IN the year 1971, the Direct Taxes Enquiry Committee headed by Justice K.N.Wanchoo submitted its report. Although the primary purpose of the Committee was to suggest ways and means to curb the menace of tax avoidance and evasion, it also dealt with matters relating to the administration of the direct taxes. Under the head- 'Taxpayer assistance and education', there was a short discussion on Advance Ruling. The Committee was impressed with the practices adopted in this regard in Australia, New Zealand, Sweden, Canada and the USA. The committee observed that a form of taxpayer assistance is a system of giving advance rulings. "Taxpayers are often perplexed by the complexities and uncertainties of the law and might with chagrin realise later that the taxing authorities do not see eye to eye with them when it might be too late to go back on the projects and ventures already initiated. At present, there is no system by which a taxpayer can get advance ruling on the tax consequences of proposed transactions."

The Committee's questionnaire regarding the utility of such a system in India met with an overwhelming positive response albeit there were some sceptics too who opined that advance rulings, given without knowing full facts, might create more problems than what they sought to resolve. Doubts were expressed that the process of obtaining advance rulings could unnecessarily delay assessment proceedings. Some also thought that this would amount to usurping the jurisdiction of the courts of law.

On balance, the Committee recommended the adoption of a ruling process: "We have carefully considered the pros and cons and we feel that the system can have great utility in such matters like deciding the tax implications of proposed foreign collaboration agreements. It would be in national interest to ensure that such projects are not subsequently shaken to the foundations by an adverse stand taken by the Income-tax authorities. We are convinced that a system of advance rulings will help in resolving ambiguities and doubts in time, in ensuring uniformity of tax treatment in similar cases. It has been suggested that an independent body may be constituted for giving such rulings."

However, considering the scope of the probable disputes arising at that time, the final recommendation was that it should be possible for the Central Board of Direct Taxes to give advance rulings on matters referred to it. The Committee, therefore recommended " that the law be amended to authorise the Board to give advance rulings. Suitable fees may be prescribed for applications for such rulings so as to eliminate purposeless and academic queries. The Board should also have the option to reject an application and refuse a ruling. A ruling once given should be binding on the Government in the particular case only, though it will not bind the taxpayers."

Nothing happened for more than two decades thereafter . India being more or less a closed economy in this period, perhaps the issue did not acquire sufficient traction. But, when, faced with the foreign exchange reserve and current account deficit crisis in the 90s, the decision was taken to open up the economy, the issue of advance ruling again cropped up and while presenting the budget for the year 1992, the then Finance Minister, Manmohan Singh stated as follows:

"Having regard to the complexities in tax laws, I have been receiving representations that the Government should give Advance Rulings whenever a taxpayer has doubts about the tax liability in respect of intended transactions. This practice obtains in a number of countries. There are certain practical difficulties in implementing such a suggestion. However, in the interest of avoiding needless litigation and promoting better taxpayer relations , a scheme for giving Advance Rulings in respect of transactions involving non-residents, is being worked out and will be put into operation soon. The scope of this can be extended subsequently on the basis of experience gained."

The following year, he brought forward the legislative proposals for the creation of a statutory authority, headed by a retired Judge of the Supreme Court. A new chapter XIX-B was added to the Income Tax Act.The Minister hoped that the scheme would be welcomed by non-residents. Thus, was constituted the Authority for Advance Ruling (AAR) in India.

The jurisdiction of the AAR was initially limited to giving rulings on questions posed to it about transactions by non-residents. This was subsequently enlarged to disputes involving Public Sector Undertakings. The ambit of the AAR was extended to cover residents also in respect withholding of taxes where the tax liability of a non-resident arose out of a transaction between a resident and a non-resident.

