Advance Ruling Mechanism & Impermissible Avoidance Arrangement

Ashish M. Shaji

22 May, 2024

Advance ruling was conceived with a view to provide certainty to business as opposed to litigation in reference to a proposed transaction. Earlier advance ruling was applicable only by non-residents pertaining to transactions undertaken or proposed to be undertaken by such non-residents or pertaining to tax liability of non-resident arising due to a transaction undertaken or suggested to be undertaken by a resident applicant with non-resident. Lets’ discuss advance ruling mechanism and impermissible avoidance arrangement.

Erstwhile authority for advance ruling

The earlier authority for advance ruling had a Chairman (who was a judge of Supreme Court/Chief Justice of the High Court or was a judge of a High Court), a vice chairman (who was a judge of the High Court), a revenue member and a law member from the Indian legal service. The advance ruling authority had representation from all sides and was balanced in its composition, but there was no way to file an appeal to the high court against the AAR decision. However, option of writ remedy was available.

Board for Advance Ruling

The board for advance ruling was constituted under the Income Tax Law with effect from 1^st April 2021. The board has 2 members, not below the rank of Chief Commissioner and provides advance rulings on Income Tax Laws^[1], Customs, Central Excise and the former Service Tax laws.

The applicant or the assessing officer may make an appeal to the High Court on directions of the Principal Commissioner or Commissioner against any ruling pronounced by the Board for Advance Rulings within the prescribed time period. The advance ruling shall be binding on the applicant and tax authorities in respect of the applicant and the given transaction. Unlike the former regime, a statutory appeal lies before the High Court against a decision passed by the board for advance rulings. It remains to be seen if this will reduce litigation or would increase it in reference to the advance ruling applications.

What is impermissible avoidance arrangement?

The term impermissible avoidance arrangement is provided in General Anti-avoidance rule under the Income Tax Laws. It is an anti-abuse provisions where the law delineates an arrangement to be an impermissible avoidance arrangement if the main objective is to get a tax benefit.

• It creates rights obligations that are not ordinarily made between persons dealing at arms’ length;
• It results in the, directly or indirectly, misuse or abuse of the provisions of the Income Tax Act;
• It creates transaction that lacks commercial substance or is deemed to lack the commercial substance, partly or wholly;
•  Transaction that is entered or performed through or in a manner that is not ordinarily employed for bona fide purposes. 

Here the burden to prove that the arrangement is not to get a tax benefit is on the assessee. In absence of the same, the law presumes that the arrangement to be carried out for the main purpose to get a tax benefit by a deeming fiction. It can impact the whole transaction even though the arrangement was not towards getting a tax benefit.

Board for Advance Ruling & impermissible avoidance arrangement

A resident or a non-resident should have a proposed arrangement to be seen through the advance ruling to know if or not the arrangement is an impermissible avoidance arrangement.

It is worthy to note here that a transaction/issue designed prima facie for avoidance of the income tax can be rejected from the ambit of advance ruling. The board for advance ruling can reject an application if it is of the opinion that it is for the avoidance of the income tax, even if the application pertains to determining impermissible avoidance arrangement. This may be a gap in the law.

Conclusion

As per law, an application can be made for determining if the proposed transaction is an impermissible avoidance arrangement or not, but as said earlier, the application may be entirely rejected if the board’s view that the suggested transaction is made for the avoidance of the income tax.

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