Understanding Advance Rulings: Key Procedural Insights

Advance Rulings Procedural & Technical Aspects Anil Doshi 31stJanuary, 2015

Overview The Scheme of advance ruling introduced from 1-6-1993 Expeditious dispute resolution foreseeable protracted litigation and to tackle problems of uncertainty in taxability The Authority for Advance Rulings ( AAR ) is an independent quasi-judicial body An AAR Bench, generally, comprises of three members: The Chairman, who is a retired judge of the Supreme Court OR the Vice-Chairman who has been a Judge of a High Court; One Revenue member from the Indian Revenue Service who is a PCC, PDIG, CC or DG of Income-tax; and One Law member from the Indian Legal Service who is an Additional Secretary to the Government of India. The office of the AAR is located at Delhi. mechanism to avoid 31/1/2015 2

Overview Address 5th Floor, NDMC Building, Satya Marg, Yashwant Place, Chanakyapuri, New Delhi-110021. Composition Chairman - Hon ble Mr. Justice V. S. Sirpurkar Other Info Secretary - Mrs. Shyama S. Bansia Additional CIT - Mr. Sardar Singh Meena Section Officer - Mr. Yogesh Dubey Email-aar.incometax@gmail.com Website www.aar.gov.in 31/1/2015 3 Presently, there are no Vice-Chairman, Revenue Member or Law Member appointed.

Advance Ruling - Scope Generally, applicants may raise any question which relates to tax liability Both questions of law as well as questions of fact can be 31/1/2015 raised before the AAR Questions can pertain to both, concluded transactions as well as anticipated transactions Hypothetical questions can not be raised before AAR Applicant can raise more than one question in one application The questions may relate to any aspect of the applicant s liability including international aspects and aspects governed by the Double Tax Avoidance Agreements ( DTAA ) 4

Advantages of Advance Ruling Assurance to non-resident investors to obtain the ruling without undue delay and with certainty re its tax implications. 31/1/2015 Best suited to sort out complex issues of taxation including those concerning DTAA. Rulings binding on the applicant as well as the ITO/CIT, not only for one year but for all the years unless there is a change in facts/ law. Facility to modify or reframe the questions, agreements or projects till the time of hearing. Confidentiality of proceedings is maintained. 5 Protracted hearing of the application is avoided.

Advantages of Advance Ruling Significantly faster dispute resolution process as compared to the normal litigation process. AAR generally pronounce its ruling within 6 months as compared to more time involved even at the second level appellate tribunal level. 31/1/2015 Writ / Special Leave Petition High Court/ Supreme Court Time taken: 7-12 years Supreme Court High Court Advance Ruling ITAT Time taken: 6-8 months CIT (A)/ DRP Authority for Advance Rulings Assessing Officer 6 Advance Ruling Standard Appeal Process

Applicant for Advance Ruling - Sec. 245N(b) Non- Resident in relation to a transaction which has been undertaken or is proposed to be undertaken - Form 34C Tax liability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken with such non-resident Form 34D Resident 31/1/2015 in relation to tax liability of a resident arising out of one or more transactions valuing Rs. 100 Crs or more in total, which has been undertaken or proposed to be undertaken by him. Form 34DA (Notification 73 & 74 dated 28th Nov 2014) Public - Sector Cos. In respect of an issue relating to computation of total income which is pending before any IT authority or ITAT Form 34E. Resident/ Non- resident In respect of an arrangement which is proposed to be undertaken is an impermissible avoidance arrangement as referred in Chapter XA or not. Form 34EA 7

Advance Ruling - Sec. 245N The AAR cannot give any ruling on questions relating to tax other than Income Tax Act, 1961. P-12 of 1995 [1997] 94 Taxman 157 No advance ruling can be sought on a question which relates to tax liability of a resident [prior to insertion of section 245N(a)(iia) w.e.f. 1-10-2014]. 31/1/2015 Hindustan Power plus Ltd.[2004] 139 Taxman 64; CTCI Overseas Corporation Ltd. [2013] 35 taxmann.com 391; X Limited [2005] 145 Taxman 573 For the purpose of determining residential status u/s 245N, 'previous year' preceding the financial year in which the application is made, is relevant. Robert W. Smith vs. CIT, [1994] 77 Taxman 530; Monte Harris v. CIT, [1995] 82 Taxman 365; P. No. 20 of 1995, [1999] 104 Taxman 168 8 Contd.

