Certainty’ and ‘clarity’ are cornerstones of a good law, especially income tax law. In recent times, one has seen how this desired element of income tax law significantly influences flow of foreign direct investment decisions globally, including in India.
The Indian income tax law has created forums like the authority of advance ruling (AAR) and, most recently, advanced pricing agreements with a view to provide foreign companies and non-residents certainty and clarity on the taxability or otherwise of any transaction undertaken or proposed to be undertaken in India. Since the rulings given by AAR are binding on the Indian tax authority as well as the taxpayer seeking the ruling, the AAR forum was also intended to reduce long-drawn litigations in India.
AAR is an alternative forum available to foreign investors to get fast-track adjudication on any issue as against the normal course of filling tax returns before the tax authority. Considering the possible overlap in exercising jurisdiction on the same issue, the Indian income tax law provides a bar on AAR from admitting any application seeking advance ruling, if any issue or question raised in such application is ‘already pending’ for adjudication before the tax authorities.
Under what circumstance one can consider that an issue ‘already pending’ before the income tax authorities has been a matter of controversy? Would mere filing of a tax return before filing of an application before AAR trigger this bar on AAR or only where the tax authorities have initiated tax assessment on the basis of such tax return filed, the bar on AAR applies?
The tax office has been opposing admission of an application before AAR in cases where a tax return has been filed before filling of AAR application, arguing that by doing so the applicant has opted for adjudication before the tax authorities instead of AAR. It was argued that, in such cases, the issue is ‘already pending’ before the tax officer and, thus, such cases cannot be decided by AAR. Substantial number of applications before AAR were caught in such controversies, creating an atmosphere of uncertainty and confusion.
AAR has delivered divergent rulings on this controversy. In some rulings, AAR has held that only in circumstances where a tax officer has already acted on any tax return filed by a foreign company or a non-resident (before filing of the AAR application) by initiating tax assessment proceeding, the bar against AAR’s jurisdiction on deciding an issue ‘already