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1 | P a g e JOURNAL ON CONTEMPORARY ISSUES OF LAW VOLUME 3 ISSUE 7

ADVANCE RULING IN INDIA

Jyoti Bharat Rangari1

ABSTRACT

In the present era of globalisation international trade is the driving force of the modern world.

There is a growing realization that no economy can grow and flourish in isolation. There is

also an increasing awareness that good tax laws and good tax administration are essential for

all modern economies. In view of the complexity of modern tax laws, taxpayers would like to

be sure of the tax implications of their proposed transactions and in that context the facility of

Advance Rulings on the interpretation of the tax laws would go a long way in making up

their mind for investment in a particular country. The scope of the study is to focus the

present Advance Ruling system in India and its advantages for the foreign nationals as well

as Indians. The Authority for Advance Rulings (AAR) has emerged as a significant player

contributing to international tax jurisprudence, not just in India, but also internationally. The

AAR is emerging as a fast and efficient forum for obtaining clarity on the tax implications for

foreigners in India.

Keywords: Advance ruling, Taxation, International taxation, Double taxation.

INTRODUCTION

In the present era of globalisation international trade is the driving force of the modern world.

There is a growing realization that no economy can grow and flourish in isolation. There is

also an increasing awareness that good tax laws and good tax administration are essential for

all modern economies.

Double taxation agreements or tax treaties are the established ways for the states to agree on

international level for the remission of problems of double taxation arising from the cross

border trade and investment. The OECD/UN model convention and other models provide the

framework for the states to draw their agreements. The government of India has entered into

1 Assistant Professor of Law


tax treaties with various foreign countries to provide stability and certainty to the tax laws

governing collaborators and their counterparts in India.

In view of the complexity of modern tax laws, taxpayers would like to be sure of the tax

implications of their proposed transactions and in that context the facility of Advance Rulings

on the interpretation of the tax laws would go a long way in making up their mind for

investment in a particular country.

Advance Ruling has been internationally recognised as “A more or less binding statement

from the revenue authorities upon the voluntary request of a private person, concerning the

treatment and Consequences at one or series at contemplated future actions or transactions”.

In India the need for such a system was recognised since 1970s by certain committees viz.

The Wanchoo Commitee, the Choski Commitee and the Chelliah Commitee, as appointed by

the Government from time to time.

The Authority for Advance Rulings (AAR) has emerged as a significant player contributing

to international tax jurisprudence, not just in India, but also internationally. With more than

70,000 cases pending before the Income Tax Appellate Tribunal2, the AAR is emerging as a

fast and efficient forum for obtaining clarity on the tax implications for foreigners in India.

CONCEPT OF ADVANCE RULING IN INDIA

BACKGROUND

The advance ruling system has been in existence in approximately 60 countries for the past

four decades3. The AAR in India is a relatively late entrant: Although the concept of

obtaining an advance ruling was conceptualized by the Wanchoo Committee in the mid-

1970s, it was only in the early 1990s that it was implemented. In 1993 the finance minister

promised to establish a forum to give advance rulings for transactions involving non-

residents. A new chapter was inserted into the Income Tax Act, 1961, creating the AAR in

order to provide certainty, avoid needless litigation, and promote better taxpayer relations

with non- residents in India.

2 ‘‘70,000 I-T Cases Still Pending as Additional Benches Yet to Start Functioning,’’ The Financial Express,

Dec. 25, 2008, avail- able at http://www.financialexpress.com/news/70-000-it-cases- still-pending-as-

additional-benches-yet-to-start-functioning/ 402620/ last visited on 15/07/2017. 3 Authority for Advance Rulings, Handbook on Advance Rulings, May 2008 edition.


The most striking feature of the Indian system is that the proceeding is adversarial (in most

countries, proceedings are negotiated), which makes the decision binding on the applicant

and the revenue authorities.

MEANING AND DEFINITION OF ADVANCE RULING

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. It has been defined in section 245 N (a) of the Income-tax Act,

1961 as amended from time to time.