Advance Ruling - Sec. 245N The applicant can seek a ruling in relation to a transaction undertaken or proposed transaction Proposed setting up of subsidiary and partnership firm with an Indian company and their eligibility to deduction u/s 80-IA; not related to a transaction undertaken or proposed transaction Against: Trade Circle Enterprises LLC [2014] 42 taxmann.com 287 (AAR); Acer Computer International Ltd., In re [2004] 138 Taxman 271 (AAR); Connecteurs Cinch, S.A. [2004] 138 Taxman 120 Indian company s capital gain tax liability impacting the applicant s business in view of stipulations in share purchase agreement, is maintainable Favor: Umicore Finance [2009] 184 Taxman 99 31/1/2015 9 Contd.

Advance Ruling - Sec. 245N Resident applicant who is directly concerned with the issue of tax deduction at source in respect of payments made to the non- resident, is considered as an eligible applicant in section 31/1/2015 245N(b)(ii). McLeod Russel India Ltd. [2008] 168 Taxman 175 There is no bar, either express or implied, against a resident PSU applicant covered within the scope of section 245N(b)(iii) re an issue relating to computation of its total income, invoking the jurisdiction of the authority for a determination under section 245N(b)(ii) re tax liability of non-resident in a transaction with such non-resident. 10 Airports Authority of India[2008] 168 Taxman 158

Procedure 31/1/2015 Pronounce ment of Ruling Preparation & filing of Application Forward to CIT Exami- nation & Hearing by AAR u/s 245R Hearing of Application 11

Application Paper Size: Application in prescribed form and annexures can be printed and filed on a regular A4 size paper. Language of Authority: 31/1/2015 Ordinarily English. However, the AAR may also permit Hindi. Language of documents: Where any document is in a language other than English or Hindi, the same should be translated in English. Application has to be submitted in quadruplicate. All copies of the application alongwith annexures and documents coming from outside India must be appostilled, notarised and counsellorised as per local laws of that country. 12 Contd.

Application Signing of Application: Application and annexures of a Company/ Individual/ HUF/ Firm/AOP shall be signed by the Managing Director or Director/ Individual/ Karta/ Managing Partner or Partner/ Principal officer or Member. Individuals/Companies: May be signed by an person duly authorised on their behalf and holding a valid power of attorney which shall be attached to the application along-with an affidavit setting out the unavoidable reasons which entitle him to sign. [Proviso to Rule 10(2) of AAR (Procedure) Rules, 1996 [Procedure Rules]] A power of attorney executed by a non-resident should be duly appostilled. 31/1/2015 13 Contd.

Application Delivery of application: Application along-with annexures and enclosures may be delivered in person or by registered post addressed to the Secretary, along-with the DD of relevant fees. Scrutiny: Secretary shall scrutinise the application, whether the 31/1/2015 same is in conformity with the Act, Rules and Procedure. Where any defects are noted in the application, the Secretary may send the same back to the applicant for removal of defects. Applicant is permitted to withdraw the application within 30 days. Thereafter, withdrawal of application at any stage before pronouncement of ruling will be at the discretion of AAR. 14

Table of Filing Fees - Noti. 74/2014 wef 28-11-14 Applicant Slab Amount of Fees An applicant referred to in sub- clauses (i) or (ii) or (iia) of clause (b) of section 245N i.e. a Non-resident or Resident Amount of one or more transaction, entered into or proposed to be undertaken, in respect of which ruling is sought does not exceed Rs. 100 crore. Rs. 2 lacs 31/1/2015 Amount of one or more transaction, entered into or proposed to be undertaken, in respect of which ruling is sought exceeds Rs. 100 crore but does not exceed Rs. 300 crore. Rs. 5 lacs Amount of one or more transaction, entered into or proposed to be undertaken, in respect of which ruling is sought exceeds Rs. 300 crore. Rs. 10 lacs Any other applicant i.e. PSUs u/s 245N(b)(iii) However, PSUs filing application u/s 245N(a)(ii) shall also be subject to slab- wise fees. In all cases Rs. 10,000 15

