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AAR Says it is Not Bound by Past Orders – Some transfer pricing verdicts were incorrect, admits quasi-judicial body November 14, 2012

Posted by Khurana Khurana & Associates LLP Chartered Accountants in Tax Planning & Compliance.
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– Courtesy Economic Times

CA. Varun Khurana

The Authority for Advance Rulings (AAR) has held that it is not bound by its earlier orders and can take a contrary view if there are sufficient reasons to believe that the earlier rulings were incorrect.

Our Analogy

The above view though contrary to Clause 2 of Section 245S on the applicability of advance Ruling which state the advance ruling shall be binding unless there is change in law or facts on the basis of which the advance ruling has been pronounced, has specific applicability- referred in Clause 1 of Section 245S.

What is Advance Ruling?

Advance ruling as defined under section 245N of the Income Tax Act, 1961 mean:-

i.            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

ii.            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 non-resident, and such determination shall include the determination of any question of law or of fact specified in the application;

iii.            A determination or decision by the Authority in respect of an issue relating to computation of total income which is pending before any income-tax authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application;

iv.            A determination or decision by the Authority whether an arrangement, which is proposed to be undertaken by any person being a resident or a non resident, is an impermissible avoidance arrangement as referred to in Chapter X-A or not.

Provided that where an advance ruling has been pronounced, before the date on which the Finance Act, 2003 receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-clause (ii) of this clause as it stood immediately before such date, such ruling shall be binding on the persons specified in section 245S.

What is the applicability of advance ruling (Section 245S)?

The advance ruling pronounced by the Authority under section 245R shall be binding only the following:-

a)      On the applicant who had sought it;

b)      In respect of the transaction in relation to which the ruling has been sought; and

c)       On the Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction.

The advance ruling shall be binding unless there is change in law or facts on the basis of which the advance ruling has been pronounced.

Situation in which the Advance Ruling be void- In reference to section 245T

Where the Authority finds, on a representation made to it by the Commissioner or otherwise, that an advance ruling pronounced by it under sub section (6) of section 245R has been obtained by the applicant by fraud or mis representation of facts, it may by order, declare such ruling to be void ab initio and thereupon all the provisions of the Act shall apply to the applicant as if such advance ruling had never been made.

AAR held that its own earlier decisions in cases such as Praxair Pacific, Vanenburg Group and its Corporation, in which it had held that the transfer pricing provisions could not apply if the income was not chargeable to tax in India, were not correct. While hearing an application by Mauritius based Castleton Investments, which had sold shares that resulted into capital gains, AAR held transfer pricing rules would apply even if the capital gains are not liable to tax in India under the India – Mauritius tax treaty. AAR did not accept the company’s argument that since there is no income chargeable to tax in India, the Company is not required to file returns or comply with transfer pricing provisions.

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