The Indian AAR was somewhat unique in as much as it was a judicial body and very few countries may have a similar arrangement. In most of the countries having advance rulings, the ruling is private and given by tax administration but is not binding on the taxpayer. The procedure before the AAR was quasi-judicial, therefore adversarial and involves following certain formalities. Unlike private rulings, the ruling of AAR was binding on the tax payer and on the tax department so long as the facts remain the same.

A ruling could be sought in respect of a transaction which has either been undertaken or is proposed to be undertaken in order to ensure certainty of the tax liability of a non-resident even before a transaction actually takes place thereby avoiding long drawn litigation. Besides, it also afforded the non-resident investor opportunities to incorporate suitable changes in their business plans, if necessary.

There were certain restraints on the AAR including one against admission of a petition in respect of a case where tax evasion is suspected. There were not too many instances where the AAR had refused to entertain an application on this ground alone although the revenue almost routinely argued on this line. The AAR was also debarred from entertaining a question which involved the determination of fair market value of any property.

The regular appeal process in India, as elsewhere, is rather time consuming. Despite some changes recently brought in through administrative and legislative measures, there are still several tiers of appeals and it takes quite some years for any dispute to be finally settled under the normal procedure. On the other hand, there was a statutory time limit of six months for the disposal of cases by the AAR which in practice used to work out to about eight to nine months. This statement may be contradictory to what the Supreme Court later observed in a case that we will discuss subsequently, but one can read the following article - 'The rising popularity of Advance rulings in India by Harshal Shah and Bijal Ajinkya - Tax notes International July, 20, 2009, p.219

No appeal was also provided against the order of the AAR. This was to give finality to its order and although its rulings did not create binding precedence, they are of great persuasive value and are regularly quoted as an authority by Courts and tribunals. As a result, in some cases, appeals by Special Leave used to be filed before the Supreme Court of India in some rare cases.

The demise of the institution of AAR is associated with the current delay in the disposal of cases, but we should try to understand the genesis of the same. It will be instructive in this regard to note the observation of the then Chairman of the AAR:

"Before proceeding to deal with the various contentions, it appears to be proper to observe that the object of creating this Authority for Advance Ruling is likely to be defeated if parties are given the opportunity to challenge the rulings either at the first stage or at the subsequent stage before High Courts. We may clarify that this has nothing to do with the composition of this Authority being presided over by a retired Judge of the Supreme Court. But permitting a challenge in the High Court would become counterproductive since writ petitions are likely to be pending in High Courts for years and in the case of some High Courts, even in Letters Patent Appeals and then again in the Supreme Court. It appears to be appropriate to point out that considering the object of giving an advance ruling expeditiously, it would be consistent with the object sought to be achieved, if the Supreme Court were to entertain an application for Special Leave to appeal directly from a ruling of this Authority, preliminary or final, and render a decision thereon rather than leaving the parties to approach the High Courts for such a challenge.

It is for the legislature to consider whether an appeal directly to the Supreme Court should not be provided against a ruling rendered by this Authority to ensure that the delay in procedure is minimised and the object of creating this Authority is achieved." ( Groupe Industriel Marcel Dassault [ 2011-TII-28-ARA-INTL)

Nevertheless, the Supreme Court of India, examining the definition of advance ruling and the binding nature of the same, took the view that the AAR is a body exercising judicial power and is a tribunal within the meaning of the expression in Articles 136 and 227 of the Constitution. And in that view of the matter, the SC inter-alia, observed:

" ….to hold that an advance ruling of the authority should not be permitted to be challenged before the High Court under Articles 226 and/or 227 of the Constitution would be to negate a part of the basic structure of the Constitution. Nonetheless, we do understand the apprehension of the Authority that a writ petition may remain pending in the High Court for years, first before a learned Single Judge and thereafter in Letters Patent Appeal before the Division Bench and as a result the object of Chapter XIX-B of the Act which is to enable an applicant to get an advance ruling in respect of a transaction expeditiously would be defeated. We are, thus, of the opinion that when an advance ruling of the Authority is challenged before the High Court under Articles 226 and/or 227 of the Constitution, the same should be heard directly by a Division Bench of the High Court and decided as expeditiously as possible." (See, Columbia Sportswear Company v DIT [2012-TII-04-SC-LB-INTL]. The resulting effect of this order was that the status of the AAR stood downgraded.

