MARCH 05, 2018

By Debasish Bandyopadhyay

THE purpose of Advance Ruling is to promote consistency, clarity and certainty in the interpretation and application of the tax law so as to determine the tax liability in respect of a proposed economic/ business activity or transaction in advance. The mechanism of Advance Ruling in customs law, has been made mandatory for the member countries by the World Trade Organization (WTO) vide Article 3 of the "Trade Facilitation Agreement" signed in the year 2013 at Bali, Indonesia.

The relevant extract of Article 3 of the said Agreement on Trade Facilitation reads as under:-

"1. Each Member shall issue an advance ruling in a reasonable, time bound manner to an applicant that has submitted a written request containing all necessary information. If a Member declines to issue an advance ruling it shall promptly notify the applicant in writing, setting out the relevant facts and the basis for its decision."

The key objectives of promoting the mechanism of Advance Ruling Authority under Customs Act, are as follows;

The Authority for Advance Rulings (AAR) has come out as a significant piece of instrument contributing immensely to the international tax jurisprudence. In India, the mechanism of Advance Rulings has assumed special importance due to greater focus on attracting Foreign Direct Investment and facilitating growth of cross-border transactions. Advance Rulings provide far greater conviction to foreign investors in respect of potential indirect tax liabilities that are to be arising out of proposed transactions in goods or services in the future course of time.

Legislative Background & Scope of Ruling:

The Legislative provisions of Advance Rulings were introduced in Customs Act, 1962 vide Finance Act of 1999. The provisions relating to Authority for Advance Rulings are laid down in the Customs Act, 1962 in Section 28E to Section 28M. Moreover, the Customs (Advance Rulings) Rules, 2002 have also been formulated to regulate the mechanism in an efficient manner. In a move to bring about synergy in the architecture of Advance Rulings mechanism, Government vide Finance Act, 2017 has unified the Authority for Advance Ruling to deal with both direct and indirect taxes. Accordingly, the Customs (Advance Rulings) Rules, 2002 has been amended vide Notification No. 29/2017-Customs (NT), Dated: March 31, 2017 to empower section 245-O of the Income-tax Act, 1961 to act as the "Authority" for the purpose of Customs Act, 1962.

In terms of section 28H of the Customs Act, the scope of the Advance Ruling or the question on which the advance ruling is sought shall be as follows;

- Classification of goods under the Customs Tariff Act, 1975 (51 of 1975);

- Applicability of a notification issued under sub-section (1) of section 25, having a bearing on the rate of duty;

- The principles to be adopted for the purposes of determination of value of the goods under the provisions of this Act.

- Applicability of notifications issued in respect of duties under this Act, the Customs Tariff Act, 1975 (51 of 1975) and any duty chargeable under any other law for the time being in force in the same manner as duty of customs leviable under this Act.

- Determination of origin of the goods in terms of the rules notified under the Customs Tariff Act, 1975 (51 of 1975) and matters relating thereto.

Application and Binding Jurisprudence:

In terms of the definition of 'applicant' provided under the Customs Act, the following persons can apply for Advance Ruling in customs as under;

- A non-resident setting up a joint venture in India in collaboration with a non-resident or a resident; or

- A resident setting up a joint venture in India in collaboration with a non-resident; or

- A wholly owned subsidiary Indian company, of which the holding company is a foreign company, or which, as the case may be, proposes to undertake any business activity in India;

- A joint venture in India; or

- A resident falling within any such class or category of persons, as the Central Government may, by notification in the Official Gazette, specify in this behalf.

Authority for Advance Rulings in Customs has been set up to give binding rulings, in advance, on cross-border transactions. Normally, in various countries Advance Ruling which is pronounced by the Authority are binding on the department concerned engaged in relevant assessment and hence possibilities of disputes and litigations can be kept away from. However, a ruling given in respect of an applicant is binding only in that applicant's case for a given transaction. In this regard, it is relevant to refer the example of United States of America where Customs Service strongly urges all parties engaged in transactions relating to the importation of goods into the United States to obtain binding guidance/information from the U.S. Customs Service prior to undertaking that transaction.

In India, t he advance ruling pronounced by the Authority shall be binding only -

- On the applicant who had sought it;

- On the [Principal Commissioner of Customs or Commissioner of Customs], and the customs authorities subordinate to him, in respect of the applicant.

Appellate Remedy:

In many countries there is no available appellate procedure or avenue against the rulings issued by the Authority of Advance Ruling. However, in India, the recently enacted GST law provides for an appellate authority for the Advance Ruling system. It is important to note that the system of Advance Ruling has gained considerable maturity in the recent past resulting into injecting of confidence in foreign investors or related stakeholders who, may acquire a ruling to get a true picture of impending tax liability in India and can plan their future course of action in the country. The mechanism of Advance Ruling has also been served as a weapon to fend off the scourge of litigation & disputes on any future economic activity. Time and again, the rulings of the Authority for Advance Ruling has been constantly questioned and challenged before the courts of law in the country. Therefore, offering a layer of appeal in the legislation for modification of any out-and-out infirmity in the ruling may not be a bad idea. However, the primary objective of advance ruling to provide certainty in a time-bound manner must be lionized all the way.