Forward to CIT Application forwarded to the Jurisdictional Principal Commissioner / Commissioner [CIT]. If considered necessary, AAR can call for relevant records from the CIT 31/1/2015 Where applicant is not assessed to tax, CBDT to designate a CIT within two weeks. [Rule 13(1) of the Procedure Rules] CIT to provide comments on the contents of the application. [Rule 13(2) of the Procedure Rules] 16

Examination & Hearing by AAR u/s 245R Two staged proceedings: AAR may allow or reject the application and pass an order u/s 245R(2). In case the Authority decides to admit the application, it is empowered to collect or receive additional material. Determination of questions raised in the application and pronouncement of ruling order u/s 245R(4). Applicant to be given a reasonable opportunity to be heard before rejection. The AAR shall not allow the application where the question raised in the application- i. is already pending before any income tax authority or Appellate Tribunal or Court. ii. involves determination of fair market value of any property. iii. relates to a transaction or issue designed prima-facie for avoidance of tax, except in case of public sector undertakings. In addition to above AAR has discretion to refuse an application in exceptional cases. 'admit'. In other words, after examining the records, the Authority either admits or rejects the application. 31/1/2015 17 In section 245R(2) the word 'allow' has been used as synonymous with

Meaning of pendency before tax authorities The words already pending u/s 245R(2) mean already pending as on the date of application and not any future date. Monte Harris vs. CIT, [1995] 82 Taxman 365; Amir Zai Sangin vs. CIT, [1999] 104 Taxman 179; Mustaq Ahmed, In re, [2007] 163 Taxman 638 31/1/2015 Whether pendency of appeal in case of a payee, acts as a bar against payer s right to seek ruling on issue of applicability of TDS provisions/rate of TDS?- No Airports Authority of India, [2008] 168 Taxman 158 Can a ruling be sought even if alternate remedy to make an application u/s 195(2) is available?- Yes Airports Authority of India, [2008] 168 Taxman 158 Mere pendency of application u/s 195/197 or revision u/s 263, is no bar SEPCOIII Electric Power Construction Corpn.,[2011] 13 taxmann.com 158. 18 Contd.

Meaning of pendency before tax authorities Whether question can be said to be pending if ROI is filed before filing of application but no notice u/s 143(2) is issued? ROI filed & notice u/s 143(2) is not issued: Considered NotPending Sin Oceanic Shipping ASA Norway vs. AAR, [2014] 41 taxmann.com 444 (SC), 31/1/2015 LS Cable & System Ltd., Korea Hyderabad Project, [2014] 42 taxmann.com 289, Mitsubishi Corporation, Japan, [2013] 40 taxmann.com 335,Aircom International Ltd. UK, [2014] 41 taxmann.com 207; 150; Jagtar Singh Purewal vs. CIT, [1995] 78 Taxman 600 ROI filed & notice u/s 143(2) is issued: Considered Pending J & P Coats Ltd.[2014] 41 taxmann.com 210; Hyosung Corporation, Korea, [2013] 36 taxmann.com Earlier position: Date of filing of the return is the relevant date to consider the applicability of 245R(2) of the Act. Foster Wheeler France SA, AAR No. 963 of 2010; NetApp B.V., [2012] 19 taxmann.com 79 (AAR); Wavefield Inseis ASA, [2013] 33 taxmann.com 545;Red Hat India (P.) Ltd. [2012] 18 taxmann.com 259; GTB Invest ASA, [2012] 18 taxmann.com 262; NetApp B.V. vs. AAR, [2012] 24 taxmann.com 174 (Delhi HC); SepcoIII Electric Power Corporation, [2012] 340 ITR 225; Sepco III Electric Power Corporation, [2012] 340 ITR 231. 19 Contd.

Meaning of pendency before tax authorities ROI filed/ assessment pending before filing of application in case of non-applicant (i.e. the party who has entered into a transaction with the Applicant) - Application was held to be not maintainable. 31/1/2015 Foster Pty. Ltd [2011] 13 taxmann.com 157, Nuclear Power Corporation of India Ltd. [2011] 16 taxmann.com 344* Also refer Rotem Company [2005] 145 Taxman 488 for a differing view re writ petition before the HC and DDIT re rate of tax *Section 245N(a)(iii) allows determination by authority, in relation to computation of total income which is pending before the Income tax Authority or Appellate Tribunal in case of public sector undertakings. 20

