BINDING EFFECT OF ADVANCE RULING ON THE INCOME TAX DEPARTMENT

[Mr. M. GOVINDARAJAN]

Advance Ruling

Chapter XIX-B of the Income Tax Act, 1961 provides the procedure for getting ruling from the Authority for Advance Ruling (Section 245 N to Section 245W).  An assessee who wants to seek advance ruling from the Authority for Advance ruling may file an application in the prescribed form along with the prescribed fee indicating the questions for which he sought for advance ruling.  On receipt of the application the Authority for Advance Ruling shall forward a copy of the application to the Principal Commissioner or Commissioner call upon him to furnish the relevant records.  The application may either be accepted or rejected by the Authority for Advance Ruling.  The application shall not be rejected without giving the applicant a reasonable opportunity of being heard. 

The Authority shall, after examining such further material as may be placed before it by the applicant or obtained by the Authority, pronounce its advance ruling on the question specified in the application.  The Authority shall pronounce its advance ruling in writing within six months of the receipt of application.

Applicability of Advance Ruling

Section 245S provides that the advance ruling pronounced by the Authority shall be binding only-

• on the applicant who had sought it;
• in respect of the transaction in relation to which the ruling had been sought; and
• on the  Principal Commissioner or Commissioner, and the income-tax authorities subordinate to him, in respect of the applicant and the said transaction.

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

Assessment based on Advance Ruling

Since the ruling given by the Authority for Advance Ruling is binding the Assessing Officer may proceed for assessment based on the ruling given by the Authority for Advance Ruling.  Appeal may be filed by the aggrieved assessee against the said order before the Commissioner (Appeals).

Once it is found that the Assessing Officer made an assessment based on the ruling given by the Authority for Advance Ruling it will hold good by the Appellate Authority also.

In ‘EY Global Services Limited v. Assistant Commissioner of Income Tax, Circle 1  (2)(2), International Taxation, New Delhi’ – 2022 (6) TMI 148 – ITAT, New Delhi, the appellant in this case is providing technology and other support services and software licenses to the member firms of the EY Network.  The appellant was established as a non-profit central service provider to enable EY member firms to share the costs of centralized services. The appellant enters into agreements with each member firm, pursuant to which it provides services required by member firms and thereafter, recovered various costs incurred by it from the member firms on actual usage basis.  The appellant filed a NIL return on 30.03.2012 on the contention that the payments received by the assessee from Indian member firms are mere reimbursement of costs and not taxable under the Income Tax Act as well as the Double Taxation Avoidance Agreement between India and United Kingdom.

The appellant filed an application before the Authority for Advance Ruling to seek an advance ruling that the payments so received by the assessee are not taxable in India under the Act or under the treaty, on 09.02.2011.  The questions raised by the appellant before the Authority for Advance Ruling are-

1. Whether amounts received/receivable by EYGSL UK in accordance with the agreement entered into with EYGBS India Private Limited inter alia, on account of services and/or Deliverables as defined in the Agreement is chargeable to tax in India as ‘fee for technical services’ under Article 13 of the Agreement for avoidance of Double Taxation between India and UK?
2. Whether the amounts received by EYGSL UK from EYGBS India Private Limited as reimbursement of costs for giving the ‘Right to benefit from the Deliverables and/or Services’ under the terms of the agreement would constitute ‘income’ in the hands of EYGSL UK within the meaning of the term in Section 2(24) of the Income-tax Act, 1961?
3. Whether the payments received by EYGSL UK for giving ‘Right to benefit from the Deliverables and/or Services’ under the terms of the agreement would be in the nature of ‘royalty’ within the meaning of the term in:

1. Explanation 2 to clause (vi) of Section 9(1) of the Act?
2. Article 13 of the India-UK Tax Treaty?

4.  Based on the answers to Questions (1) to (3) above, and in view of the facts as stated in Attachment III, and also in light of the declaration provided by EYGSL UK that it does not have a permanent establishment in India in terms of Article 5 of the India- UK Tax Treaty, whether the payments received by EYGSL UK would be chargeable to tax in India?
5. Based on the answers to Questions above, would the receipts by EYGSL UK from EYGBS India suffer withholding tax under section 195 of the Act, and at what rate?

