Tax Settlement Commission & Advance Ruling Mechanism

In the complex landscape of income tax, disputes and uncertainties can frequently arise. To minimize litigation, ensure compliance, and provide clarity to taxpayers, the Indian Income Tax Act has historically offered specialized mechanisms. Two such significant provisions are the erstwhile Income Tax Settlement Commission (ITSC) and the Authority for Advance Rulings (AAR).

1. The Erstwhile Income Tax Settlement Commission (ITSC)

The Income Tax Settlement Commission was a crucial body designed to provide an alternative dispute resolution mechanism. It allowed taxpayers facing income tax disputes to settle their cases finally and expeditiously, by making a full and true disclosure of their undisclosed income and the manner in which it was derived. Its primary objective was to reduce prolonged litigation and provide a degree of immunity from penalties and prosecution.

Historical Context & Purpose:

• Reduced Litigation: The ITSC served as a dedicated forum for taxpayers to resolve their tax disputes quickly, bypassing the lengthy appeals hierarchy (CIT(A), ITAT, High Court, Supreme Court).
• Voluntary Disclosure: It encouraged taxpayers to voluntarily disclose income that had not been previously declared to the tax authorities.
• Immunity: A significant benefit was the power of the Commission to grant immunity from penalties and prosecution in respect of the income covered by the settlement.

Who Could Apply (Past Tense, as it's discontinued):

• Any taxpayer (individual, company, firm, etc.) could apply to the ITSC if assessment or reassessment proceedings were pending against them.

Key Conditions for Application (Past Tense):

To apply to the ITSC, certain conditions had to be met:

• A full and true disclosure of the income not disclosed before the Assessing Officer had to be made.
• The manner in which such income was derived needed to be clearly stated.
• The additional amount of tax payable on the undisclosed income offered for settlement had to exceed a prescribed threshold. For instance, initially, it was ₹50 lakh for corporate/firms and ₹10 lakh for others. These thresholds changed over time.

The Settlement Process (Past Tense):

1. Application: The taxpayer would file an application in the prescribed form with the ITSC, disclosing the additional income and calculating the tax payable thereon.
2. Report from AO: The Commission would call for a report from the Assessing Officer regarding the application.
3. Hearing: Both the taxpayer and the Department would be given an opportunity to be heard.
4. Settlement Order: If satisfied, the Commission would pass a settlement order determining the total income and the tax payable. This order was final and conclusive and could not be reopened by any authority or court, except in cases of fraud or misrepresentation.

Abolition of ITSC:

The Income Tax Settlement Commission was abolished by the Finance Act, 2021, with effect from February 1, 2021. No fresh applications could be filed with the ITSC on or after this date. Pending applications were transferred to new "Interim Boards for Settlement" for disposal. The government's intent was to move towards faceless assessment and dispute resolution mechanisms.

2. Authority for Advance Rulings (AAR)

The Authority for Advance Rulings (AAR) is a judicial body that provides binding rulings on income tax questions, primarily to non-residents, concerning transactions that are already undertaken or proposed to be undertaken. The key benefit of an advance ruling is that it provides certainty regarding tax liability even before a transaction is completed, thereby preventing future disputes and litigation.

Purpose and Scope:

• Certainty: To provide certainty on tax liability to applicants regarding a transaction, especially for cross-border transactions.
• Dispute Prevention: To avoid future litigation that might arise from differing interpretations of tax laws between the taxpayer and the Department.
• Facilitating Investment: It helps attract foreign investment by providing a clear tax roadmap for proposed transactions.

Who Can Apply? (Section 245N):

• Non-residents: For any income tax question arising from any transaction they propose to undertake or have already undertaken (but before filing the first appeal).
• Residents: Certain categories of residents who propose to undertake a transaction with a non-resident.
• Public Sector Undertakings (PSUs): Notified PSUs can apply in relation to their income tax liability.
• Other Notified Persons: Any other person or class of persons as may be notified by the Central Government.

What Can Be Ruled Upon?

The AAR can rule on questions of law or fact relating to the computation of total income concerning:

• Any transaction which is proposed to be undertaken by a non-resident.
• A transaction that has already been undertaken by a non-resident but before filing the first appeal.
• Applicability of any provisions of the Income Tax Act or Double Taxation Avoidance Agreements (DTAAs).

However, the AAR cannot entertain applications where the question:

• Is already pending before any income tax authority, Appellate Tribunal, or any court.
• Relates to a transaction or issue that is designed for the avoidance of income tax.

Key Features of Advance Ruling:

• Binding Nature: An advance ruling pronounced by the AAR is binding on the applicant who sought the ruling and on the income tax authorities (including the Commissioner and Assessing Officer) in respect of the specific transaction and applicant. It is not a general precedent.
• Speedy Disposal: The AAR is generally mandated to pronounce its ruling within six months of receiving the application, though practical delays may occur.
• Non-Appealable: An advance ruling is final and cannot be appealed before any court or income tax authority. However, it can be nullified if obtained by fraud or misrepresentation.
• Rectification: The AAR can rectify any mistake apparent from the record within six months from the date of the order.

Procedure for Obtaining an Advance Ruling:

1. Application: The applicant files an application in the prescribed form along with the prescribed fee, stating the question(s) on which the ruling is sought.
2. Comments from AO: The AAR usually forwards a copy of the application to the concerned Assessing Officer for their comments.
3. Hearing: The AAR hears the applicant and the Department's representative.
4. Ruling: After considering all submissions and arguments, the AAR pronounces its advance ruling.
5. Withdrawal: An application can be withdrawn within 30 days of filing.

Example of Advance Ruling:

Scenario: A US-based software company (non-resident) plans to open a liaison office in India and wants to understand if its activities in India will constitute a "Permanent Establishment (PE)" under the India-US DTAA, and consequently, if its profits would be taxable in India. They apply to the AAR for a ruling on this specific question.

Outcome: The AAR would examine the proposed activities of the liaison office. If the AAR rules that the activities would NOT constitute a PE, then the company gains certainty that it will not be subject to Indian income tax on its global profits (only on income directly attributable to Indian operations, if any). This provides clarity and confidence before they invest heavily in India.

Comparison: ITSC (Erstwhile) vs. AAR