Authority for Advance Rulings (AAR)

CONCEPT OF ADVANCE RULING

Sometimes, a person, who enters into a transaction, may not be sure relating to the amount of tax
he may have to pay, on the income which he earns out of such transaction. In order to obtain
certainty, regarding the tax treatment of such income, a non-resident, has an option to obtain an
advance ruling in India, which outlines, the tax, which would be payable on income arising out
of such transactions.

Simply speaking, advance ruling is a mechanism , through which, parties to a transaction, can
approach Authority for Advance Ruling (“AAR”) , to decide what will be the tax implications,
of a particular transaction. This method, avoid tax litigation, as the ruling is binding on the party
which obtains it, as well as the tax authorities.

From the perspective of the Indian payor, it gives them certainty on the amount of taxes which
are to be withheld from the payment to the non-resident.

WHO CAN OBTAIN AN ADVANCE RULING AND COVERED TRANSACTIONS

The Authority for Advance Rulings (‘AAR’), gives a ruling to either of the following : –

 Non – Resident , including a person, who is acting as an agent of the non-resident .

The applicant should be a non- resident, during the relevant accounting year. The fact that he
subsequently becomes a resident, would not make any difference to the eligibility to make an
application ; or

 Specified resident: –
Certain public sector companies – Refer Para
Other resident applicant for determining their tax liability on transactions with Resident
or Non-Resident valuing INR 100 Crores or more – Refer Para

The transaction, in relation to which the Ruling is provided could be

  Transaction which has been undertaken in the past ; or
 A future

Once such Ruling is given, it brings upfront clarity, with regard to the taxability of income
arising from such transaction to the applicant. The scheme of Advance Rulings reduces
potential disputes between the Income-tax authorities and the taxpayers.

WHAT IS AN ADVANCE RULING ?

We have already discussed that advance ruling is a mechanism through which,parties can
approach Authority for Advance Ruling (AAR) , to decide the tax implications of a particular
transaction. Now we will analyses the definition of advance ruling given in the Income-Tax Act.

As per Section 245N(a) advance ruling means –

i. A determination by the Authority in relation to a transaction which has been undertaken

or is proposed to be undertaken by a non-resident Applicant :-

Where the non-resident has undertaken any transaction (past), or proposes to undertake any
transaction, and he is not sure about the taxability of such transaction in India, such non-resident
may apply to Authority for Advance Ruling to determine the tax liability arising out of such
transaction.

Suppose, Mr. Gary is a tax resident of Singapore, and he plans to sell shares of an Indian
company to another non-resident based out of USA. However, he is not clear about taxability of
such capital gains in India, as per the Tax treaty between India and Singapore / Income-Tax Act,
1961.  Gary can make application before Authority for Advance Ruling in order to determine the
taxability of such capital gains in India.

ii. A determination by the Authority in relation to the tax liability of a non-resident arising
out of a transaction which has been undertaken or is proposed to be undertaken by a
resident applicant with such non-resident
Where the non-resident has undertaken any transaction or proposed to undertake a transaction
with the person resident in India, then the Authority for Advance Ruling may determine
taxability of such transaction in India.

iii. A determination by the Authority in relation to the tax liability of a resident applicant,
arising out of a transaction which has been undertaken or is proposed to be undertaken by
such applicant, and such determination shall include the determination of any question of
law or of fact specified in the application

The Authority for Advance Ruling initially determined the tax liability of non-resident only.
However, with effect from October 1, 2014, the Finance Act, 2014 inserted a specific provision
permitting specified residents , to approach Authority for Advance Ruling to determine their tax
liability arising out of past transaction or future transaction.

CBDT vide Notification No. 73/2014, dated 28-11-2014,  has notified the following as such
specified class of resident to include a resident person, in relation to his tax liability arising out
of one or more transactions valuing Rs100 crore or more in total , which has been undertaken
or proposed to be undertaken.

Suppose, Mr. A is a resident in India and has sold shares of a Netherlands company to a US
buyer, for a total consideration of 120 crores,  Mr. A can approach Authority for Advance Ruling
in order to determine his tax liability arising out of such transactions.