As per section 245N (a) of the Income-Tax Act “Advance Ruling” means

– A determination by the Authority in relation to a transaction which has been undertaken

or is proposed to be undertaken by a non-resident applicant; or

– A determination by the Authority in relation to the tax liability of a non-resident arising

out of a transaction which has been undertaken or is proposed to be undertaken by a

resident applicant with such non-resident, and such determination shall include the

determination of any question of law or of fact specified in the application;

COMPOSITION OF ADVANCE RULING AUTHORITY

The advance ruling in India is rendered by an Authority constituted by the Central

Government specifically for this purpose known as “Authority for Advance Ruling” (AAR)

[Section 245-O (1)].

Authority for Advance Ruling (AAR) consist of three member, viz :

Chairman (who is a retired judge of the Supreme Court)

An Indian Revenue Service officer (who is qualified to be a member of CBDT, who

may be referred to as a Revenue Member); and

An Indian Legal Service officer (who is qualified to be an additional secretary to the

Government of India, and may be referred to as the Law Member) [Section 245-O(2)]


POWERS OF ADVANCE RULING AUTHORITY

The AAR enjoys all powers of a Civil Court under the code of Civil Procedure, 1908, as

are referred to in Section 131 of the Income Tax Act, 1961 when trying a suit in respect of

the following matters namely:

Discovery and inspection,

Enforcing the attendance of any person, including any officer of a banking

company and examining him on oath,

Compelling the production of books of account and other documents, and

Issuing commissions.

The AAR also enjoys the status of a Civil Court for the purpose of section 195 of the Code

of Criminal Procedure, 1973. [Section 245 U (2)]. Section 195 deals with ‘Prosecution for

Contempt of lawful authority of public servants, for offences against public justice and for

offences relating to document given in evidence’. But it would not enjoys powers of Court

for the purposes of Chapter XXVI of the Code of Criminal Procedure which deals with

‘provisions as to offences affecting the administration of justice’. Further, every

proceedings before the AAR is deemed to be a judicial proceedings within the meaning of

Sections 193 & 228 and for the purpose of Section 196 of the Indian Penal Code, 1860.

Section 193 deals with ‘punishment for false evidence’ and section 228 deals with

‘intentional insult or interruption to public servant sitting in judicial proceeding’.

UNIQUENESS OF THE ADVANCE RULING

Advance ruling system has been practiced in approximately 60 countries for the past four

decades. India is comparatively late entrant. Today, advance ruling is becoming more and

more indispensable as trade and commerce are getting more global; and complex problems

are swamping the tax administration the world over.

It is recognised today that a well-executed advance ruling system will improve the perception

of the Administration of Income tax laws in the eyes of taxpayers and the public.

In many ways the advance rulings system in India is unique and far more effective than in

most other countries. In most countries the advance rulings are delivered by the revenue


authorities and not by a judicial or quasi-judicial body. Therefore these rulings are largely

considered to be non-binding. However, in India the AAR has been set up as a high-level

quasi-judicial authority, which has been granted statutory recognition. Also, the tax laws in

India give binding value to the AAR ruling; both on the person applying for the ruling and

the Revenue Department4. These are the features that make the AAR system in India akin to

the advance ruling system practiced in Denmark5 and Sweden.6

Another distinctive feature of the AAR regime in India is that it does not have any

discretionary power regarding the admission of an application made before it. As long as the

application is made by a non-resident for determining its tax liability and does not fall within

the category of prohibited questions (discussed later herein) for which an advance ruling

cannot be sought, the AAR is bound to pass a ruling on the question. This is unlike the

practice in other countries, where providing a ruling is completely contingent on the

discretion of the Revenue Department or the authority from which a ruling is sought.

In many countries there is no process to appeal against advance rulings issued. In India as

well, under the ITA there is no process to appeal against the order passed by the AAR.

