Indian Central Board of Direct Taxes (‘CBDT’), vide notification 49/2022, notified new forms for applying for advance ruling. The form issued are Form No. 34C, 34D, 34DA, 34E, 34EA. The forms can be signed digitally.
The Authority for Advance Rulings (AAR) (Income-Tax) is a quasi-judicial body under the Ministry of Finance, which is chaired by a retired Supreme Court Judge. It was established in 1993 as per the provisions of chapter XIX B of the Income Tax Act 1961 inserted by Finance Act 1993 w.e.f. 01.06.1993. An application for advance ruling can be made by a non-resident, a resident concerning the taxability of a non-resident, a resident for a transaction of INR 100 Crores (~USD 12,909,810) or more (introduced in 2014), a notified public sector company or any person who needs clarity on whether a proposed transaction will attract the rigours of 'General Anti Avoidance Rules' (GAAR). It should be noted that under the Act, the AAR is bound to pronounce its ruling within 6 months from the date of receipt of the application. The issue of new forms and procedure is expected to make the advance ruling route simple, economical, expeditious and authoritative. However, it was observed that the taxpayers were not opting for it due to various reasons such as:
The current challenge before the AAR is the significant high pendency and old applications (close to 400-500 cases) against an average annual disposal of about 60 (in the five-year period from FY 2013-14 to 2017-18). This leads to a fact that one can expect a ruling not before atleast 18 - 24 months after filing the application. There are no publicly available statistics of monthly disposals of the AAR. However, an analysis of published rulings of the AAR, shows that in a 108-month period (from FY 2010-11 to FY 2018-19), the AAR did not publish any rulings for 45 months.
The government has always been delayed in appointing a chairman. Further, with every Chairman retiring from the AAR, there have been times where the AAR has not functioned at all for months - again due to non-appointment by the Government of a Chairman. This has been the major reason for the backlogs. The fate of the transactions in these cases remain in the hands of an authority which in these cases is non-functional and may not function at all until clarification is received sometimes due to the vacancy in the position of chairman or sometimes any other person. As a result, the total number of applications pending before the AAR continues to increase even though the number of new applications has reduced in the past five years.
The other significant reason for delay is tax department’s objection to every application considered as being for ‘avoidance of tax’.
Where the applicant has undertaken a transaction (and sought an advance ruling), the law provides that the tax authorities will keep the determination of the tax consequences related to the transaction in abeyance until the AAR has pronounced its ruling. Currently, AAR rulings are being issued much beyond the mandated six-month period as mentioned above. Invariably, by the time the AAR issues the ruling, all applicants must have filed a return of income for the relevant FY related to the transaction. The applicant may have paid no tax, or tax on the income arising from the relevant transaction based on its stand before the AAR. Any proceedings regarding this return of income are kept in abeyance by the tax authorities until the AAR ruling is issued. If the AAR ruling, when issued a few years later, is adverse, the applicant is liable for both tax and interest on the income in relation to the transaction. In all such cases, the interest liability is significant because it is levied for the entire period from the date of the transaction and the date of the AAR ruling which is grossly not fair. If the ruling had been pronounced within the mandated six-month period, the applicant could have paid the tax immediately.
Conclusion:
Since the forum of AAR is meant for giving a certainty to non-residents / foreign investors in terms of knowing their tax position in India for a proposed / an actual transaction with a view to avoid any surprise later on and thereby avoid the tax litigation. The new forms and procedures would certainly help and boost the confidence in the taxpayers and thereby leading to tax certainty for them.
