What is Authority for Advance Rulings (AAR)?

The Authority for Advance Rulings has emerged as an important adjudicatory body on tax matters. Recent rulings by the AAR in Castleton Investment Limited and the MAT controversy have brought the importance of the institution in tax disputes and related matters.

The Responsibility of the AAR is to provide the facility of ascertaining the income-tax liability of a non-resident as well as that of certain special categories of residents. If an entity or company has any doubt about the tax liability of its business, it can go to the AAR. The AAR here gives a ruling and it will become policy guide to the company as well as to the tax authorities. Hence, the companies can plan their income-tax affairs well in advance and to avoid long drawn and expensive litigation.

 In the case of Income Tax Appellate Tribunal, a company goes to it if it has a grievance related to the tax notice it has got from the tax authorities. But in the case of AAR, such a notice is not needed to seek its ruling. 

The scheme of Advance Rulings has been introduced under the Income-tax Act, 1961. It was reinforced by the Finance Act, 1993. Chapter XIX-B of the Income-tax Act, which deals with advance rulings, came into force with effect from 1-6-1993. Under the scheme the power of giving advance rulings has been entrusted to an independent adjudicatory body. Accordingly, a high level body headed by a retired judge of the Supreme Court has been set-up. This is empowered to issue rulings, which are binding both on the Income-tax Department and the applicant. The procedure prescribed is simple, inexpensive, expeditious and authoritative.

Advance Ruling means written opinion or authoritative decision by an Authority empowered to render it with regard to the tax consequences of a transaction or proposed transaction or an assessment in regard thereto. 

Constitution of AAR

The Authority for Advance Rulings consists of a Chairman who is a retired Judge of the Supreme Court and two members of the rank of Additional Secretary to the Government of India, one each from the Indian Revenue Service and the Indian Legal Service. A non-resident or certain categories of resident can obtain binding rulings from the Authority on question of law or fact arising out of any transaction/proposed transactions which are relevant for the determination of his tax liability.

The Authority for Advance Rulings (AAR) pronounces rulings on the applications of the non-resident/residents submitted in the prescribed form following prescribed procedure and such rulings are binding both on the applicant and the income-tax department.

Thus, the applicant can avoid expensive and time consuming litigation on any question of law or fact which might arise from normal income-tax assessment proceedings. AAR (Procedure) Rules, 1996 provide detailed procedure for obtaining advance rulings.

Who can seek advance rulings?

Any non-resident person whether individual, company, firm, association of persons or other body of corporate can make an application for seeking an advance ruling in regard to his/its tax liability. Similarly, certain category on residents can also seek advance rulings:

For Non-resident

For determination, in relation to a transaction which has been undertaken or is proposed to be undertaken by a Non-resident applicant, on any question of law or fact specified in the application.

For Resident

  1. A resident who has undertaken or proposes to undertake a transaction with a non-resident may seek a ruling for determination on any question of law or fact in relation to such transaction involving the tax liability of the non-resident.
  2. A resident falling within notified categories may seek 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 fact relating to such computation of total income.

Under the existing provision of the Income Tax Act, 1961(Section 6) the taxable entities are broadly divided into three groups, viz. , Individual , Company and all other persons such as Hindu Undivided Family , Firm, Association of Persons, etc.

These taxable entities are divided into three categories depending upon their residential status. These categories are :-

•  Resident,

•  Resident but not ordinary resident and

•  Non – Resident

What are the benefits of AAR?

  • Helps the applicant in planning his income-tax affairs well in advance.
  • Brings certainty in determining the tax liability.
  • Helps avoiding long drawn and expensive litigation.
  • It is inexpensive, expeditious and binding.

Areas on which advance rulings can be sought

The 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, by the non-resident applicant. However, an advance ruling cannot be sought where the question.

  • is already pending in the case of the Non-resident applicant before any income-tax authority, the Appellate Tribunal or any court;
  • involves determination of fair market value of any property; or relates to a transaction which is designed prima facie for avoidance of income-tax.

How to seek advance ruling?

The applicant may seek advance ruling by making an application to the Authority in the prescribed form i.e. Form No. 34C, 34D or 34E, as the case may be in the manner indicated therein and following the procedure as prescribed in AAR (Procedure) Rules, 1996.

The advance ruling is required to be pronounced by the Authority within six months of the receipt of a valid application.

Is advance rulings binding?

Advance ruling pronounced by the Authority would be binding in respect of the transaction(s) in relation to which ruling has been sought:

  • on the Commissioner and the income-tax authorities subordinate to him in respect of the applicant; and
  • on the applicant who has sought it.