In this case the Authority for Advance Ruling may also determine any question of law or fact as
specified in the application.

iv. A determination or decision by the Authority in respect of an issue relating to

computation of total income which is pending before any income-tax authority or the
Appellate Tribunal and such determination or decision shall include the determination or
decision of any question of law or of fact relating to such computation of total income
specified in the application;
v. A determination or decision by the Authority whether an arrangement, which is
proposed to be undertaken by any person being a resident or a non-resident, is an
impermissible avoidance arrangement as referred to in Chapter X-A or not:

Where there is any proposed arrangement by a resident or non-resident person, the application
can be made before the Authority for Advance Ruling to determine whether GAAR provisions
are applicable on such transaction.

ENABLING PROVISIONS

The provisions of law, pertaining to Authority for Advance Rulings (AAR) are as follows : –

1. Chapter XIX – B of the Income Tax Act, 1961 – Section 245N to 245V;
2. Rules 44E and 44F of the Income-tax Rules,1962 ; and

 the Authority for Advance Ruling (Procedure) Rules, 1996 [‘Rules’].

ILLUSTRATION–1
MNC Ltd. UK, is a worldwide leader in manufacturing car engines and after support services for
such engines. It intends to sell such engines goods to IMI Private Limited, an Indian company,
which manufactures automotives. The contract involves supply of engines and providing after
sales support services, which would be provided from the factory premises of IMI Private
Limited . MNC Ltd. UK , and IMI are not sure,  whether the income arising from such sale and
after sale support services would be taxable in India. Can MNC Ltd obtain an AAR Ruling ?
Why should IMI Private Limited be interested in getting such ruling for MNC Ltd. UK ?

SOLUTION

Authority for Advance Rulings, gives a ruling to a non-resident relating to transaction which is
proposed to be undertaken. Hence, MNC Ltd. UK can obtain an AAR Ruling . IMI Private
Limited would be interested in getting such ruling for MNC Ltd. UK, since it is under a legal
obligation to withhold tax from such payments. If it does not withhold taxes, and Indian
Government is unable to recover such taxes from MNC Ltd. UK, it shall be liable for the
following consequences : –

 TDS can be recovered from IMI, considering it as an agent of MNC UK ;

 It shall be liable for interest for non-deduction of TDS @ 1% per month from the date
such tax was deductible till the date such tax is deducted;
 It may be liable for penalty for default in deduction of TDS

ILLUSTRATION – 2

XYZ Ltd UK, has been supplying software since FY 2016-17 to IMI Private Limited, an Indian
company  for a total consideration exceeding Rs. 200 crores per year . There are no income tax
proceedings pending against XYZ Ltd UK, in respect of any transaction in India. Can XYZ Ltd
UK, obtain an Advance Ruling during FY 2018-19, assuming the sales are likely to exceed Rs.
200 crores in this FY as well ? Alternatively, where IMI sells such goods to another unrelated
Indian company for Rs. 225 crores, can IMI Private Limited, an Indian company obtain an
Advance Ruling to determine its own tax liability ?

SOLUTION

The Authority for Advance Rulings (‘AAR’), gives a ruling to a non-resident relating to
transaction which has been undertaken, provided certain conditions are satisfied.
Given that there are no income tax proceedings pending against XYZ Ltd UK, and assuming
other such conditions are satisfied(refer Pragraph<<>>), XYZ Ltd UK can obtain an AAR
Ruling.

IMI Private Limited can obtain an AAR Ruling to determine its own tax liability, assuming it
falls within the definition of “specified person”, given that the transaction value is more than
Rs. 100 Crores. For the definition of specified person, refer Paragraph

IMPORTANCE OF AUTHORITY FOR ADVANCE RULING

 To bring tax certainty into transactions

 To minimize controversy and litigation and Associated cost
 To bring tax certainty into transactions
 To give more consistency in the application of the law
 To achieve a more coordinated system
 Deal with undesirable impact of GAAR

There are various advantages of advance ruling. Some of these are discussed as under : –

 Tax Certainty

The party entering into a transaction, knows, the tax implication once an advance Ruling has
been obtained for such transaction. Given that such rulings are also binding on tax authorities, it
brings certainty, of tax payable on a given transaction.

 Avoids Litigation

Given that the tax implications are known in advance, it helps in avoiding unnecessary litigation,
and the cost associated with such litigation.

 Brings Consistency in the application of law

A ruling once given can also be applied in subsequent years as well on the same issue,  if there is
no change in law or facts. Thus, it will bring consistency in taxation matters.
  Deal with undesirable impact of GAAR

Introduction of General Anti-Avoidance Regulations (‘GAAR’), has led to an increase in

uncertainty for the taxpayers.