However, one may resort to the remedy provided by the Constitution of India by filing a

special leave petition to appeal against the AAR’s ruling before the Supreme Court of India7

or by a writ petition before the High Court8.

Another distinctive feature of the AAR system in India is that once a ruling is passed by the

AAR, the applicant is bound by that ruling and cannot renounce the right to rely on it. This is

contrary to the position in the U.S.9, France,10 Germany,11 and Sweden.12

4 Section 245 S of the ITA 5 In Denmark, the advance rulings are issued by the SKAT. They are binding on the applicant and the tax

authorities for five years provided the facts described in the application remain constant. See International

Master Tax Guide, 5th Edition 2008-2009, CCH India, p. 469. 6 In Sweden, private rulings are issued by the Council for Advance Tax Rulings, a tax law commission that is

an independent body of the National Tax Board, the revenue collection agency. As in India, the process

followed by the council is adversarial in nature; the National Tax Board and the applicant are made

counterparties to the application. See Carlo Romano, Advance Tax Ruling and Principles of Law Towards a

European Tax Rulings System? Doctoral Series, Vol. 4, IBFD, Netherlands, pp. 406-407. 7 Article 136 of the Constitution of India. 8 Article 226 of the Constitution of India. 9 In the U.S., the taxpayer has a right to renounce a letter ruling, which is a statement by the IRS National

Office to the applicant after the application of law to his specific facts. 10 In France, the taxpayer generally has the right to renounce an advance ruling, but in some exceptional

circumstances the ruling may also be binding on the taxpayer. See Romano, supra note 8, pp. 409-413. 11 In Germany, rulings are either binding or nonbinding. In nonbinding rulings, the tax authorities express their

intention not to bind the applicant. See Romano, supra note 8, pp. 395-397.


ADVANTAGES OF ADVANCE RULING

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.

As we have seen above that how advance ruling is benefited to non-resident and also is

different than the standard litigation proceeding.

Figure 1 represents the hierarchy of courts in a standard litigation procedure, while Figure 2

show the situation when an advance ruling is filed. As shown in Figure 1, the average time

taken for the final determination of a tax liability of a non-resident in a standard litigation

process may take anywhere from 7 to 12 years. This is largely because of the adversarial

approach adopted by the authorities at initial stages of the litigation process, cumbersome

procedures that result in delay, and the hierarchy of the administrative and judicial authorities

that must be adhered to. Further, it is only when the matter reaches the judicial authorities,

the Income Tax Appellate Tribunal, the High Court, and the Supreme Court, that one can

expect justice.

12 In Sweden, a favourable ruling is binding on the revenue officers and the court if the taxpayer so requests,

while an adverse ruling does not bind the court that pronounced it. See Romano, supra note 8, pp. 409-413.


Conversely, the time taken for the final determination of the tax liability of a non-resident by

applying for an advance ruling as contemplated in the ITA is six months, but in practice, as

shown in Figure 2, it is approximately eight to nine months. Therefore the process of

approaching the AAR to determine the tax liability substantially eliminates the long litigation

process. Only in cases when an aggrieved party chooses to exercise its constitutional right to

file a special leave petition before the Supreme Court or file a writ petition to the High Court

do the issues take time to resolve. The expeditious manner in which the AAR disposes of an

application is the primary reason for the rise of its popularity.

PROCEDURE OF ADVANCE RULINGS-

Who May Seek An Advance Ruling?

As per section 245N(b) of the IT Act, the Advance ruling uder the Income Tax Act could

be sought by:

a) A non-resident.

b) Resident having transactions with non-residents.

c) Specified categories of residents by Central Government.

The advance ruling process is designed to provide certainty to non-residents undertaking or

proposing to undertake transactions in India. While initially an advance ruling could only be

sought by a non-resident of India, the scope has now been expanded to resident Indians

regarding transactions with non-residents. Under Indian law, a non-resident is an individual

who has not fulfilled either of the following two conditions13:

In the financial year immediately preceding the year in which the application has been

made, the individual resided in India for a period of 182 days or more; or

In the span of four years immediately preceding the year in which the application has

been made, the individual resided in India for 365 days or more and has not resided in

India for 60 days or more in the preceding year.