The TARC constituted by the then government also examined the functioning of the AAR and was of the view that historically, the AAR has remained one of the most popular ADR forums for taxpayers in India. (1 st report of the TARC- page 243 ). It also pointed out that AAR has also come under criticism for inordinate delays in pronouncing rulings despite a statutory limit of 6 months and that delayed appointment of the chairman/member(s) of the AAR has contributed to such delays. The TARC identified other key limitations of the AAR as (a) Limited reach – AAR is accessible only to non-resident taxpayers, PSUs and some resident taxpayers having transaction with non-residents under the I-T Act. A large number of resident taxpayers, especially large taxpayer units (LTUs), cannot access the AAR. (b) Public ruling – AAR's ruling is in the nature of private ruling insofar as the ruling is applicable to the applicant taxpayer and is binding only on the facts of each ruling. Even though the facts could be identical, the AAR ruling would not be binding on other taxpayers. In other words, AAR is not mandated to give out 'public rulings', thus significantly limiting the utility and precedence value of rulings pronounced by the AAR. (c) Lack of accessibility – The AAR is located at New Delhi. Not having any bench at other places in the country significantly constrains the efficacy of the AAR's functioning .

While presenting his budget for the year 2014, Finance Minister, Arun Jaitley in his Budget speech stated "Currently, an advance ruling can be obtained about the tax liability of a non-resident from the Authority for Advance Rulings. This facility is not available to resident taxpayers except Public Sector Undertakings. I propose to enable resident taxpayers to obtain an advance ruling in respect of their income tax liability above a defined threshold . I also propose to strengthen the Authority for Advance Rulings by constituting additional benches."

Accordingly, the ITA was amended and a post of Vice Chairman was created and two new Benches were proposed to be constituted beyond the principal bench at Delhi. A person who has been a judge of the High Court could become Vice-Chairman. Advance ruling was also made available to a resident taxpayer in relation to his tax liability arising out of one or more transactions valuing rupees one hundred crore or more in total which has been undertaken or proposed to be undertaken.

In order to improve the efficiency and efficacy of the AAR, and to increase the available pool for appointment as Chairman, AAR, section 245-O of the ITA was further amended by the Finance Act, 2017 to provide that a former Chief Justice of a High Court, or a person who has been a High Court Judge for at least seven years shall also be eligible to be Chairman of the AAR.

It was also provided that in the event the Chairman is unable to discharge his functions owing to absence, illness or any other reason, or in the event that the office of the Chairman falls vacant, the Vice-chairman shall discharge the functions of the Chairman until the new Chairman enters upon his office or until the incumbent Chairman resumes his duties.

Nothing therefore indicated that the AAR as an institution had lost its relevance or that its functioning was utterly dissatisfactory and that its demise will come soon. But then came another judgement of the Supreme Court in the case of National Co-operative Development Corporation with some acerbic observations and some recommendations. After narrating a brief history of the institution and its evolution, the Court observed:

"(…) The ground level situation is that this methodology has proved to be illusionary because there is an increasing number of applications pending before the AAR due to its low disposal rate and contrary to the expectation that a ruling would be given in six (6) months (as per Section 245R(6) of the IT Act), the average time taken is stated to be reaching around four (4) years!

There is obviously lack of adequate numbers of presiding officers to deal with the volume of cases. Interestingly, the primary reason for this is the large number of vacancies and delayed appointments of Members to the AAR . In view of the time taken, the very purpose of AAR is defeated, resulting in the mechanism being used infrequently as is evident from the ever- increasing tax related litigation.

