The genesis of Authority for Advance Rulings (AAR), dates back to the year 1993. AAR was established as a quasi-judicial body to operate as an alternate dispute resolution mechanism. In the Finance Act 1993, the Central Government introduced AAR as an independent authority, which could be approached by non-residents for obtaining an advance ruling on any question of law or fact in respect to any transaction that may be undertaken or was proposed to be undertaken by them in India.
With the liberalisation of foreign investments in India, there was a substantial increase in transactions involving non-residents in India. Therefore, a mechanism was put in place to address the taxability of non-residents in India. The intent of the Government through the advance ruling mechanism was to provide certainty to non-resident taxpayers and as a result reduce litigation.
The story so far
AAR was established to consist of a Chairman who would be a retired Judge of the Supreme Court and two other members, one from Indian Revenue Service and the other from Indian Legal Service respectively. Thereafter the constitution was expanded to include a Vice-Chairman who would be a retired Judge of a High Court.
The concept of advance rulings to address taxability of proposed transactions in advance, initially gained popularity in India and the mechanism was well accepted by the non-resident taxpayers. Subsequently the mechanism of advance rulings was extended to resident taxpayers as well in certain specified cases as well.
As per the Act, AAR was required to pronounce the advance ruling by way on a written order within 6 months of receipt of application.
Over the years it became difficult to fill the post of Chairman due to unavailability of retired judges of the Supreme Court which led to a substantial time-lag in disposal of applications by AAR. In an attempt to stream-line the functioning of AAR, in 2017 the Income Tax Act 1961 (the Act) was amended to provide that the Chairman of AAR could also be a retired Chief Justice of a High Court or a Judge who has been a Judge of a High Court Judge for at-least seven years.
Despite the above, practically it was experienced that the AAR applications remained pending for long durations. The delay was in-effect defeating the very purpose of an advance rulings. As per the Government, the delay was attributed to the suspended functioning of AAR which was due to the inability to fill-in the vacancy for the Chairman/ Vice-Charmain. Therefore, the functioning of AAR was adversely impacted and resulted in inordinate delay in disposal of applications. In fact, over the last few years, the applications pending with AAR had increased many-folds.
The intent of an advance ruling mechanism is to provide certainty on the taxability of specified transaction(s), with an aim of ultimately reducing unnecessary litigation, as well as to create a predictable tax environment for the taxpayers to instill confidence. However, given the inordinate delay in disposal of applications by AAR, the purpose was getting defeated and AAR was losing its relevance and effectiveness.
Citing the hampered functioning of AAR due to reasons mentioned above and with the intent to revive advance rulings as an effective dispute resolution mechanism, the Government, through Finance Act 2021, has replaced AAR with another body called Board of Advance Rulings (BAR).
Although BAR would replace AAR, there are certain fundamental differences in BAR as compared to AAR, which are worth highlighting.
HOW BAR DIFFERS FROM AAR
One of the key differences between AAR and BAR, is in the constitution of BAR. AAR constituted of judicial members i.e., retired Judges of Supreme Court and High Court. BAR would constitute of members of the Income Tax Department i.e., officers who would be at least of the rank of Chief Commissioner and above.
Another very pertinent difference is that the order of AAR was binding on both the taxpayer and the Income Tax Department, with respect to the transaction for which advance ruling had been obtained. Under the normal course, the order of the AAR could not be appealed against. However as per the amended provisions of the Act, order of BAR would not be binding and either of the aggrieved parties i.e., the taxpayer or the income tax department would have the liberty to file an appeal against the order of BAR with the High Court.
In the case of AAR, while as per the Act the remedy of appeal was not available, however practically in many cases, both the taxpayers and the income tax department were challenging the order of AAR by filing writ petitions and special leave petitions before the High Courts and Supreme Court respectively. The Hon’ble Supreme Court in its judgement in the case of Columbia Sportswear Company held that AAR was a body exercising judicial power and that it was a Tribunal within the meaning of Article 136 and Article 227 of the Constitution and therefore power vested in the High Courts to exercise judicial superintendence over the decisions of all Courts and Tribunal’s within their respective jurisdictions would apply to orders passed by the AAR too.