13 Section 2(30) read with section 6 of the ITA.


In the case of a company, it will be considered a non-resident of India if it has been

incorporated outside India and has been controlled and managed entirely from outside India

for the financial year preceding the year in which a ruling has been sought.14

QUESTIONS ON WHICH RULING CAN BE SOUGHT?

The advance ruling can be sought on any question of law or fact specified in the application

filed by the applicant before the AAR in relation to a transaction which has been undertaken

or is proposed to be undertaken by the non-resident applicant.

MATTERS THAT CANNOT BE CONSIDERED

The AAR is precluded from considering three categories of questions:15

Questions already pending before other authorities under the ITA;

Questions pertaining to market value of any property; and

Questions pertaining to transactions designed for the avoidance of tax.

A similar question pending before any other authority in the applicant’s matter prevents the

AAR from admitting the application made before it. However, the mere filing of a tax return

and the pendency of assessment proceedings will not bar the applicant from making an

application before the AAR.16 The pendency envisaged in the ITA is specific to the question

for which an AAR ruling has been sought. The question must be in dispute before the tax

department. A mere notice issued by the Revenue Department pertaining to the return filed

without referring to the question for which the ruling is sought will not prevent the AAR from

adjudicating the questions.

The second question that falls outside the jurisdiction of the AAR relates to the determination

of fair market value of any property, immovable or movable. Lastly, the AAR cannot allow

14 Section 6 read with section 2(26) of the ITA. 15 Section 245 R of the ITA. 16 Agtar Singh Purewal v. CIT, (1995) 213 ITR 512 (AAR).


any application if it relates to a transaction that in the authority’s prima facie opinion is

designed for the avoidance of income tax.17

PROCEDURE FOR MAKING AN APPLICATION

The application has to be made in following forms:

In case a non-resident desiring to obtain an ruling, an application has to be filed with

the AAR in Form 34C.

In case of a resident desiring to obtain ruling, an application has to be filed with AAR

in Form 34D.

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 must be made in quadruplicate.

It should be presented by the applicant in person or by an authorized representative

or may be sent by post;

The AAR, at present, holds its sittings at its headquarters at Delhi.

The application must be accompanied by draft of Rs. 2500 drawn in favour of

“Authority of Advance Ruling” payable at New Delhi.

The secretary may send the application back to the applicant if it is defective in any

manner for removing the defect.

The application must be signed as per the provisions of Rule 44E (2) of the Income Tax Rule,

1962.

17 See Advance Ruling No. P-9 of 1995, (1996) 220 ITR 377 (AAR), in which the AAR, regarding investments

through Mauritius, held that the transaction was prima facie to avoid tax, and hence it did not give a ruling.

See also In re Canaro Resources Ltd. 2009-TIOL-ARA-IT, in which the AAR held that since the transaction

was motivated by a business purpose, it should not amount to tax avoidance and on that basis it gave a ruling

on the transaction.


ENCLOSURES TO THE APPLICATION

A statement listing question(s) in relation to the transaction on which the advance ruling is

required. This is optional. The question(s) may be stated in the application form itself. If,

however, space provided is insufficient, separate enclosure may be used for this purpose.

It may be noted that the question(s) raised in the application should be exhaustively drafted

covering all aspects of the issue involved and all alternative claims that the applicant may

wish to make without prejudice to each other. This is because if at a later stage the

applicant desires to raise any additional question which is not set-forth in the application,

he may have to obtain permission of the AAR. Granting of such permission is at the

discretion of the AAR.

A statement of relevant facts having a bearing on the question(s) on which the

advance ruling is required.

A statement containing the applicant’s interpretation of law or facts, as the case

may be, in respect of the question(s) on which the advance ruling is required.

Where the application is signed by an authorized representative, the power of

attorney authorizing him to sign.

