Taxpayers can approach AAR for tax liabilities on deals above Rs 100 cr

Corporate lawyers say, it will help reduce litigation on M&As and transfer pricing orders issued by tax department after a transaction is announced

In a positive move to cut tax litigation, the Central Board of Direct Taxes (CBDT) has notified that resident taxpayers who plan transactions valuing Rs 100 crore or above can approach the Authority for Advance Rulings (AAR) for determination of their tax liabilities under such transaction.

This step will help reduce litigation on mergers and acquisitions (M&As) and transfer-pricing orders issued by the tax department after a transaction is announced, say corporate lawyers. Earlier, this facility was available only for multinational companies (MNCs) and their overseas arms. However, with this change, the local subsidiary of an MNC can approach the AAR for advance tax rulings.

NORMS EASED

• Move will help reduce litigation on M&As and transfer-pricing orders issued by the tax department
• Earlier, this facility was available only for MNCs and their overseas arms
• Tax lawyers say this is a positive step towards achieving a non-adversarial tax regime as promised by the new government

The tax department has clarified the advance rulings will not be applicable if the question being sought to be raised before the AAR is already pending before any tax authority or Appellate Tribunal.

The CBDT notification is a part of measures to reduce tax litigation as promised by Finance Minister Arun Jaitley in his maiden Budget in July 2014. The Budget had announced the opportunity to seek advance rulings from AAR would also be available to local resident taxpayers.

The Bharatiya Janata Party (BJP) had, in its manifesto, promised to bring down “tax terrorism” unleased by the previous United Progressive Alliance government on MNCs, which saw many companies reduce their investments in India. In some cases involving the MNCs — such as Shell and Vodafone —the Indian courts had ruled in favour of the MNCs and rejected the tax department’s orders.

Earlier, resident taxpayers were allowed to approach the AAR only to determine the tax liability of non-resident taxpayers with respect to a transaction, which they had entered into or proposed to enter into, with such non-resident taxpayers. After this announcement, Indian taxpayers can approach the AAR to get a ruling to determine their own tax liability to a transaction that they undertake or propose to undertake.

Tax lawyers say this is a positive step towards achieving a non-adversarial tax regime as promised by the new government. “It is expected to bring about clarity at the time the transactions or projects are on the drawing board, making the tax outcome more certain and minimising the possibility of a tax dispute arising at a later stage, thereby saving resources in terms of time, cost and efforts in defending or litigating a dispute,” said a lawyer with Khaitan & Co.

“One would now look forward to hearing from the government regarding the additional benches of the AAR in other metros that would be set up as announced in the Budget, which will strengthen the infrastructure of the AAR and would result in speedy disposal of applications for advance rulings,” he added.

The AAR forum will soon become functional with the government appointing V S Sirpurkar to take charge as the new chairman of AAR. With this, the hearing of pending cases and the new applications for advance rulings is expected to commence soon.