The Authority for Advance Ruling ruled as below-

1. Consideration received on account of provision of services/deliverables is not FTS.
2. Consideration received amounts to receive fees and it does not amount to reimbursement of expenses.
3. Consideration received for giving right to benefit from the computer software procured from several third party vendors (deliverables) is in the nature of royalty under Article 13 of India-UK DTAA as well as section 9(1)(vi) of the Act whereas consideration received for giving right to benefit from services is not in the nature of royalty under Article of India-UK DTAA.
4. In respect of Q.No.3, it was ruled that consideration for computer software is taxable as royalty. This is irrespective of the fact whether the applicant has a PE in India or not.
5. Consideration received in respect of giving right to benefit from computer software (deliverables) by the applicant would suffer withholding of tax under section 195 of the IT Act.

The Authority for Advance Ruling held that owing to the nature of services rendered by the assessee, all services except software charges are not taxable in India.  Accordingly the Authority for Advance Ruling ruled that software charges are taxable as ‘Royalty’ as per the provisions of the Act and the treaty.  The appellant filed a writ petition before the High Court challenging the Ruling given by the Authority for Advance Ruling.

Since the ruling given by Authority for Advance Ruling is binding on the assessee who sought advance ruling before the Authority for Advance Ruling and on the Principal Commissioner or Commissioner and the Income Tax Authorities subordinate to him, in respect of the application and the transaction.  Based on this the Assessing Officer proceeded the case of the appellant and passed the final assessment order. In the order dated 30.11.2018 the Assessing Officer held that the following payments were held taxable @ 10% as ‘Royalty’ under the Act as well as the treaty-

• Software license and Maintenance charges – Rs.7,28,25,439/-
• Global Technology Charges - Rs 3,65,90,140/-
• GWAN Connectivity Charges – Rs.32,41,122/-

Against this order of Assessing Officer the appellant filed an appeal before Commissioner (Appeals).  The appellant has contended to apply the provisions of section 158A of the act which deals with a situation where an assessee claims that any question of law arising in his case for an assessment year which is pending before the Assessing Officer or any Appellate Authority is identical with a question of law arising in his case for another assessment year which is pending before the High Court on a reference under section 256 or before the Supreme Court on a reference under section 257 or in appeal under section 261. 

The Commissioner (Appeal) found that the provisions of section 158A are not applicable in this case because of the fact that the appellant has filed writ before High court against the order of authority for advance ruling.  The provisions of section 158A are applicable only where the reference before High Court is under section 256 of the act. Moreover, as discussed above, Commissioner (Appeals) found that the act of filing appeal before Commissioner (Appeals) itself is redundant because the matter has already been decided by Authority for advance ruling which is a higher appellate forum. The act of the appellant to file writ petition before High Court is sufficient to keep the matter alive.

The appellant filed appeal before the Income Tax Appellate Tribunal (‘ITAT’ for short).  The appellant did not appear before ITAT during the personal hearing.  The Revenue submitted that the appeal is not at all maintainable inasmuch as Assessing Officer has followed the ruling of  Authority for Advance Ruling  in assessee’s own case, hence Commissioner (Appeals)  has rightly dismissed the assessee’s appeal as not maintainable.  The Revenue prayed the ITAT to dismiss the appeal filed by the appellant.  ITAT was further informed that the appellant has filed a writ petition before the High Court and the same is still pending.

The ITAT held that once it is made clear that the Revenue authorities only followed the ruling of Authority for Advance Ruling in assessee’s own case, no fault can be found in their orders in appellate proceedings. No case has been made out that authorities below have not correctly followed the ruling of Authority for Advance Ruling. It is also not a case that High Court has reversed the order of Authority for Advance Ruling. In this view of the matter, ITAT did not find any infirmity in the order of Commissioner (Appeals).  ITAT therefore upheld the same. This appeal filed by the assessee stands dismissed.

Conclusion

The Finance Act, 2021 inserted a second proviso to section 245-O which provides that the Authority so constituted shall cease to operate on and from such date as the Central Government may, by notification in the Official Gazette, appoint.  In the place of Authority for Advance Ruling the Central Government shall constitute one or more Boards for Advance Rulings, as may be necessary, for giving advance rulings under this Chapter on or after such date as the Central Government may, by notification in the Official Gazette, appoint.  This amendment came into effect from 01.04.2021.  For this purpose the Central Government made ‘e-advance ruling scheme, 2022’ with effect from 18.01.2022.  A separate procedure is framed for the conduct of getting advance ruling through this scheme.