AAR 'return's to reason: Mere filing of return does not bar admission of advance ruling application
The Authority for Advance Rulings (“AAR”), in the case of In Re: Mitsubishi Corporation1, has held that the mere filing of a tax return does not create grounds for the rejection of an advance ruling application under proviso (i) to Section 245R of the Income Tax Act, 1961 (“ITA”). While the proviso prevents the AAR from admitting an application based on a question which is ‘pending’ before the tax authorities, the AAR has held that this criteria would only be satisfied once a notice under either Section 142(1) or Section 143(2) of the ITA has been issued by the authorities.
Mitsubishi Corporation (“Applicant”) is a Japanese resident company that has established a branch office in India primarily for support services. The Applicant entered into an arrangement with an Indian company, Power Grid Corporation of India Limited by which it executed two separate contracts for offshore supply and onshore services respectively. Subsequently, the Applicant sought an advance ruling before the AAR as to whether payments received under the off-shore supply contract would be taxable in India and whether the Applicant and its assignee in India would be assessed as independent companies or as an association of persons under the ITA.
The revenue objected to the admissibility of the application contending that since the Applicant had filed a return of income under Section 139 of the ITA, a question was ‘pending’ before the tax authorities which would make the application inadmissible. The revenue relied on the AAR’s previous rulings in In Re: SEPCO III Electric Power Corporation2 and In Re:NetApp B.V.3 and strongly urged that mere filing of a return should be a bar to the admissibility of an advance ruling application. The Applicant, on the other hand, relied on the AAR’s ruling in Hyosung Corporation, Korea, In re:4 and contended that the question raised in the application was not an issue that was pending before the tax authorities. Based on the same, the AAR ruled on admissibility of the application.
Ruling of the Authority
The AAR, after hearing all contentions put forth by the parties, arrived at the conclusion that the mere filing of an income tax return will not create a bar on admissibility of an advance ruling application as under the proviso to Section 245R of the ITA. The AAR based this conclusion on the following:
Processing of return: The AAR observed that when a return is filed under Section 139 of the ITA or in response to a notice under Section 142(1) of the ITA, it is processed by the tax authorities under Section 143(1) of the ITA. Section 143(1) requires the authorities to compute total income or loss after adjusting arithmetical errors or incorrect claims apparent from the return. Since the expression ‘incorrect claim’ is defined in the ITA and since the ITA bars intimation under the provision after one year from filing of return, the AAR observed that the tax authorities have no jurisdiction to examine larger issues i.e. those beyond the scope of Section 143(1) at this stage.
Notice under Section 143(2): The AAR also observed that where the tax authorities observe that the claims made in the return are inadmissible or where income has been understated, loss has been overstated or tax has been underpaid, a notice under Section 143(2) of the ITA may be served which would open such issues for adjudication.
Accordingly, the AAR observed that except where a notice under Section 142(1) or Section 143(2) of the ITA has been served, the tax authorities have no jurisdiction to examine or adjudicate upon debatable issues shown in the filed return. The AAR proceeded to respectfully disagree with the decisions in In Re: SEPCO III Electric Power Corporation5 and In Re:NetApp B.V.6 and observed that although these decisions provide that the mere filing of a return would be a bar to admissibility, an analysis of Sections 142(1) and 143(2) of the ITA would make it evident as to why this should not be so.
Finally, the AAR relied on its rulings in In re: Jagtar Singh Purewal7 and Hyosung Corporation, Korea, In re:8 to hold that a question can be held to be ‘pending’ only when the issues are shown in the return and a notice under Section 143(2) of the ITA is issued in respect of such issues.
In an interesting ruling, the present bench of the AAR has set in stone its view on the contentious issue as to whether the filing of a tax return would in itself preclude an advance ruling application from being admissible. It must be pointed out that the position that the mere filing of a return shall not create such bar seemed settled by the AAR itself through an array of rulings till the year 2011.9 However, since 2011, the AAR has taken the contrary view in a few rulings even though none of these rulings have provided compelling reasoning.10 Further, the Delhi High Court, in NetApp B.V. v. Authority for Advance Rulings, has confirmed such finding of the authority as well.
In this context, the AAR’s ruling is commendable owing to the fact that it has examined the procedure provided under Sections 139, 142 and 143 of the ITA and arrived at a well reason ruling. Although, the present bench of the AAR had earlier ruled along similar lines in Hyosung Corporation, Korea, In re:11, the unqualified nature of the reasoning provided in the present ruling makes its position clear that a question would be considered ‘pending’ before the tax authorities only if the tax authorities initiate proceedings through a notice under Section 142(1) or Section 143(2) of the ITA calling into question the income of the assessee. Accordingly, a voluntary return filed under Section 139 of the ITA which has not been adjudicated upon shall not create a ‘pending’ question as required under Section 245R of the ITA.
Continuing from the logical position arrived at by the AAR, although it is settled that the process of assessment commences from the filing of a return12, Section 245R requires a ‘question’ to be ‘pending’ and not just the assessment procedure. A ‘question’ can be said to be ‘pending’ only when the tax department initiates a step to adjudicate on the return filed by the assessee. Thus, the AAR has rightly departed from the Delhi High Court’s ruling in NetApp B.V. since the Court failed to notice such distinction and had ruled on this basis.
The present ruling will have a positive impact on several foreign entities that are desirous of filing an advance ruling subsequent to the filing of tax return. It must be noted that vide a notification released by the Central Board of Direct Taxes in May, 201313, Rule 12(3)(aab) has been added to the Income Tax Rules, 1962 which provides that any entity that seeks to claim benefits under a DTAA must file a tax return in India under the ITA. Thus, non-resident applicants are given protection under DTAAs in India only if they file tax returns in India. Since several applications before the AAR relate to issues involving DTAAs, non-resident applicants may rely on this ruling to file a tax return in India prior to submitting the application so as to ensure that they receive protection under the concerned DTAA.
However, owing to the contradictory jurisprudence on this issue that has come from the AAR over the years, one can only hope that this ruling and the strength of the reasoning provided in it will put this issue to rest hereafter.
1 A.A.R. No.1309 of 2012.
2 (2012) 342 ITR 213 (AAR).
3 (2012) 347 ITR 461 (AAR), upheld by the Delhi High Court in NetApp B.V. v. Authority for Advance Rulings, (2012) 253 CTR 164 (AAR – New Delhi).
4 (2013) 261 CTR 230 (AAR – New Delhi).
7 (1995) 213 ITR 512.
9 In re: Jagtar Singh Purewal, Supra; Rotem Company, In re:,  238 ITR 189 (AAR); Mustaq Ahmed, In re:, (2007) 293 ITR 530 (AAR).
10 In Re: SEPCO III Electric Power Corporation, Supra; Wavefield Inseis Asia, In re:, (2012) 343 ITR 136 (AAR); NetApp B.V., In re:, Supra; Red Hat India Private Limited In re:,  18 taxmann.com 259 (AAR - New Delhi).
12 Auto & Metal Engineers v. Union of India,  229 ITR 399 (SC).
13 Notification No. S.O. 1111 (E), May 1, 2013.