The Authority for Advance Rulings (AAR) is a body set up under the Act specifically to give advance rulings to non-residents on the tax implications of their transactions in India. The prime objective for setting up the AAR was to avoid needless litigation and for promoting better relations with the tax-payers.

Clause (a) of section 245N of the Income-tax Act, 1961 (the Act) defines the term ‘advance ruling’ to means (a) the determination of a question of law or fact in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant and also includes the determination of the tax liability of a non-resident arising out of such transaction with a resident applicant; (b) the determination or a decision on a question of law or fact relating to the computation of total income which is pending before any Income-tax authority or the Appellate Tribunal.

Thus, the AAR can rule on a question of law or fact in relation to a transaction which a non-resident proposes to undertake or which a non-resident has already undertaken. By obtaining such a ruling, a non-resident entity could know the tax implications of a transaction that it proposes to enter into with a resident of India.

Clause (b) of section 245 of the Act defines the term ‘applicant’ as

‘Applicant Means :— (section 245N(b))

1. A non-resident who proposes to enter into a transaction or has already entered into a transaction in India

2. A resident who proposes to enter into such transaction with the non-resident party.

3. A resident falling within such class or category of persons as the Central Government may, by notification in the Official Gazette, specify. (Public Sector Undertakings have been notified vide Notification No. 725(E) dated 3rd August, 2000 (refer to 245 ITR (St.) 5).

The AAR consists of the following members who are appointed by the Indian Government:

• A Chairman who is a retired judge of the Supreme Court;

• An officer of the Indian Revenue Service (IRS) who is qualified to be a member of the Central Board of Direct Taxes;

• An officer of the Indian Legal Service who is, or is qualified to be, an Additional Secretary to the Government of India.

• Application for Advance Ruling:—

1. In case a non-resident desiring to obtain an ruling, an application has to be filed with the AAR in Form 34C.

2. In case of a resident desiring to obtain ruling, an application has to be filed with AAR in Form 34D.

3. Other application can be by a notified resident applicants (Public Sector Undertakings notified by the Central Government), have to make an application to the AAR in Form 34E.

• Application in appropriate form shall be presented in person or through registered post or through authorized representative to Secretary AAR or such other designated person.

• Application shall be filed in quadruplicate.

• Application shall be accompanied by a fee of Rs 2500/-

• On receipt of application, the AAR shall forward a copy of such application to Commissioner and may call for such records as it deem fit from Commissioner.

• The AAR, after examination of records call for, either allows or rejects application.

• The rejection of application cannot be made unless an opportunity of being heard is given to the applicant.

The AAR gives an ‘advance ruling’ on any question of law or fact specified in an application filed by the applicant before the AAR in relation to a transaction, which has been undertaken or proposed to be undertaken by the non-resident.

However, it is pertinent to note that the AAR will not entertain an application where the question raised in the application —

• involves the determination of fair market value of any property;

• relates to a transaction or issue which is designed prima facie for the avoidance of income-tax.

• matter is pending (Except in case of resident applicant) for adjudication by any income tax Authority or applicable tribunal or any court.

The AAR has all the powers of a Civil Court under the Code of Civil Procedure 1908, as are referred to in section 131 of the Act.

Obtaining an Advance Ruling:

• Helps non-residents in planning their income tax affairs well in advance;

• Brings certainty in determination of the tax liability;

• Helps in avoiding long drawn litigation; and

• It is relatively inexpensive, expeditious and binding.

It is mandatory for the AAR to pronounce its ‘advance ruling’ within a period of six months of the receipt of the application.

The ‘advance ruling’ pronounced by the AAR is binding —

• on the applicant;

• in respect of the transaction for which the ruling is sought; and

• on the jurisdictional CIT and the income-tax authorities subordinate to the CIT.

Thus, the advance ruling is binding as aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced.

The decision of the AAR can be challenged by filing a Special Leave Petition (SLP) before the Supreme Court.