This judgement had somewhat diluted the binding nature of AAR orders, by allowing writ petitions to be filed before the High Courts against AAR orders in specified circumstances.
Under the new regime though, the option of appeal against the order of BAR, has been provided through the statute itself.
Although the re-haul of the advance ruling mechanism by replacing AAR with BAR is a positive step by the Government, however BAR has been introduced with certain structural changes. Whether changing the fundamentals of the mechanism would achieve the desired result seems questionable, given the attributes of BAR.
Since BAR would only constitute of officers of the income tax department as compared to judges of Supreme Court or High Court earlier, the stature of the forum may be perceived to be diminished.
Further, the order of BAR would no longer be binding and can be appealed before the High Court. This would in-effect lead to protracted litigation at multiple levels. Post a BAR order, either of the aggrieved party may exercise its right to appeal against the said order. Certainty on the matter of taxability of the relevant transaction may not be achieved unless the matter is adjudged by the Apex Court. The same would also entail substantial time and cost. In such a scenario would the taxpayer be better off in pursuing the matter under normal course of assessments and appeals?
Another aspect that has been introduced in relation to BAR is the possibility of rendering the entire process of advance rulings as ‘faceless’ under the new regime. The Government has cited that for imparting greater efficiency, transparency and accountability, it would make a scheme, whereby the interface between the BAR and the applicant during the course of proceedings would be eliminated to the extent technologically feasible. Further under the said scheme, a system of dynamic jurisdiction would also be introduced. Such a scheme would be introduced by way of a notification.
This is in-line with the Government’s move towards minimizing physical interface between the taxpayers and the income tax department, as has been in the case of ‘faceless assessments’, ‘faceless appeals’ and ‘faceless penalty proceedings’.
Although the provisions of the Act have been amended to replace AAR with BAR, however BAR is yet to be notified as per these provisions. Further, these notifications would lay down the rules and procedures for the functioning of BAR.
PENDING APPLICATIONS
Another aspect that warrants attention is the impact of replacement of AAR with BAR on the existing applications filed with AAR, which are pending disposal as on date.
As per the amended provisions of the Act, post the notification of BAR, all applications pending before AAR would automatically stand transferred to BAR for disposal. It is pertinent to note that, when these applications were filed, the taxpayers had decided of approaching the AAR based on the erstwhile regime. For such taxpayers, the inordinate delay in disposal of the applications, for one has already diluted the purpose of filing the application.
Further where now such applications would be disposed off by the BAR and the order would no longer be binding, the same would effectively render the entire process of advance ruling redundant for such applicants.
Even after waiting for such extended time for disposal of their applications, they would neither be able to receive certainty on the taxability of the specified matter, nor would they be able to avoid litigation, since the order of BAR would be open to appeal.
CONCLUSION
The Government has made several attempts over the years to maintain an effective advance ruling mechanism and has introduced various policy changes to ensure efficiency. It has now attempted to revive the alternate dispute resolution mechanism through BAR. However, the fundamental changes introduced in the new regime in case of BAR, do not align with the objective of providing a certain, litigation free tax environment. On the contrary it may lead to protracted litigation for the taxpayers. For taxpayers contemplating to approach an advance ruling forum, these considerations would have a substantial impact on the decision-making process. Whether it would thus be feasible to even approach the BAR or continue under the normal dispute resolution provisions under the Act, is a big question which would only be answered in the time to come.
The intent of the Government has been to expedite advance rulings and to extend efficiency and transparency to the process. In order to achieve the same, Government should contemplate making the order of BAR binding, as in case of AAR. This would ensure that the process is effective and would help achieve the objective of reducing unnecessary litigation. Further the Government should also provide some flexibility in case of pending applications, by allowing them the option to withdraw such applications and not mandatorily be disposed off by BAR.