AAR 1.

India has emerged as a potential investment location in the world today on the back of large market size and high customer potential. At the same time, it is perceived as a risky place to make investments in the light of expensive and long drawn taxation litigation. To comfort the position of investors, scheme of Advance Ruling was introduced by Finance Act, 1993 by inserting Chapter XIXB consisting of sections 245N to 245V in the Income Tax Act, 1956 with effect from 1st June, 1993. It seeks to provide greater clarity to investors, primarily non-residents and specified categories of residents on their tax liability in India and enables them to plan their taxation affairs to avoid any litigation. 2. Under the scheme, Authority for Advance Ruling (AAR) has been set up to pronounce advance rulings. It is an independent body comprising of a chairman, who is a retired judge of the Supreme Court and two members of the rank of additional secretary to the Government of India, one each from Indian revenue services and Indian legal Services. 3. Section 245N reads as defines Advance ruling and applicant as follows: Advance ruling" means (i) A determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a non-resident applicant; or (ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been undertaken or is proposed to be undertaken by a resident applicant with such non-resident, and such determination shall include the determination of any question of law or of fact specified in the application; (iii) a determination or decision by the Authority in respect of an issue relating to computation of total income which is pending before any income-tax authority or the Appellate Tribunal and such determination or decision shall include the determination or decision of any question of law or of fact relating to such computation of total income specified in the application : [Provided that where an advance ruling has been pronounced, before the date on which the Finance Act, 2003 receives the assent of the President, by the Authority in respect of an application by a resident applicant referred to in sub-clause (ii) of this clause as it stood immediately before such date, such ruling shall be binding on the persons specified in section 245S;]

"Applicant" means any person who (i) (ii) (iii) is a non-resident referred to in sub-clause (i) of clause (a); or is a resident referred to in sub-clause (ii) of clause (a); or is a resident falling within any such class or category of persons as the Central Government may, by notification in the Official Gazette42, specify in this behalf;

In simple words, Section 245N states that a ruling may be obtained by an applicant who may be a non resident or a resident having a transaction with a non resident or a specified categories of

resident ( at present Public sector companies, as defined in sec 2(36A) of the Income tax act, 1956. The applicant may raise any question of law or fact to ascertain the tax liability of a nonresident arising out of a transaction undertaken or proposed to be undertaken. Sec 245U provides that 1.7 1.8