Other issues Permissible to approach Authority for questions which pertains to the taxability of the non-resident employees servicing in India in some cases - Lloyd Helicopters International Pty ltd. v. CIT 31/1/2015 [2001] 115 taxman 334 (AAR). Net of tax payments to non-residents since question is for the determination of tax liability of non-residents, application maintainable Jay Shree Tea & industries ltd. [2005] 145 Taxman 516 (AAR), Steffen, Robertson & Kirsten Consulting Engineers & Scientists vs CIT [1997] 95 Taxman 598 (AAR). Applicant cannot approach Authority for a ruling only on part of a transaction ZD, In re [2013] 212 Taxman 246 (AAR). 21

Maintainability of Application-245R(2) Clause (ii) & (iii) of first proviso Whether AAR is enjoined to reject application if question involves determination of fair market value of property? - Yes Instrumentarium Corpn. [2005] 143 Taxman 1; Morgan Stanley & Co., USA, [2006] 152 Taxman 1 Whether only a prima facie view for avoidance of tax is relevant under proviso (iii) to section 245R(2)? Yes Against: X Ltd., [1996] 86 Taxman 252 Favor: Companies Incorporated in Mauritius [1996] 89 Taxman 125; Star Television Entertainment ltd. [2010] 188 Taxman 206 (AAR); Moody's Analytics Inc. USA, [2012] 24 taxmann.com 41; DIT vs Copal Research [2014] 49 taxmann.com 125 (Delhi HC). Also refer A Ltd. [2012] 343 ITR 455:- The AAR was of the view that the proposal of buy-back was a scheme devised for avoidance of tax. Despite, this the application was not rejected & ruling was pronounced against the assessee. 31/1/2015 22

Rejection of Application Instances Name of the Case Facts and/or Reasons for rejection The AAR pronounced the rulings only in respect of those assessment years for which technicians (employees of the applicant) were non-residents. For other years, the applications was rejected Hindustan Powerplus Limited and Caterpillar India Pvt. Limited (AAR No. 562, 563 and 565 of 2002) 31/1/2015 The Applicant has raised certain questions which are pending before the tribunal in case of Gracemac, a company merged with the Applicant After merger, the appeal pending before the tribunal for all practical purposes are in the appeal of the Applicant. Hence the application is rejected MOL Corporation (AAR 782 of 2008) and Microsoft Operations Pte. Limited (AAR 781 of 2008) 23

Rejection of Application Instances Name of the Case Facts and/or Reasons for rejection The Applicant had raised a similar question pending before its AO and hence the application was rejected. Sri Educational and Health Trust (AAR No. 673 of 2005) Ramachandra 31/1/2015 Application for re-opening of the earlier application on the basis of certain additional facts The AAR exercising its discretion rejected the application stating that the discretion cannot be exercised to go to the aid of an indiligent and indifferent applicant who maintained silence throughout proceedings Yongnam Engineering & Construction Pte Limited (AAR 842 of 2009) the earlier 24

Discretionary powers outside the first proviso u/s 245R(2) to refuse an application Whether the Authority is correct in refusing to give a ruling at the time of final hearing in the absence of any fresh material, merely on the basis of the suspicion of illegality/fraud?- No 31/1/2015 Mahindra BT Investment Co. (Mauritius) Ltd. vs DIT [2013] 35 taxmann.com 535 (Bombay) Discretion has to be exercised judiciously keeping in view the spirit and purpose of the provisions concerning advance ruling. Microsoft Operations Pte. Ltd., [2009] 178 Taxman 328; Yongnam Engg. & Construction (Pte.) Ltd.,[2010] 188 Taxman 163; ZD,[2013] 29 taxmann.com 147 Discretion may be invoked in exceptional cases but the power to reject on grounds not expressly spelt out by the statute cannot be ruled out. 25 In absence of proper documentation the AAR shall refuse to give a ruling. Dishnet Wireless Ltd. [2012] 24 taxmann.com 302

Hearing of application An authorised representative appearing for the applicant at the hearing shall file, before the commencement of the hearing, a document authorising him to appear for the applicant. - Rule 14 31/1/2015 AAR (Procedure) Rules 1996 The Authority may permit or require the applicant to submit additional facts to enable it to pronounce advance ruling. - Rule 11 AAR (Procedure) Rules 1996 The question should arise out of the statement of facts given with the application. No question not specified in the application can be urged. 26 Contd.

