Court Streamlines Special Audit Process for Oracle India, Balancing Efficiency and Fairness

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Case Name: 

Oracle India Pvt. Ltd. vs Principal Commissioner of Income Tax & Anr. (High Court of Delhi)

W.P.(C) 1552/2019, C.M. Appl. No. 7151-7152/2019

Date: 15th February 2019

Key Takeaways:

1. The court ordered a sequential approach to special audits, starting with the earliest assessment year.

2. Modified terms of reference for special audits were accepted by both parties.

3. The court emphasized the need to avoid overlapping issues and unnecessary repetition in audits.

4. The judgment provides a balanced approach, considering both the tax authorities' needs and the taxpayer's concerns.

Issue: 

The main question here was: Should special audits for multiple assessment years be conducted simultaneously, or should there be a more structured, sequential approach?

Facts: 

Oracle India Pvt. Ltd. (that's our petitioner) was facing special audits for several assessment years, from 2008-09 to 2013-14. They weren't too happy about how this was being handled, so they went to court asking for orders similar to what they'd gotten for assessment years 2015-16 and later. 

The court had previously dealt with similar issues in other cases (like W.P.(C) No. 1110/2012, 2353/2013, 2500/2014, 3765/2015, 735/2017, 3630/2016, and 2251/2018). In those cases, they'd set some guidelines for how these special audits should be conducted. 

Arguments:

Oracle's side was basically saying, "Hey, let's do this in a way that doesn't drive us crazy!" They wanted a more structured approach to these audits.

The tax authorities, on the other hand, needed to conduct these audits but were open to finding a more efficient way to do it.

Both parties agreed on modified terms of reference for the special audits, which was a good start. 

Key Legal Precedents:

The court referred to its previous orders in similar cases, especially W.P.(C) No. 2251/2018. These earlier decisions had established a framework for conducting special audits in a more organized manner. 

Judgement:

1. Special audits will be done one at a time, starting with the earliest year (2008-09 in this case).

2. Once an audit for one year is done, they'll move on to the next year.

3. The court kept the stay orders on audits for later years in place until the audit for the previous year is completed.

4. They recognized that doing all audits at once would be a nightmare and could lead to repetitive work.

5. The Assessing Officer and Special Auditor can consider findings from earlier years when looking at later years.

6. Oracle can approach the Assessing Officer and Special Auditor with information from earlier audits or assessments.

7. The Special Auditor must stick to the terms of reference given in the order dated 31.12.2018. 

FAQs:

1. Q: Why did the court order a sequential approach to audits?

  A: To avoid confusion, reduce workload, and prevent unnecessary repetition of work across multiple years.

2. Q: Can Oracle use findings from earlier audits in later ones?

  A: Yes, they're allowed to approach the Assessing Officer and Special Auditor with relevant information from earlier years.

3. Q: What happens if there's a dispute during the audit process?

  A: The parties can approach the court by filing an application in the existing writ petitions.

4. Q: Does this judgment affect any other proceedings?

  A: No, the court clarified that this doesn't impact any pending advance pricing agreement proceedings.

5. Q: What should the Special Auditor focus on?

  A: They must stick to the terms of reference provided in the order dated 31.12.2018.

1. Issue Notice. Mr. Deepak Anand, Advocate, appearing on behalf of the respondent accepts notice of the petition as well as of the application.

2. The assessee seeks orders identical with orders made in relation to the special audits directed for Assessment Years 2015-16 and for the subsequent years. In previous orders, the court had heard other Writ Petitions including W.P.(C) No. 1110/2012, 2353/2013, 2500/2014, 3765/2015, 735/2017 and 3630/2016 as well as W.P.(C) No. 2251/2018, and directed that the modified terms of reference made under Section 142(2a) shall be followed in the special audit. In the present case, modified terms of reference have been indicated in the order of the Assessing Officer dated 31.12.2018. The previous order of this court passed in W.P.(C) No. 2251/2018, inter alia, was to the following effect:

"Learned counsel for the parties, on instructions, state that modified terms of reference for special audit are acceptable and may be taken on record. The modified terms of reference for the assessment years ('Ays') 2008- 2009 to 2013-2014 signed by counsel for the parties are enclosed as annexure-A to this order and would be treated as a part of this order.

Learned counsel for the parties also agree that the special audit under Section 142(2A) of the Income Tax Act, 1961 would begin on 1.4.2018 with the audit for the A Y 2008- 2009. On completion of special audit for A Y 2008-2009, special audit for the next A Y, i.e. 2009-2010 will commence. Thereafter, on completion of the special audit for preceding year, special audit for the succeeding year would commence.

Learned counsel for the parties also agree that the special audit under Section 142(2A) of the Income Tax Act, 1961 would begin on 1.4.2018 with the audit for the AY 2008- 2009. On completion of special audit for AY 2008-2009, special audit for the next AY, i.e. 2009-2010 will commence. Thereafter, on completion of the special audit for preceding year, special audit for the succeeding year would commence.

In order to ensure that there is no dispute or debate about limitation, it is directed that the interim orders staying special audit and assessment proceeding for the A Y 2009- 2010 and subsequent years would continue till the special audit for the immediate preceding year is completed. This direction is acceptable to both the petitioner and the respondents. Interim order for the A Y 2008-2009 would remain in force till31.3.2018.

This statement and direction is justified and necessary, as simultaneous special audit for all years would create difficulties, cause inconvenience and would require huge manpower. Further, issues overlap and some issues may not require examination in view of finding in an earlier year. This would be an aspect to be examined and considered by the assessing officer ('AO') and the special auditor. The petitioner, of course, will be at liberty to approach the AO and the special auditor, on the basis of the audit or the assessment orders passed for the earlier year.

In case any issue cannot be resolved or settled, the parties can approach the court by way of an application in the present writ petitions. We also clarify that this consent order would not affect the advance pricing agreement proceedings, which are stated to be pending.

Writ petitions are accordingly disposed of, with no order as to costs."

3. This court also clarifies that in line with the previous orders made in all the said writ petitions, simultaneous special audit for all years will create difficulties and also result in overlapping of some issues that may arise during examination in all different years. The Assessing Officer and the Special Auditor may examine these aspects also. It is open to the petitioner/assessee to approach the AO and the special auditor on the basis of audit and the assessment order passed in the earlier years. In the event it is necessary to resolve any such incidental issue, the parties are at liberty to approach this court.

4. Furthermore, the Special Auditor shall adhere to the terms of reference (contained in the order dated 31.12.2018) while carrying out the task assigned to him.

5. The writ petition and the application is disposed of in the above terms.

S. RAVINDRA BHAT, J

PRATEEK JALAN, J

FEBRUARY 15, 2019