Last updated: January 27th, 2024 5:28 PM

Advance Ruling under Income Tax

An advance ruling refers to the facility of obtaining a judgment in advance from the Authority for Advance Rulings. The facility is used when the assessee has anticipated contentious issues in the Income Tax assessment. An advance ruling enables the assessee to obtain an authoritative decision of the Authority for Advance Rulings. The decision sought generally pertains to tax consequences of a transaction or proposed transaction. The scheme for advance rulings under the Income Tax Act is meant to enable non-residents planning to invest in India to be certain of their income tax liability. Hence, non-residents can avoid any tax disputes with the Income Tax authorities in the future. Hence, advance rulings can be used by a non-resident to determine the income tax aspects of a proposed or current transaction. Advance ruling can also be used by an Indian resident entering into a transaction with a non-resident to determine the tax liability.

Authority for Advance Rulings

The Authority for Advance Rulings is an independent quasi-judicial body separate from the Income Tax department. It is headed by a retired judge of the Supreme Court of India. Authority for Advance Rulings is based in New Delhi and also includes two retired senior officers of the Government of India.

Filing Application for Advance Ruling

A non-resident whether individual, company, firm, association of persons or another body corporate can request an Advance Ruling. Advance Rulings may be performed with respect to tax liability in relation to a transaction which has already been undertaken or is proposed to be undertaken. A resident of India can also request for an advance ruling if the transaction involves a non-resident.

The request for an advance ruling can be made to the Authority for Advance Rulings in the prescribed form along with a statement of facts and arguments in support of the views on the question(s) posed. An applicant for advance ruling is entities to represent the case before the Authority for Advance Rulings either personally or through an authorised representative.

Acceptable Questions for Advance Ruling

Questions posed to the Authority could relate to any aspect of non-residents tax liability, including international aspects and aspects governed by Double Taxation Avoidance Agreements. The questions can cover aspects of allied laws that may have an impact on the tax liability of the non-resident under the Income Tax. However, any question posed to the Authority for Advance Ruling must have a direct bearing on and nexus with the interpretation of the Income Tax Act.

Questions NOT Acceptable for Advance Ruling

Authority for Advance Ruling cannot admit any application for a matter which is pending before an Income Tax authority, an Appellate Authority or a Court. Therefore, questions must be posed to the Authority before any dispute arises. Further, the Authority for Advance Rulings can also not deal with any questions that pertain to the determination of the fair market value of any property. The application made to the authority may relate to a transaction or issue which is designed for the avoidance of income tax. In such cases, the application will not be processed.

Validity of Advance Ruling

Before pronouncing an advance ruling, the authority will scrutinise the application to check the residency status of the applicant. Non-residents can apply only through a resident representative. An Advance Ruling pronounced by the Authority for Advance Rulings is binding on the applicant. It is also binding on the Income Tax department. The advance ruling will not be valid if the facts of the transaction actually executed are materially different. The difference is determined in relation to the facts on the basis of which the ruling was pronounced.