Where the application is signed by an authorized representative, an affidavit setting

out the unavoidable reasons which entitles him to sign.

Separate enclosures may be used where the space provided for any of the items in

the relevant forms is insufficient.

In the covering letter, the applicant may make a request for being heard before

pronouncing the ruling.

PROCEDURE OF THE AUTHORITY

On receipt of the application, the AAR will forward a copy to the Commissioner.

Commissioner may be called upon to furnish the relevant records.

AAR shall examine the application and such records.

After examination, an order shall be passed u/s 245R(2) to either allow or reject the

application

A copy of order u/s 245R(2) is sent to the applicant and to the commissioner.


If the application is allowed vide order u/s 245R(2), the AAR shall :

a) Examine such further material as may be placed before it by the applicant;

b) Examine such further material as may be obtained by the Authority suo-moto;

and

c) Pronounce its advance ruling on the question specified in the application

within six months of the receipt of the application.

EFFECT OF AAR RULINGS

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.

Unlike in other jurisdictions where the applicant or the revenue service has the option to

accept the ruling, an AAR ruling is binding not only on the applicant but also on the Revenue

Department.18 Further, since such a ruling pertains to a question relating to the transaction

and is not specific to a particular assessment year, any ruling passed by the AAR will be

binding so long as there is no change in law or facts on the basis of which the ruling was

pronounced. This is unlike the practice in some other jurisdictions in which the binding

nature of a ruling is restricted to a specific period.19

An AAR ruling in India does not have any precedential value like a ruling of the High Court

or Supreme Court of India. It is not a judgment in-rem but rather a judgment in-personam;

that is, the ruling applies on a case-by-case basis, not universally. However, the rulings of the

AAR do have some persuasive value for persons other than the applicant. The AAR generally

follows the ruling in other cases on materially similar facts, and mostly certainly in other

cases that it has ruled on that raises the same question of law.

18 Section 245 S of the ITA. 19 In Denmark, the advance rulings are issued by the SKAT. They are binding on the applicant and the tax

authorities for five years provided the facts described in the application remain constant. See International

Master Tax Guide, 5th Edition 2008-2009, CCH India, p. 469


APPEAL OF AAR RULINGS

There is no provision in the ITA for appealing against the order of the AAR. However, the

Supreme Court has been granted the discretionary jurisdiction to hear appeals from

subordinate courts by way of a special leave petition under article 136 of the Constitution of

India. Recently there have been many cases in which the Supreme Court has admitted a

special leave petition against orders of the AAR and ruled in favour of the applicant. In these

cases, the Supreme Court has considered the matter expeditiously and delivered a ruling

within about one year, in the interest of justice. In the alternative, the applicant or the

Revenue Department may also file a writ petition in either the High Court or the Supreme

Court alleging that the applicant’s fundamental rights (as contained in Part III of the

Constitution of India) are being violated, for example, by noncompliance with the rules of

natural justice or by pronouncement of an arbitrary or unreasoned decision.

SOME CRITICISM ON APPEAL TO THE SUPREME COURT

The decisions of the Authority for Advance Ruling is being repeatedly and constantly been

questioned by the tax authorities before the courts. The rationale for the advance ruling was

to provide certainty in a timely manner. Filing of appeal against an AAR ruling is not

justified by many investors. According to them AAR ruling should have finality. At present,

no appeal lies against an AAR ruling as the Ruling is binding on the appellant as well as the

Revenue authorities in respect of the transaction for which it is sought as per S.245S.

However, SLPs against AAR ruling are being entertained by the Courts as a matter of

routine. If such SLPs are entertained, AAR rulings cannot serve the purpose of achieving

finality in the matter. So there is contention that SLP should be allowed only in cases where

there is an allegation that the Ruling was obtained by fraud or misrepresentation.