Hearing of application Any additional questions not set-forth in the application may be urged by leave of the authority. - Rule 12 AAR (Procedure) Rules 1996 On non-appearance by assessee or the CIT, the authority may proceed to dispose the application exparte. However, the application can be restored within 15 days of receipt of such order provided there is sufficient cause for non-appearance. - Rule 17 AAR (Procedure) Rules 1996 Proceedings before AAR are not open to the public. 31/1/2015 27

Pronouncement of Ruling Authority shall pronounce its advance ruling in writing within six months from the date of application. However, in some cases the Ruling is pronounced beyond the period of six months. Orders of the authority as the Chairman may deem fit are released for 31/1/2015 publications. Certified true copy of order passed u/s 245R(6) will be delivered to the Commissioner & the applicant. Where the Authority finds on representation made by Commissioner or otherwise that the ruling has been obtained by fraud or misrepresentation of facts, the Authority may declare such ruling to be void-ab-initio. (sec. 245T) 28 Advance Rulings pronounced by AAR are not binding on other tax- payers, however the rulings have persuasive value.

Rectification of Ruling - Rule 19 Authority can rectify a mistake apparent from record/amend the order passed u/s 245R(6) before the order pronounced by the Authority has been given effect by the AO. Al Nisr Publishing vs. CIT [1999] 105 Taxman 308 If what the Authority has done is to separate the narration of facts 31/1/2015 forming part of the question set forth by the petitioner and reframe the question keeping intact the rest of the question after putting it to the counsel of the petitioner, the order cannot be said to suffer from any mistake much less mistake apparent from the records. Instrumentarium Corpn [2005] 144 Taxman 578 29 Contd.

Rectification of Ruling - Rule 19 The Authority does not have power while rectification of ruling either to admit additional material or to review the ruling on 31/1/2015 the basis of additional material. General Electric Pension Trust [2007] 159 Taxman 213 While dealing with an application under Rule 19 it is not permissible to re-frame the questions or issues already framed and/or to add further questions. CTCI Overseas Corporation Ltd. [2013] 35 taxmann.com 391 30

Applicability of Advance Ruling-Sec. 245S A Ruling is binding only on the applicant, Commissioner & the tax authorities subordinate to him, in respect of the transaction in relation to which the ruling is sought. 31/1/2015 Ruling pronounced by the Authority would not be binding in case of any other assessee or the departmental authorities. Further, it shall continue to be binding so long as there is no change in law or facts on the basis of which the ruling has been pronounced. An assessment order, which gives effect to a binding ruling of AAR, cannot be regarded as being erroneous or as being prejudicial to interest of revenue for invocation of jurisdiction u/s 263. Prudential Assurance Co. Ltd. Vs DIT, [2010] 191 Taxman 62 (Bom.) 31 / DIT vs Prudential Assurance Co. Ltd. [2013] 30 taxmann.com 126

Judicial Review of Ruling by High Court / Supreme Court Article 323B of the constitution provides for setting up of Administrative Tribunals, by the appropriate legislatures under certain statutes. Hence AAR considered to be a Tribunal. 31/1/2015 Being a Tribunal, the AAR rulings are subject to judicial review by Apex Court under Article 136 and by the High Court under Article 226, 227. Unless a similar issue is pending before the Supreme Court or if the SLP raises substantial question of general importance it should not be burdened unduly and writ petitions against the order of AAR should lie with the respective High Courts. 32 Columbia Sportswear Co vs. DIT [2012] 346 ITR 161 (SC) Contd.

Judicial Review of Ruling by High Court / Supreme Court Scope of judicial review Grounds: a. Perversity 31/1/2015 b. Violation of the principles of natural justice c. Malice d. Bias and patent illegality on account the order going against the provision of law e. Prejudice in not considering the various clauses in accordance with law f. Procedural irregularities in arriving at process of decision-making Verizon Data Services India (P.) Ltd. vs AAR [2013] 33 taxmann.com 539 (Mad. HC) and Anurag Jain vs AAR [2009] 183 Taxman 383 (Mad. HC) 33

Further information can be obtained from www.aar.gov.in Notes provided in the respective forms of Application Handbook available on the website 31/1/2015 34

31/1/2015 Thank You 35