The form in which   GAAR,   is generally incorporated in tax laws, is broad and can be
interpreted in various ways. It may be applied by tax officers to genuine business  transactions,
which are entered for legitimate business purpose. To avoid such application, a taxpayer can
approach AAR, which would result in greater demand for advance rulings.

ADVANTAGES OF AUTHORITY FOR ADVANCE RULING

 Ascertain Tax implications beforehand and planning business

 Ascertain Tax implications for a resident applicant
 Time bound resolution
 Complex issue resolution
 Binding nature& Continuity of Ruling

ASCERTAIN TAX IMPLICATIONS PRIOR TO TRANSACTION

AAR enables the non-residents, to ascertain the income tax liability of a proposed transaction,
beforehand (i.e, even before making an investments or entering into any actual transactions in
India). Hence, the non-resident can plan their investments, considering the tax cost, based on the
AAR Ruling. This would help them to evaluate, whether a given transaction generates sufficient
after tax returns on investment, as are required by non-resident investor. Further such a Ruling,
also helps the non-resident investor   to avoid long-drawn litigation.

ASCERTAIN TAX IMPLICATIONS FOR A RESIDENT APPLICANT

Where a resident applicant, enters into a transaction with the non-resident, he can determine the
tax liability of non-resident with whom he may transact. This would be particularly helpful in
case of contract where the tax liability of the non-resident is to be borne by the resident
applicant.

TIME BOUND RESOLUTION

The Authority is to pronounce its ruling within a statutory time limit of six months of the
receipt of the application. This helps in providing a time bound resolutions instead of long term
litigations. However, in certain cases, it has been noted that the rulings may take more than 6
months.

COMPLEX ISSUES RESOLUTION

Generally, issues relating to International tax are complex, and involve not only the
interpretation of the Income Tax Act, 1961, but also, interpreting   double taxation avoidance
agreements (DTAA). In many cases, there may be    a difference in opinion , between the parties
to a transaction, or between taxpayer and tax authorities. Such issues can be resolved, through
the process of advance ruling.
BINDING NATURE

The rulings of the Authority, are binding on the applicant as well as the Commissioner, and
the income-tax authorities subordinate to him. This avoid unnecessary litigation, as both the
taxpayer and tax authorities, are bound by such ruling.

CONTINUITY OF RULING TO FUTURE YEARS

Once the ruling has been obtained on a given set of facts,    the taxpayer may be sure about his
liability not only for one year,  but for all the years covered under the transaction   unless there is
a change in the facts or law.

However, in case there is a change in any of the facts, basis which the ruling was obtained, or the
provision of law change, which impact the tax position, the ruling will not apply.

ILLUSTRATION – 3

LMN Ltd UK, proposes to sell clothes to Surya Private Limited, an Indian company  for a total
consideration of Rs. 100 crores during FY 2018-19 . There are no income tax proceedings
pending against Surya Private Limited  in India. Which parties can obtain   an Advance Ruling
during FY 2018-19  ? What are the advantages of such an advance ruling to various parties ?

Both LMN Ltd UK  and Surya Private Limited can obtain an Advance Rulings for the proposed
transaction to determine the tax liability of LMN Ltd UK. Please refer the discussion above for
advantages of such an advance ruling to various parties. 
COMPOSITION OF THE AAR

The AAR constituted by Central Government shall consist of : –

a) Chairman, who has been a Judge of the Supreme Court or the Chief Justice of a High
Court or Judge of a High Court for at least seven years.

b) Vice-chairman, who has been a judge of High Court;

c) Member from the Indian Revenue Service(IRS), who is qualified to be a member of the
Central Board of Direct Taxes or member from the Indian Customs and Central Excise
Service, who is, or is qualified to be, a member of the Central Board of Excise and Customs;
and

d) Member from the Indian Legal Service  (ILS) who is, or is qualified to be, an Additional
Secretary to the Government of India.

LOCATION OF THE AUTHORITY FOR ADVANCE RULING, SALARY AND

ALLOWNACES OF THE EMPLOYEES

The Authority shall be located in the National Capital Territory of Delhi  and its benches shall
be located at such place as the Central Government may, by notification specify.

The salaries and allowances payable to, and the terms and conditions of service of the Members
have been prescribed by the Government of India.