SOME ISSUES AND LANDMARK RULINGS OF AAR

1. Transfer Pricing and the Aar

The AAR has yet to rule on issues of transfer pricing, but it may rule on such questions in the

future. So far the AAR has considered that a ruling on transfer pricing would involve a


determination of the fair market value of a property, which is prohibited by the ITA.

However, these restrictions apply only to questions pertaining to tangible and intangible

property, and cannot be expanded to determine the arm’s-length price pertaining to services.

In the landmark Morgan Stanley20 case (in which an appeal was filed from the AAR ruling),

the Supreme Court ruled on the issue of determination of arm’s-length price of a particular

service. From this it can be inferred that the AAR has the requisite jurisdiction to rule on

transfer pricing pertaining to services.

Also, the AAR was created in 1993, while the provisions pertaining to transfer pricing were

introduced much later, in 2001. Therefore the intent of the legislature was never to restrict the

jurisdiction of the AAR to prevent it from ruling on issues such as transfer pricing.

Landmark Morgan Stanley & Co.21 on Permanent Establishment, Transfer Pricing, And

Attribution Of Profits Issues

Facts of The Case- Morgan Stanley & Co. U.S., (MS & Co.) is incorporated in the United

States and is in the business of providing financial advisory services, corporate lending, and

securities underwriting services. MS & Co. has a number of group companies in various parts

of the world. Morgan Stanley Advantage Services Private Limited (MSAS) is an Indian

private limited company set up by the Morgan Stanley Group to support the group members’

front office and infrastructure unit functions in their global operations. The support services

to be rendered by MSAS broadly cover functions such as information technology support,

account reconciliation, research support, and so on. Within that framework, MS & Co.

outsourced some activities to MSAS by way of a service agreement. MS & Co. Proposed

sending some personnel to India to undertake stewardship activities to enforce quality control

standards. Also, some personnel would be deputed to MSAS and would work under the

supervision and control of MSAS.

To obtain clarity on the taxation of its Indian outsourcing operations, MS & Co. filed for the

tax ruling by the AAR, raising the following questions:

Does MS & Co. have a Permanent Establishment (PE) in India under the India-U.S.

income tax treaty by virtue of MSAS being regarded as its fixed place of business or

20 DIT v. Morgan Stanley, (2007) 109 BOMLR 1348 21 Ibid


as a dependent agent, or constituting a service PE on account of personnel sent for

stewardship or deputation of its personnel to MSAS?

Was the method used for transfer pricing between MS & Co. and MSAS the most

appropriate method, and was the price paid at arm’s length?

If it is held that there is a PE in India, would there be anything further attributable to

the PE if the PE was compensated on an arm’s length basis?

AAR Ruling- The AAR held that the captive service provider (MSAS) is not a fixed place of

business PE of MS & Co., as it is not the business of MS & Co. that is carried out from there.

The AAR also held that MSAS does not constitute an agency PE of MS & Co. because it

does not have the authority to conclude contracts on behalf of MS & Co.

Regarding the exposure to a service PE on the proposed assignment of personnel for

stewardship or the deputation of personnel, the AAR held that the presence of employees of

MS & Co. for more than 90 days would constitute a service PE in India.

The AAR also held that no portion of the global profits of MS & Co. would be taxable in

India if the Indian company (PE) was compensated at arm’s length. The AAR relied on

Indian tax authorities’ Circular 23 of 1969 and Circular 5 of 2004 in that regard and held that

an arm’s-length payment extinguishes any further profits that may be sought to be attributed

to the non-resident.

The AAR did not rule on the transfer pricing questions on the grounds that it is precluded

under the Indian Income Tax Act (ITA) from giving a ruling on an issue that is under

consideration by the tax authorities. That was a stringent view, as tax officers have been

instructed to scrutinize all international transactions involving amounts in excess of INR150

million (approximately US $3.7 million).

Appeal- The Indian tax authorities filed a special leave petition (similar to an appeal) before

the Supreme Court, challenging that ruling.

