An advance ruling refers to a written interpretation of tax laws issued by tax officials to companies and individuals who have requested clarity about some complex tax topics. An advance ruling is often requested by the taxpayer when the said person is not clear or uncertain about certain provisions of the Act. Advance tax rulings must be applied for prior to the proposed activity.
| For example, under income tax, advance ruling is available in international taxation. It helps foreign or offshore companies clarify their income tax obligations, plan income tax in advance and avoid lengthy and expensive legal disputes. |
Objectives of an Advanced Ruling
- To provide certainty about the applicant's future activities before the tax liability arises.
- Attracting Foreign Direct Investment (FDI) - by clarifying provisions of taxation and showing them a clear picture of future tax liability. This would be attractive for foreigners who refrained from getting involved due to exhausting tax disputes.
- Decreases the cost for litigation and legal dispute expenses.
- Make transparent decisions on time and in an affordable manner.
Getting an advance ruling is not really expensive, while the procedure for the same is easy and quick as well. Thus, it offers certainty and transparency to the taxpayer on issues that may cause disputes with the tax authority.
Introduction of Advance Ruling
The theory of advance rulings was introduced in India under the Finance Act, 1993. Provisions pertaining to advance rulings can be found under the Income Tax Act, 1961, Chapter XIX-B (Section 245N to 245V).
As per Section 245N of the Income Tax Act, 1961, advance ruling in relation to non-residents is defined as:
- Authority determination on transactions that have been undertaken or are proposed to be undertaken by any non-resident, or
- Authority determination on transactions that have been undertaken or are proposed to be undertaken by a resident with a non-resident.
As per the law, authorities are required to make a decision within six months of receiving a request. These rulings bind both the applicants and the tax department. Two additional institutions were established in 2014 in New Delhi and Mumbai, which are headed by retired Supreme Court judges.
- The authority has, over the years, formed a professional legal structure pertaining to the interpretations of tax treaties and various disputes related to international taxation through its decisions.
- Hardly a fraction of its decisions were challenged in the Supreme Court through writ petitions and most of the decisions were upheld by both sides.
- Although the decisions have no precedential value, they are widely reported in various legal publications and cited by Courts of Appeal and even the Supreme Court for their persuasive value.
- As such, the supervisory authority has become credible and considered to have a genuine legal standing in the eyes of potential applicants. The activities of the Agency have proved to be very useful, especially for foreign persons doing business in India.
Updation after Finance Act, 2021
The Authority was replaced by the Board for Advance Rulings (BAR), which includes two Chief Commissioners of Income Tax, by the Finance Act, 2021. It stipulated that the decisions of the BAR were not binding and that both parties could appeal to a higher court.
The formation of BAR and other relevant changes that were introduced under the Finance Act, 2021 are not consistent with the basic conceptual necessities of an effective advance ruling system. The central purpose of advanced decision systems is to enable a taxpayer intending to make a large and complex transaction to obtain a binding decision in advance from the tax authority or an independent third party. Devaluing the new agency does not increase investor/taxpayer confidence in its independence, especially when dealing with high-value and complex international transactions.
Besides, the right to appeal against BAR’s ruling granted to taxpayers and the tax department shall result in matters remaining pending in litigations rather than getting wrapped up quickly. It also adds a new class of appeals to the High Court, where ordinary tax appeals take at least three years to resolve anyway.
Statutory Provisions
As per Section 245Q read with Rule 44E of the Income Tax Act, 1961, any applicant that wants to request an advance ruling can file an application in Form No. 34C stating the matter on which they seek an advance ruling. The application is checked against the appendices and the extracts and documents accompanying the appendices. The application must be submitted in four copies along with the proof of payment.
Applicants are permitted to withdraw their application within 30 days of filing the application.
In some cases, if there is a valid reason, you may be permitted to withdraw your application after 30 days of filing as well. |
Following is the fee structure that must be complied with during advance ruling applications:
| Category of Case (for which ruling is sought) |
Fee |
| When the amount of one or more transactions performed or proposed to be performed is not more than INR 100 crores. |
INR 2 lakhs |
| When the amount of one or more transactions performed or proposed to be performed is more than INR 100 crores but less than INR 300 crores. |
INR 5 lakhs |
| When the amount of one or more transactions performed or proposed to be performed is more than INR 300 crores. |
INR 10 lakhs |
According to Section 245R of the Income Tax Act 1961, the authority will not accept the application of an applicant in the following cases:
- The matter is already pending in the Income Tax Office/Court/Tribunal.
- Includes determining the fair market value of property.
- A transaction aimed at avoiding taxation.
However, a domestic or public sector company or even a foreign company may investigate if such a transaction has been proposed as an impossible arrangement.
Applicants can submit an advance ruling request either themselves or through an authorized representative. The authority shall announce its decision within six months after the authority has received the application and a copy of the judgment duly signed and attested by the members, sent to the applicant and the Commissioner of Income Tax.
As per Section 245W of the Income Tax Act, 1961, appeals can be filed in the High Court against the order that was passed, BAR’s rulings, the Authorized Officer on the directions of Principal Commissioner of Income Tax (PCIT) or Commissioner of Income Tax (CIT) within a period of 60 days from the date of communication about the ruling or order. Besides, the appeal can be filed by both individual applicants or the Department.
Rulings Pronounced by Authority
- CIT vs. Ericsson Telephone Corporation India
It was held that the foreign company application where it was raised before the authority for advance ruling is not pending merely on the ground that the Indian company had raised an issue to the income tax authority.
The Indian company, not for the foreign company with whom it had transactions, had sought clarification to assess the officer but with a view to benefit the other party. Therefore, based on judicial ruling the authority for advance ruling cannot reject the application.
- Real Resourcing Ltd. (2010)
It had been decided that the referral fee received by the applicant, a UK company, from an India based recruitment agency for referring potential Indian clients and candidates to the latter even if it is in the nature of consultancy services, cannot be considered to be ancillary and subsidiary to the enjoyment/application of the right or information referred in para. 3(a) of Art. 13 of the Indo–UK DTAA, nor the activity of providing information would fall within the ambit of making available the technical knowledge and experience of the service provider, in the absence of Permanent Establishment (PE), the receipts in the nature of referral fee are not taxable even as business profits.
- Asia Satellite Telecommunications Co. Ltd. (2010)
In this matter, the Authority for Advance Rulings held that the income earned by a non-resident company from providing satellite bandwidth to Indian customers was not taxable in India under the India-Canada DTAA. The authority held that the non-resident company did not have a PE in India and hence, the income was not taxable.
- Foster's Australia Ltd. (2008)
The Authority for Advance Ruling in the case of Foster's Australia Ltd. has ruled that income arising on the assignment of the exclusive and perpetual license for the use of the trademark in India would be deemed to accrue or arise in India irrespective of the fact that the assignment was made by the foreign owner of the trademark in favor of another foreign company overseas.
Conclusion
Advance rulings are not just an opportunity for foreigners to familiarize themselves with the taxation structure in India but also aims to reduce legal conflicts and disputes between parties, which is generally quite costly, time-taking and can become unaffordable at times. Besides, considering the authority is obligated to make a decision within six months of receiving an advance ruling request, applicants are guaranteed to gain certainty about their future activities before any tax liability arises.
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