The Authority functions as an independent quasi-judicial body , and is  deemed to be a Civil

Court , for the purposes of section 195 of the Code of Criminal Procedure, 1973.

POWERS OF THE AUTHORITY [SECTION 245U]

The Authority for advance Ruling has powers vested with the Civil Court , in respect of the
following matters : –

 Discovery and inspection,

  Enforcing the attendance of any person, including any officer of a banking company ;
 Examining on oath, issuing commissions and
 Compelling the production of books of accounts and other documents.

The AAR is deemed to be a Civil Court , for the purposes of section 195 of the Code of Criminal
Procedure, 1973 . Every proceeding before the AAR shall be deemed to be a judicial proceeding
under the Indian Penal Code.

WHO CAN MAKE AN APPLICATION

a. NON-RESIDENTS

Non-residents can make application to the AAR, in order to determine the tax implications
of transactions which they have already undertaken , or future transactions which are proposed to
be undertaken by them.

There is no threshold limit for approaching AAR when an application is made by a NR. This
implies that the non-resident can make an application to the AAR, irrespective of the amount of
tax involved in a particular transaction.

Further, residents can also approach AAR for determining the tax liability of a non-

resident,  arising out of transaction undertaken by such resident with the non-resident.

b. RESIDENTS
A resident applicant can approach Authority for Advance Rulings (AAR) for determining tax
liability in following cases : –

 Resident’s tax liability on transactions entered by it either with : –

o Resident ; or
o Non-Resident.

The threshold limit for approaching AAR for resident is transaction valuing INR 100   Crores or
more.  Such provision has already been discussed in detail at Para 3 this chapter

 A resident applicant can also approach AAR for determining tax liability of the non-
resident arising out of the transaction entered into by him. Such provision has already
been discussed at Para 3 of this chapter.

c. PUBLIC SECTOR UNDERTAKINGS (PSU)

PSUs can approach AAR in respect of an issue relating to computation of total income which
is pending before the tax authority or the appellate authority.

However, an application for Advance Ruling cannot be made for the purpose of determination of
Fair Market Value.

GAAR TRANSACTIONS COVERED WITHIN THE AMBIT OF MEANING OF

“ADVANCE RULING”

A resident or Non-resident applicant can also approach AAR, to determine,  whethera transaction
which is proposed to be undertaken, is an impermissible avoidance arrangement.  This would
imply, that, an application for AAR cannot be made to  ascertain whether a past transaction
would be an impermissible avoidance arrangement for the purpose of GAAR.

QUESTIONS IN AN ADVANCE RULING

One of the important aspect of an advance ruling is, what questions can be asked, by the
applicant, in such a ruling ? This is important because this decides, the scope as well as the utility
of the advance ruling. The following should be noted in regards to, what questions can be asked
by the applicant : –

1. The applicant can raise more than one question in one application.

2. The questions may be on points of law as well as on points relating to facts pertaining
to the income-tax liability (i.e. considering the provisions of the Act and/or the relevant
DTAA). Mixed question of law and fact can also be included in the application.
3. The question raised in the application, should arise out of the statement of facts given
with the application.
4. Complex question may be divided into two or more simple questions.
5. The questions should be so drafted that each question is capable of a brief answer.
6. No ruling will be given on a purely hypothetical or academic question.
7. Questions not specified in the application cannot be urged.
8. Normally, a question is not allowed to be amended , but in deserving cases the
Authority may allow amendment of one or more questions.

WHEN AN ADVANCE RULING CANNOT BE SOUGHT ?

In the following cases, in advance ruling cannot be sought : –

 QUESTION IS PENDING BEFORE OTHER AUTHORITIES

In case the question raised in the  application,  is already pending before any income-tax
authority, Tribunal or any Court,the Authority cannot allow application.

For e.g. a notice for initiation of assessment proceedings may be regarded as pendency of

proceedings and may create an application invalid before AAR.

 QUESTION INVOLVES DETERMINATION OF FAIR MARKET VALUE OF

ANY PROPERTY

No application can be made before the AAR on questions,  relating to the determination of fair
market value of any property, movable or immovable.
  TRANSACTION IS DESIGNED PRIMA FACIE FOR TAX AVOIDANCE

The application would not succeed,  if it relates to a transaction , which is designed prima facie
for the avoidance of income-tax. Only the prima facie impression created in the mind of the
Authority on the facts stated before it, that transaction is undertaken to avoid income tax is
sufficient cause for rejecting the application. It is not necessary to refer the detailed facts of
the case to determine whether a particular transaction is designed to avoid income tax.