In its judgment, the Supreme Court has reaffirmed the ruling of the AAR in that regard and

has also held that stewards do not constitute a PE. The judgment is a respite for the

outsourcing industry as a whole, and has tremendous implications, especially for the

emerging KPO (knowledge process outsourcing) industry, and for outsourced research and

development and contract manufacturing.


Aar Departs From Its Earlier Views- While ruling against the assesse, AAR has also taken

a contrary stand to its earlier rulings as well as some HC and ITAT decisions. Following

issues are relevant in this context:

2. Software Taxation

Dassault Systems Kk 22- In this case issue was pertaining to the weather payment received

from sale of software products be treated as business profits under Article 7 of the India

Japan Double Taxation Avoidance Agreement (“DTAA”) or classified as Royalty under

Article 12? In a ruling pronounced AAR had held that payment received on account of supply

of software products to end-users was not taxable as royalty.

However, in other case Citrix Systems Asia Pacific Pty Limited23- While dealing with the

same issue AAR held that in case of transfer of ‘user right’ in software or licensing of

software, copyright in software could not be divorced from software. The payment was for

use of copyright and hence, taxable as royalty. Similarly, AAR held that software payments

were taxable as royalty in Millennium IT Software Ltd (TS-585-AAR-2011) as well as in

other later rulings.

AAR observations in Citrix System case are worth quoting here: “Even then, there is the

aspect of judicial discipline and consistency involved. We have already noticed what we

consider to be the divergence in views in this Authority. We are inclined to take the view that

the sale or licensing for use of copyrighted software amounts to or amounts also to the grant

of a right to use a copyright. Differing views by this Authority can be got resolved and the

matter set at rest only by a decision of the Supreme Court, laying down the law finally, to be

followed by all the Courts and Tribunals including this Authority. Only an authoritative

pronouncement by the Supreme Court can settle this controversy.”

Interestingly, Finance Bill, 2012 proposes an amendment to Income-tax Act, which would

have the effect of nullifying rulings favourable to the assessee and which is broadly in

consonance with the rulings delivered by the AAR.

22 229 CTR 105 AAR (2010) 23 TS-82-AAR-2012


3. SALE OF TECHNICAL INFORMATION-NOT TAXABLE

Pfizer Corporation (Aar 620/2003) 141 Taxman 442- Pfizer Corporation, a Panama

Company (PC) owned the technology information pertaining to the manufacture of nutrition

food supplement product manufactured and sold by Pfizer India Both trademarks are

registered in India. Indian company was using the technology information without payment

of any royalty. In November 2003, EAC Nutrition Ltd., a Denmark company acquired

technical information and entered into agreement with an Indian company for early

termination of license of Indian company and paid consideration for the same. The dossier

containing technical information was handed over in Bangkok, Denmark company deducted

the tax, Indian company approached AAR, contending the technical information was a capital

asset and the amount received was not taxable in its hand AAR accepted the contention and

held that the consideration was not chargeable to tax u/s 5 or section 9.

4 Return Filing Requirement for Non-Residents

In Vnu International B.V [Ts-130-Aar-2011(Aar)]- AAR held that a foreign company was

required to file a return u/s 139, even though its income from sale of shares was not taxable

under the treaty. AAR took similar view in Deere & Co24. An earlier bench of AAR, in

Vanenburg Group B.V’s case25 had ruled that provisions of Sec. 139(1) were only

machinery provisions and would not be applicable in the absence of tax liability.

5. Capital Gain

Fidelity Group Canada & Usa, Mathews India Fund, Usa26- This is one of the landmark

rulings given by the authority. It is a common ruling Fidility Group of cases USA & Canada

and Mathews India Fund, as facts in all these cases were similar and germane issue involved

in them is common. The applicants in these cases were registered with SEBI as sub-accounts

of the respective FII. They have invested under FII

Regime in shares in Indian companise. As required by the SEBI Regulations, each applicant

had appointed a global custodian as its correspondent to act for the applicant. Both global and

domestic custodians are acting in ordinary course of their business and were performing

24 (TS-394-AAR-2011) 25 (2007) 208 CTR (AAR) 177, 26 (AAR/678 TO686, 694TO 723/2006) & (AAR/733/2006) (2007) 158 TAXMAN 373


similar custodial services for other FIIs as well. The applicant did not have any branch, office

or place of bussiness in India.

