The Hindu Business Line : Benefit of a peek

NON-RESIDENT investors in India have the facility of knowing in advance the tax implications of investment decisions with regard to India. Chapter XIXB was introduced in the income-tax code with effect from June 1, 1993, and the Authority for Advance Ruling (AAR) was established.

A non-resident is entitled to seek an AAR ruling in India if he is not pursuing an alternative remedy, or if the transactions in regard to which he seeks a ruling do not really constitute a tax avoidance design, or it does not entail any question of valuation.

Advance rulings are provided in the US, France, the Netherlands, Germany and Sweden. The Indian law differs from the law in other countries in two important respects. The AAR in India is a quasi-judicial body, independent of the revenue department in India. In other countries, it is departmental. Second, the taxpayer, having applied for a ruling, is bound to accept the decision in India while he can refuse to do so in the other countries. The power of the AAR is unfettered.

The AAR has evolved a simple procedure for its working and has earned the admiration of the entire judicial system. The Expert Group noted that several intricate questions relating to deduction of tax at source from payments, which are to be made to non-residents by residents arose frequently, particularly with the opening up of the economy.

Public sector organisations and authorities undertaking substantial projects involving foreign collaboration also faced uncertainty regarding their liability to deduct taxes from payments to non-residents.

The Expert Group recommended that apart from non-residents, residents seeking a ruling regarding the taxability of payments that they have to make to non-residents should also be entitled to apply for advance rulings.

The Finance (No. 2) Act, 1988 provided that a ruling may be sought by a resident falling within such class or category of persons as the Central Government may, by notification in the Official Gazette, specify in this regard. The Finance Act, 2003, further amended the law. It provided for ruling in relation to the tax liability of a non-resident out of a transaction proposed to be undertaken by a resident applicant with such non-resident. The Central Government had already notified the two classes or persons which are public sector companies and persons seeking advance ruling in relation to transactions undertaken or proposed to be undertaken by a resident with a non-resident.

There were difficulties in determining the issues arising out of a transaction proposed to be undertaken by a resident with a non-resident. The meaning of `advanced ruling' had to be streamlined and broadened so as to include pre-assessment determination as well as post-assessment decision of issues relating to the computation of the total income. The Finance Bill, 2000 amended the meaning of `advance ruling' so as to take in transactions by residents with non-residents.

In respect of notified categories of resident applicants, the conditions relating to an issue designed, prima facie, for avoidance of income-tax was made non-applicable. These amendments had introduced some confusion with regard to the jurisdiction of the AAR. Some clarity is provided by the ruling given in April in this regard.

Hindustan Powerplus case

In this case (AAR 267 ITR 685), the applicant sought an advance ruling on the taxability of the amount received by one Kohutek from Caterpillar Asia Private Ltd, Singapore. He happened to be a permanent employee of Caterpillar Asia. He was working with Hindustan Powerplus Ltd in technical services under an agreement. The question related to taxability of the remuneration and other benefits paid to Kohutek by Hindustan Powerplus Ltd.

The AAR Juxtaposed the definition of `advanced ruling' given in the Act. Clause (ii) of Section 245 N reads thus:

"Advance ruling means 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."

Before its amendment by the Finance Act, 2003, with effect from June 1, 2000, the provision reads thus:

"A determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with a non-resident."

A comparison of the provision before after the amendment shows that whereas before the amendment a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with a non-resident was within the meaning of the expression `advance ruling', after the amendment a determination should relate to taxability 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 a non-resident.

Thus, it is evident that the advance ruling has to be in relation to the tax liability of a non-resident.

Admittedly, in this case, the question in respect of which the advance ruling is sought relates to the tax liability of a resident. Therefore, after the amendment no advance ruling can be sought on such a question.

The ruling no doubts interprets the law correctly, though it restricts the application of Section 245 N to non-resident taxpayers only.

But resident taxpayers have the option of going to the Central Board of Direct Taxes or the Settlement Commission. The decision, therefore, cannot be faulted. It clarifies the law.

(The author is a former Chief Commissioner of Income-Tax.)

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