 OTHER CASES

Questions cannot be raised with respect to quantification of income of a taxpayer or

for determination of arm’s length price under Indian Transfer Pricing regulations.

APPLICATION FOR ADVANCE RULINGS – RULES

In relation to the Application filed by eligible applicant the following rules, shall apply : –

 Application for advance ruling should be in prescribed form and manner, stating the
question on which the advance ruling is sought
 Application shall be in quadruplicate and accompanied by following fees:-

Category of
Category of case Fee
applicant

· Non-resident for his Rs. 2

Amount of one or more transaction, entered
own tax liability; Lacs
into or proposed to be undertaken, in respect
· Resident for tax of which ruling is sought: – Rs. 5
liability of Non- i. Does not exceed Rs. 100 Crore Lacs
resident; and ii. Exceed Rs. 100 Crore but does not exceed
Rs. 300 Crore Rs. 10
· Resident for his
iii. Exceeds Rs. 300 Crore Lacs
own tax liability
 Rs.
PSUs In any case
10,000

 Applicant can withdraw his application within 30 days of the date of application.

However, based on judicial proceedings, the AAR can allow the withdrawal of
application even after 30 daysof the date of application.

PROCEDURE TO BE FOLLOWED IN CASE OF AN APPLICATION BEFORE AAR

Once, a proper application has been filed before the Authority for Advance Rulings, the
following procedure shall be followed : –

Step I: Authority for Advance Rulings shall forward a copy of application to

Commissioner to ascertain whether the case is pending or not, and if necessary call for the
records.

Step II: AAR may allow or reject the application. In case      application is rejected following
points should be noted: –

1. Before rejecting the application, an opportunity of being heard shall be given to the

applicant.
2. Reason for rejection shall be given in the order.
3. Copy of order shall be sent to the applicant and to the CIT.
4. No appeal is possible against order of rejection

Step III: After allowing application and examining the information placed before it, AAR

pronounces its Advance Ruling on the question specified in the application.

Step IV: On request of applicant before pronouncing its Advance  Ruling, AAR shall

provide an opportunity of being heard to the applicant,  either in person or through an
authorized representative.
Step V:  AAR shall pronounce its Advance ruling in writing within 6 months from the date of
receipt of application.

Step VI: A copy of the Advance Ruling pronounced by AAR shall be sent to applicant and to
the Commissioner.

OTHER POINTS

 DEATH OF THE CHAIRMAN OR INABILITY TO DISCHARGE FUNCTION

BY THE CHAIRMAN

Where there is a vacancy in the office of the chairman, by the reason of his death, resignation
or otherwise, the senior most Vice-Chairman shall act as the Chairman until new chairman enters
upon his office to fill such vacancy in accordance with provisions of the Act.

Further, in case the Chairman is unable to discharge his functions owing to absence, illness or

any other reason, the senior most Vice-Chairman shall discharge the functions of chairman until
the chairman resumes his duties.

 IMPACT OF VACANCY OR DEFECT IN THE CONSTITUTION OF

AUTHORITY

No advance ruling of the Authority for Advance Rulings or proceedings of the Authority for
Advance Rulings can be questioned or treated as invalid, on the account of vacancy or defect in
the constitution of authority.

 PENDING APPLICATION BEFORE AAR AND PROCEEDING ON ISSUES

COVERED THERE IN BY INCOME TAX AUTHORITIES

No income tax authority or ITAT shall proceed to decide any issues in respect of which an
application has been made by the Applicant.

 BINDING NATURE OF RULING OF AAR

The advance ruling pronounced by Authority is binding on  : –
– The applicant who had sought it, in respect of the transaction in relation to which the ruling
had been sought; and
– On the Commissioner and authorities subordinate to him.

 ADVANCE RULING SOUGHT BY APPLICANT BY FRAUD OR

MISREPRESENTATION OF FACTS

Where the AAR finds that Advance Ruling is sought by applicant by fraud or

misrepresentation of facts, then it may declare such ruling to be void-ab-initio by an order and
all the provisions of the Act shall apply, as if such advance ruling has never been made.

 APPEAL AGAINST ORDER OF AAR

The order of AAR giving its opinion is a final order and no appeal is possible against such an
order.