The important issue for the consideration of the Authority was whether profits arising from

sale of portfolio investments in India would be treated as capital gains or business income of

the applicants.

The AAR observed that the circumstances and the framework of the plethora of legislations

unmistakbly pointed-out that a FII was not registered for carrying out trade in securities, it

could only invest in securities for the purpose of earning income by way of dividends and

interest etc. And realising capital gains on their transfer. On the basis of the facts on record,

the Authority ruled that gains arising to the applicants from sale of portfolio investments in

India would be capital gains and they could not be treated as busiess income.

Emirates Fertilizer Trading Company Wll27-The applicant is a partnership firm and a

resident of UAE. It acquired shares of listed companies and proposes to dispose of the said

shares. It was held by the Authority that the capital gains arising from alienation of the shares

in Indian companies to the applicant who is a resident of UAE are taxable only in UAE.

Under the Act, it cannot be disputed that capital gains arising to a non resident in India, are

taxable in India. Having regard to section 90(2) of the Act, the terms of the treaty have

overriding effect over the provisions of the Act in the event of there being conflict between

the treaty and the Act. Union of India vs Azadi Bachao Andolan28 and RV.A.L Andagan

Chettiar29, It follows that in view of the provisions of para 3 of Article 13 of the treaty, the

capital gains arising to the applicant can be taxed only in UAE and not in India and that their

taxability under the Act in India does not depend upon whether they are as a fact taxable in

UAE. Accordingly, gains from alienation of shares in Indian companies held by the applicant,

a resident of UAE, will not be taxable in India.

6. SHARE TRANSFER UNDER BUSINESS RE-ORGANIZATION

Goodyear Tire And Rubber Company30- Non-resident applicant transferred majority

shareholding in Indian company to its foreign subsidiary as a part of reorganization process.

27 AAR NO. 628 OF 2004 28 (2003) 263 ITR 706 (SC) 29 267 ITR 654 (SC) 30 TS 178 AAR 2011


The transfer was made at ‘nil’ value as a gift. AAR ruled that no capital gains tax was

applicable, as shares were transferred without any consideration. AAR observed that the

mechanism to compute capital gains would fail and hence, tax could not be levied. AAR also

held that the transfer pricing provisions were not applicable in the absence of liability to pay

tax. AAR held that transfer pricing provisions were not applicable, as share transfer pursuant

to restructuring was not taxable.

Finance Bill, 2012 proposes an amendment by way of insertion of new Sec. 50D providing

that where consideration for transfer of capital assets is not ascertainable, then fair market

value of the asset as on the date of transfer is to be taken as ‘full value of consideration’.

Further, explanation is proposed to be added to Sec. 92B to clarify that business restructuring

or reorganization is also covered under the definition of the term ‘international transaction’.

CONCLUSION

Over the last few years, AAR rulings have come a long way in removing uncertainty and

imbalance in the tax administration. The AAR has helped instinct confidence in foreign

investors who, after obtaining a ruling, get a true picture of their tax liability in India, and can

then plan their business affairs before entering India. The AAR mechanism has also proved

beneficial as it avoids long and expensive litigation.

The advance ruling mechanism has turned out to be an effective method of obtaining clarity

on the possible tax implications for an eligible applicant in India and also provides a quick

solution for a foreign investor to obtain certainty on the tax implications of a particular

transaction.

The AAR has also significantly contributed to international tax jurisprudence in India, as it

has for the first time discussed issues that are ambiguous or controversial under Indian law. In

deciding such issues, the AAR is responsive to international developments, and relies on the

writings of eminent jurists, international judicial precedents, and recent developments in

other countries while considering the questions of law placed before it.

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