Union Budget-2018 & Amendments in Advance Ruling:

On the commitment to align certain provisions with the obligations under the Trade Facilitation Agreement, many significant amendments are proposed in the provisions of Advance Ruling under the customs law. The broad heads of such amendments are as under -

- Constitution of new Advance Ruling Authority under Customs Act,

- New provision for Appellate Authority to appeal against the Advance Ruling,

- Enhancement in the scope of Advance Ruling,

- Amendment in the definition of Advance Ruling.

The proposals are made in the Finance Bill, 2018 vide clauses 48 & 49 to amend section 245-O of the Income Tax Act, 1961, for constitution of a new Customs Authority for Advance Ruling under section 28EA of the Customs Act. Thus, it is stated that the Authority as mandated under section 245-O, shall cease to act as an Authority for Advance Rulings for the customs and shall act as an Appellate Authority for the purpose of the Customs Act, 1962. It is relevant to note that the Finance Bill seeks to insert a new section 28EA in the Customs Act for appointment of the Customs Authority for Advance Rulings. Accordingly, it is proposed that Board may appoint officer of the rank of Principal Commissioner of Customs or Commissioner of Customs, as the case may be, for Customs Authorities for Advance Rulings.

The introduction of an extra layer in the scheme of Advance Ruling by converting the existing authority into an appellate one, may be a welcome move because, in case of an unfavourable ruling, assesse would have a recourse of appeal. The said internal forum of appeal would give rise to opportunity for the related stakeholders to reconsider their position.

Another significant amendment has been made in the definition of ‘applicant' in section 28E of the Customs Act, 1962 for expanding the horizon of advance ruling. The relevant part of clause 62 of the Finance Bill is extracted below;

"62 . In the Customs Act, in section 28E, -

(i) xxx;

(ii) xxx;

(iv) for clause (c), the following clause shall be substituted, namely:––

‘(c) "applicant" means any person,––

(i) holding a valid Importer-exporter Code Number granted under section 7 of the Foreign Trade (Development and Regulation) Act, 1992; or

(ii) exporting any goods to India; or

(iii) with a justifiable cause to the satisfaction of the Authority, who makes an application for advance ruling under section 28H;';

(v) xxx;

(vi) xxx;

(vii)xxx."

The increase in popularity and its implication of such mechanism can also be recognised from the fact that the scope of advance rulings has been gradually enhanced to increase the eligibility of applicants. Accordingly, honouring the commitment of Trade Facilitation Agreement, the definition of applicant is amended to include any person holding a valid Importer-Exporter Code or exporting any goods to India or having a justifiable cause to the satisfaction of the authority, can make an application for advance ruling.

Further, the definition of "Advance Ruling" in section 28E of the Customs Act, 1962 is also proposed to be amended vide clause 62 of the Finance Bill, 2018 as extracted below;

"62 . In the Customs Act, in section 28E, -

(i) clause (a) shall be omitted;

(ii) for clause (b), the following clause shall be substituted, namely:––

‘(b) "advance ruling" means a written decision on any of the questions referred to in section 28H raised by the applicant in his application in respect of any goods prior to its importation or exportation;';

(iii) xxx;';

(iv) xxx;

(v) xxx;';

(vi) xxx;

(vii) xxx."

Therefore, it can be said that the purpose of refurbishing the process of Advance Ruling as discussed above has been to smoothen the process of approaching the Advance Ruling Authority so as to assists stakeholders in confirming the tax consequences of proposed transactions and promotes voluntary compliance by assisting them to comply with tax laws.

Conclusion:

The country is facing s trong challenges from the developed economies over simplification of trade regulations and adherence to the trade protocols directed by the World Trade Organisation for making the entire economic ecosystem more conducive to business. At this juncture, India needs a robust advance ruling mechanism in sync with the vision of the current Government of making the country, an economic super-power. The aforesaid amendment in Customs Advance Ruling has been made to overcome the obvious disadvantage of an uncertain tax position as well as to uphold the spirit of even-handedness in dealing with tax matters in the country . As a result, the taxpayer is alerted in advance about the tax consequences of the economic activity that is proposed to be undertaken in the future . In the wake of aforesaid amendments, it is hoped that the rejuvenated Authority for Advance Ruling is going to be a force to reckon with in promoting clarity and certainty in cross-border transactions in the coming days.

(The views expressed in the article are strictly personal.)