the Authority.

Who can make an Application?

Any non-residents who have either entered into a transaction or have proposed to enter into a transaction can make applications. This application can be made to predetermine the taxability and computation of taxes for such undertaken or proposed transaction. Applications can also be made for transactions that involve any question of laws or of facts. Residents entering into such transactions with non-residents can also make application for advance rulings.

Central Government has issued Notification No. 73/2014 dated 28.11.2014. It allows residents who have either entered or proposed to enter into transactions valuing ₹ 100 Crore or more to make an application for determining their tax liability. Further, the Central Government has reserved their right to allow residents falling within such class or category of persons which are notified through Official Gazette. In this regard, Central Government has notified following class of persons as applicants –

(a). Public Sector Company as defined under section 2(36A) of the Income Tax Act.

(b). A person seeking an advance ruling in relation to the tax liability of a non-resident arising out of a transaction undertaken by him with the non-resident.

However, Authority for Advance Rulings (AAR) will not allow an application in respect of the following –

(i). Any question pending before any Income-tax Authority, Appellate Tribunal or Court (Except in the case of a resident applicant notified by Central Government as such class of persons that are allowed to make applications for advance rulings]

(ii). Any question that involves the determination of the fair market value of any property; and

(iii). Any question in relation to a transaction which is designed prima facie for the avoidance of income-tax (Except in case of a resident applicant notified by Central Government as such class of persons that are allowed to make applications for advance rulings]

Restrictions on Appellate Authority

Section 245RR provides that where a resident applicant has made an application to AAR and referred issues therein for the decision of AAR, then, any Income-tax Authority or Tribunal should not take any decision in respect of such issues. This section denies use of both remedies for a resident assessee. Such resident can choose only any one of the two remedies i.e either for revision under Income-tax Authority/Appeal Authority or under application for Advance Ruling to AAR.

Authority for Advance Rulings [Section 245-O]

AAR shall be constituted by the Central Government. It will be made up of a Chairman (a person who has been a judge of the Supreme Court), Vice-Chairman (a person who has been a Judge of a High Court), Revenue Member from the Indian Revenue Service (a IRS who is a Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General) and a law Member from the Indian legal Service (a person who is, or is qualified to be, an Additional Secretary to the Government of India).

Their Terms and conditions of service and the salaries along with allowances payable to them will be as prescribed. Central Government shall also provide the Authority with such officers and employees, as may be necessary, for the efficient discharge of the functions of the Authority under this Act. AAR is established in National Capital Territory of Delhi. Powers and functions of AAR to be discharged by its Benches as may be constituted by the Chairman from amongst its Members thereof. Such Bench will consist of –

• The Chairman or the Vice-Chairman; and
• One Revenue member; and
• One law member

Such Benches can be placed at any location notified by Centra Government.

Section 245P specifically tells that no proceedings of such AARs will be invalidated on account of vacancies or any defect in the constitution of the Authority.

Applicability of Advance Ruling [Section 245S]

Advance rulings are binding only upon the applicants who have sought it and in respect of only those specific transactions in relation to which such advance rulings were sought. It will also be binding on the Principal Commissioner or Commissioner who are having jurisdiction over the applicant and the Income-tax Authorities subordinate to them. Such advance ruling will continue to remain in force unless there is a change either in law or in fact on the basis of which the advance ruling was pronounced.

What are circumstances under which Advance Ruling can be void?

Any rulings made by AAR are final. They cannot be challenged by Income Tax Authorities or such applicants. However, there are circumstances where such rulings can become void. This is possible when such advance ruling has been obtained by the applicant by fraud or misrepresentation of facts. Under such circumstances, the Authority may, by order, declare such ruling to be void ab initio. The consequence of such declaration of void ab initio is that provisions of Income Tax Act shall apply as if no application have been made to AAR. A copy of this order will be sent to both the applicant and the Principal Commissioner or Commissioner.

Power of Authority [Section 245U & 245V]

Section 245U allow certain powers to Authority for Advance Rulings (AAR). Such authority will have all powers of the Civil Court in respect of –

• discovery and inspection
• enforcing the attendance of any person, including any officer of a banking company and examining on oath,
• issuing commissions and
• compelling the production of books of accounts and other records.

It will have the power to regulate its own procedure in all matters arising out of the exercise of its powers under the Act. This Authority would also be deemed to be a Civil Court for the purposes of section 195 of the Code of Criminal Procedure, 1973 and every proceeding before the authority shall be deemed to be a judicial proceeding under the Indian Penal Code. Section 245V provides power to AAR for regulating Its own procedures in all matters arising out of the exercise of its powers under the Act.