Direct Tax Alert - AAR admits application as the issue raised is not covered in the notices issued

Background

With an aim to bring tax certainty for Multinational Corporations, the Indian Government had introduced Authority for Advance Ruling (AAR)¹ wherein specified taxpayers can approach AAR and obtain its view in specified matters. Section 245(2) of the Income-tax Act, 1961 (IT Act) lays down certain circumstances where the AAR shall not admit the application. One such circumstance is that the question raised in the application is not pending before any income-tax authority or Appellate Tribunal (with some exception) or any court. Determination of whether a matter which is referred to AAR is pending before any income-tax authority has been a contentious issue especially when a notice has been issued by the Tax Officer.

In this regard, recently, the Authority for Advance Ruling (AAR)² had an occasion to examine a matter where the Tax Officer had issued a notice under section 142(1) of the IT Act, whether the taxpayer can seek a Ruling from AAR or not.

We, at BDO in India, have summarised this ruling and provided our comments on the impact of this decision.

Facts of the case

The taxpayer, an Indian Company, is a wholly owned subsidiary of a Japanese company. The taxpayer had declared and distributed dividend to its holding company and had paid Dividend Distribution Tax (DDT) under section 115-O of the IT Act on such dividends. On 30 November 2018, the taxpayer filed an application before the AAR seeking Ruling on whether beneficial rate of 10% provided under India-Japan Double Taxation Avoidance Agreement (DTAA) can be substituted for DDT rate or not. The Tax Officer objected to the taxpayer’s application on the ground that notices had been issued to the taxpayer prior to filing of the application and thereby it cannot be admitted under section 245R(2)(i) of the IT Act.

The chronology of events before the tax department is as follows:

Date	Event
3 July 2017	Tax Officer issues notice under section 143(2) of the IT Act.
9 July 2018	Tax Officer issues notices under section 142(1) along with a detailed questionnaire.
05 September 2018	Notice under section 142(1) with another questionnaire issued.
30 November 2018	Taxpayer files an application seeking Ruling from AAR.
11 December 2018	Taxpayer files an application under section 144A of the IT Act for refund of excess DDT.
20 December 2018	Tax Officer passes an order under section 143(3) of the IT Act rejecting taxpayer’s request for refund of excess DDT.

The Tax Officer sought AAR’s attention to the questionnaire contained in the notice of 9 July 2018 wherein questions pertaining to dividend income and corresponding expenses as well as outward foreign remittances were asked. Thus, it contended that the issue of refund of excess DDT was pending when the taxpayer has filed the application.

While the taxpayer admitted that notices were issued prior to filing of application before AAR, it contended that the issue raised in the application was not the subject matter of any of the notices. The taxpayer also contended that the notice issued under section 143(2) of the IT Act was a standard notice for complete scrutiny, without any question. Further, the questions raised in the application were not covered in the questionnaires issued. The taxpayer also clarified that the application under section 144A of the IT Act was submitted after the application was filed with AAR and hence not governed by section 245R(2)(i) of the IT Act. The taxpayer relied on prior AAR rulings³ on this issue.

AAR Ruling

While admitting the taxpayer’s application, the AAR made following observations:

• Notice under section 143(2) of the IT Act was for scrutiny under Computer Aided Scrutiny Selection (CASS). In the Schedule DDT of the income tax return form, the taxpayer had disclosed that it had deducted and also deposited DDT and there was no refund claim of DDT in the tax return. Since DDT was deducted and paid as per section 115-O of the IT Act and no refund claim was made, selection of case for scrutiny under CASS could not have been on account of DDT payment.
• The questions raised in the questionnaire were in respect of dividend income earned by the taxpayer and had no relevance to the dividend declared by the taxpayer.
• The claim for refund of DDT was made vide application dated 11 December 2018 which was after the filing of application before the AAR .i.e., 30 November 2018. The pendency has to be considered on the date of filing of application and accordingly, there was no pendency. Merely because the taxpayer had raised the issue of excess DDT in his subsequent letter dated 30 December 2018, it does not create any pendency on the date of application filed before AAR.
• The Delhi High Court in the case of Hyosung⁴ held that a notice under section 143(2) of the IT Act merely asking for certain information from the taxpayer issued prior to filing of application before AAR will not constitute bar in terms of section 245R(2)(i) of the IT Act. The same principle applies in respect of other notices issued under section 142(1) of the IT Act as well.

BDO comments

While the Finance Act, 2021 has introduced the Board for Advance Ruling which will replace AAR, the provisions relating to admissibility of application shall apply mutatis mutandis. Hence, this decision should be relevant even for the application made to Board for Advance Ruling. Another aspect that needs consideration is that the AAR has observed that merely an issuance of notice would not entail the application invalid. The issue on which advance ruling is sought should be specifically brought out in the notice.  Hence, this ruling will help all the taxpayers who have approached/considering to approach AAR after the notice is issued. Furthermore, in case of limited scrutiny, one could draw a support of this decision to contend that the matter is not pending in terms of section 245(2)(i) of the IT Act if the question raised before the AAR is not covered by the reason for scrutiny selection.

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