We may notice a significant development in Section 245N of the IT Act. It was through Notification No.11456 dated 3.8.2000 that public sector companies were added to the definition of 'applicant', and in 2014, it was made applicable to a resident who had undertaken one or more transactions of the value of Rs. 100 crore or more.

Insofar as a resident is concerned, the limit is so high that it cannot provide any solace to any individual, and we do believe that it is time to reconsider and reduce the ceiling limit, more so in terms of the recent announcement stated to be in furtherance of a tax friendly face-less regime! We may refer to the international scenario where there has been an incremental shift towards mature tax regimes adopting advance ruling mechanisms. The increase in global trade puts the rulings system at the centre-stage of a robust international tax cooperation regime. The Organisation for Economic Cooperation and Development (for short 'OECD') lists advance rulings as one of the indicators to assess trade facilitation policies, making it an aspirational international best practice standard. For example, Australia and New Zealand have a robust system of advance rulings wherein the decisions (which are public rulings affecting a large number of taxpayers) are given teeth by being made binding on the revenue authorities. New Zealand has gone a step further and innovated "status rulings" under which a taxpayer can apply to the Commissioner for a ruling on how a change in the law impacts an existing ruling. In the United States, there is a mechanism for the Treasury to authorise guidance in the form of revenue rulings, procedures and notices. The mechanism again, has been bolstered by subsequent practice and interpretations of the United States courts, where rulings have indicated that taxpayers may be penalised if they act inconsistently with legal interpretations set out in the revenue rulings, procedures or notices. Tax transparency has been a hallmark trait of the Swedish legal system. Swedish law requires public disclosure of ex ante tax administration such as advance rulings. Both the taxpayer as well as the Swedish Tax Agency can request an advance tax ruling, these rulings are published without information identifying the taxpayer that requested them. The Skatterättsnämnden, or the Council for Advance Tax Rulings is the Swedish Government agency which is vested with this power. The advance ruling system has played a crucial role in Sweden's position as a country with one of the highest tax compliance rates in the world.

The aim of any properly framed advance ruling system ought to be a dialogue between taxpayers and revenue authorities to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become another stage in the litigation process.

We, thus, consider it appropriate to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward. "

After giving a few homilies quoting from Nani Palkhivala and Martin Luther King, the Court directed: A copy of this order be sent to the Department of Revenue, Department of Expenditure and Department of Economic Affairs, Ministry of Finance and to the Ministry of Law & Justice .

The judgement in this case was delivered on September 11, 2020 and in the budget 2021, presented on 1 st February, we are told that the institution of the AAR would no longer be functioning and would be replaced by a Board of Advance Ruling (BAR) consisting of Chief Commissioners of Income Tax. The only reason offered for this drastic change is that the post of chairman and Vice- Chairman has remained vacant in the recent past. On the 1 st of September,2021, the government has notified the constitution of the BAR with two benches in Delhi and one bench in Mumbai. Although it is not the purpose of this article to examine the working of the BAR, one important change needs to be highlighted in the context of the latest Supreme Court decision. The order of the BAR will not be binding either on the taxpayer or on the tax department and would be appealable before the High Court .

Also, it would be unrealistic for a Board consisting of two Chief Commissioners to enter into a dialogue with the taxpayer as contemplated in the SC order; nor is it an amalgam of the Swedish and New Zealand Model. On top of it, there is indication that the faceless scheme, which essentially is to prevent any interface between the taxpayers and the tax administration, will be extended to this body as well.

Despite what is now being said, the system of an AAR headed by a member of the higher judiciary assisted with domain expertise provided by an IRS officer and an Indian Legal Service Officer was working well. For whatever reason, the trust of the general public in India in the impartiality of an authority is more if the same is headed by someone from the judiciary. It has been reported that a writ has been filed against the amendment but one does not know the fate of the same. How the new system will work cannot also be predicted now. But condemning an Institution for the inability of the government and the Supreme Court in appointing the Heads is not fair at all.