Indian Court Clamps Down on Shopping for Best Tax Audit Outcome

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By Madhur Singh

Sept. 22— An Indian high court order is seen as clamping down on “forum shopping”—the practice in which a companies shop for the most favorable tax audit from various authorities, often without disclosing concurrent assessments.

The Karnataka High Court ruled against venture capital firm Eplanet Ventures Mauritius Ltd, saying a company can't apply for an advance ruling while simultaneously undergoing or having completed tax assessment.

In Eplanet Ventures Mauritius Ltd v. Director of Income Tax (International Taxation), Bangalore, agreed that Authority for Advance Rulings (AAR) correctly denied Eplanet Ventures' application for an advance ruling once an assessment had been rendered.

The Aug. 31 order strengthens the tax department's position by clarifying that no advance ruling can be sought when a question is already pending before an income tax authority, and tax consultants say it will help prevent “forum shopping.”

Case Facts

Mauritius-based Eplanet Ventures Mauritius Ltd, which invests in Asia, Europe and the United States, had sought a ruling from the AAR while under audit yet didn't disclose the request to the Indian tax assessing officer.

When its application came up for consideration before the AAR, the AAR held that the application had become “infructuous”—invalid—because an assessment order had been written.

If the company had informed the assessment officer of the pending advance ruling request, the AAR said the audit would have been halted.

Eplanet Ventures sought a ruling on the matter before the Karnataka High Court, arguing against the AAR's decision and demanding that the AAR render a decision on merits since it admitted the application.

The AAR countered that once an assessment order is passed, the petitioner could opt for appropriate proceedings before a higher appeals forum, but that the taxpayer couldn't appeal the assessment to the AAR.

The Order

The high court made note of the fact that Eplanet Ventures had voluntarily participated in the assessment proceedings without informing the assessment officer of pending proceedings at the AAR.

“If the petitioner had any grievance against the assessment proceedings or finalization of the said proceedings, nothing prevented it from raising objection for conclusion of the assessment proceedings by contending that the matter was pending consideration before the Advance Ruling Authority with reference to the aspect of liability to pay tax,” the court said.

Going Forward

The order clarifies that in cases where assessment proceedings are underway, a company should follow regular appeals channels but that the AAR, established to help nonresidents plan income tax affairs in advance through binding rulings to avoid drawn out litigation, isn't the appropriate forum for appealing assessments.

Paresh Parekh, Mumbai-based partner at Ernst & Young, told Bloomberg BNA in an e-mail Sept. 20 that the judgment “that may change how some of the taxpayers look at approaching the AAR.”

“This may come as a sigh of relief for the Revenue department as it shall curb the attempts of forum shopping by taxpayers."

Parekh added that the ruling hasn't clarified whether a window of opportunity exists for a taxpayer to file an application for advance ruling in between the stage of commencement and completion of assessment proceedings.

“It would be important to have clarity to avoid misuse of the High Court's specific observation in the context of ‘completed assessment’,” he said.

To contact the reporter on this story: Madhur Singh in Chandigarh at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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