Introduction

The case of Intrado EC India Private Limited, Bengaluru v. DCIT-Circle-3(1)(1), Bangalore adjudicated by the Income Tax Appellate Tribunal (ITAT), Bangalore Bench, on November 9, 2022, centers around significant issues of transfer pricing (TP) adjustments and the proper issuance of tax communications in compliance with Central Board of Direct Taxes (CBDT) Circular No.19/2019. The appellant, Intrado EC India Private Limited, challenged the final assessment order passed by the Assessing Officer (AO) for the assessment year 2016-17, which included substantial TP adjustments and disallowances under Section 40(a)(i) of the Income Tax Act, 1961.

Key issues in the case involved the validity of TP adjustments made through orders that allegedly did not comply with procedural mandates, specifically the requirement of a Document Identification Number (DIN) in tax communications post the issuance of CBDT Circular No.19/2019. Additionally, the case delved into the nature of payments made by the assessee for management services and whether they qualified as Fees for Technical Services (FTS) under the Double Taxation Avoidance Agreements (DTAA), thereby necessitating tax deduction at source (TDS).

Summary of the Judgment

The ITAT, Bangalore Bench, upon reviewing the submissions and relevant legal provisions, concluded that the TP adjustment of Rs.22,03,14,210 made by the AO was based on an invalid order. The AO had issued two orders under Section 92CA: one dated October 31, 2019, without a DIN, and another on November 1, 2019, with a DIN. The Tribunal found that the first order was rendered invalid due to non-compliance with CBDT Circular No.19/2019, which mandates the inclusion of a DIN in all tax communications post October 1, 2019, unless specific exceptions apply. Since the required procedural safeguards were not followed, the TP adjustment based on this order was deemed invalid and subsequently deleted.

Regarding the disallowance under Section 40(a)(i), the Tribunal examined whether the payments made by Intrado EC India Pvt Ltd to its related parties qualified as FTS requiring TDS. The Tribunal agreed with the appellant's stance that the services provided did not transfer technical knowledge in a manner that would necessitate TDS under the relevant DTAAs.

Ultimately, the Tribunal allowed the appeal, setting aside both the TP adjustments and the disallowances, thereby favoring Intrado EC India Private Limited.

Analysis

Precedents Cited

The judgment extensively referenced several pivotal cases that influenced the Tribunal’s decision:

• Tata Medical Centre Trust v. CIT(E) [2022]: Affirmed that any tax communication lacking a DIN post CBDT Circular No.19/2019 is invalid.
• Sap Lab India Pvt Ltd vs DCIT [2022]: Addressed the limitation period for passing orders under Section 92CA, emphasizing adherence to procedural timelines.
• De Beers India Minerals Pvt. Ltd (TS-312-HC-2012): Established the 'make available' test for FTS, requiring that technical knowledge be imparted in a manner that allows the recipient to utilize it independently.
• UCO Bank vs. CIT, W.B. [1999]: Highlighted the binding nature of CBDT circulars on tax authorities.
• GE India Technology Centre vs CIT [2010]: Clarified that TDS is mandatory only when the payment is chargeable under the Income Tax Act.

These precedents collectively underscored the Tribunal’s approach in evaluating procedural compliance and the substantive nature of services rendered for TP and TDS considerations.

Legal Reasoning

The Tribunal’s legal reasoning can be distilled into two main components:

1. Compliance with CBDT Circular No.19/2019

The CBDT Circular No.19/2019 mandates that all tax communications issued after October 1, 2019, must contain a Document Identification Number (DIN). Any deviation from this, unless under specified exceptional circumstances, renders the communication invalid. In this case:

• The first TP order dated October 31, 2019, was issued manually without a DIN and without the requisite written approval as stipulated for exceptions.
• The subsequent order dated November 1, 2019, though containing a DIN, was scrutinized for its timeliness based on Section 2CA(3A), which requires such orders to be issued at least 60 days before the expiration of the limitation period (October 31, 2019, for AY 2016-17).

Given that the November 1st order was beyond the stipulated timeline, and the first order lacked procedural compliance, the Tribunal deemed both orders invalid under Para 4 of the CBDT Circular. Consequently, the TP adjustment based on these orders was nullified.

2. Nature of Payments and Applicability of TDS

Regarding the disallowance under Section 40(a)(i), the Tribunal evaluated whether the payments of Rs.22,03,14,210 to related parties constituted Fees for Technical Services (FTS). The critical examination revolved around whether these payments "made available" technical knowledge as per the DTAA definitions.

The Tribunal concurred with the appellant, noting that the services provided were managerial and administrative, lacking the transfer of technical expertise necessary to categorize them as FTS. The agreements between the parties did not facilitate the transfer of technical knowledge independent of the service provider, thereby satisfying the 'make available' test established in De Beers India Minerals Pvt. Ltd.

Furthermore, relying on precedents like GE India Technology Centre vs CIT, the Tribunal held that TDS under Chapter XVII-B was not applicable as the payments were not chargeable under the Act.

Impact

This judgment has profound implications for both tax authorities and taxpayers:

• For Tax Authorities: Reinforces the necessity of strict compliance with procedural directives, particularly regarding the issuance of tax communications with proper DINs as per CBDT Circulars. Any lapses could render significant adjustments invalid.
• For Taxpayers: Empowers taxpayers to challenge TP adjustments and disallowances on procedural grounds, ensuring greater protection against arbitrary tax assessments.
• Transfer Pricing Regulations: Clarifies the application of the 'make available' test for determining the nature of payments, potentially influencing how companies structure their intercompany agreements and service provisions.

Overall, the judgment emphasizes the importance of adhering to procedural norms and substantiating the economic substance of intercompany transactions.

Complex Concepts Simplified

Document Identification Number (DIN)

A Document Identification Number (DIN) is a unique identifier assigned to every tax communication issued by the Income Tax Department. Post CBDT Circular No.19/2019, the inclusion of DINs became mandatory for all tax notices, orders, and communications to ensure traceability and transparency.

'Make Available' Test for Fees for Technical Services (FTS)

The 'make available' test assesses whether a service payment qualifies as FTS under the DTAA. For a payment to be classified as FTS, the service provider must impart technical knowledge, skills, or processes to the recipient, enabling them to utilize this expertise independently in the future.

Section 40(a)(i) of the Income Tax Act, 1961

Section 40(a)(i) disallows any expense on payments made to a non-resident where TDS is mandatory under Chapter XVII-B and such tax was not deducted or paid. The disallowance serves as a penalty on the assessee for non-compliance with TDS provisions.

Section 92CA of the Income Tax Act, 1961

Section 92CA pertains to the determination of the arm's length price (ALP) for international transactions involving non-residents. This section guides the transfer pricing adjustments that tax authorities can make when determining if transactions are conducted at arm's length.

Conclusion

The ITAT Bangalore Bench's decision in Intrado EC India Private Limited vs DCIT-Circle-3(1)(1) underscores the paramount importance of procedural compliance in tax assessments. By invalidating the TP adjustments due to non-conformance with CBDT Circular No.19/2019, the Tribunal reinforced the binding nature of such circulars on tax authorities. Additionally, the clear articulation of the 'make available' test for FTS payments offers clarity on the applicability of TDS, safeguarding taxpayers from unwarranted disallowances.

This judgment serves as a precedent for future cases, emphasizing that while tax authorities possess significant powers in scrutinizing transactions, their actions must be anchored in procedural correctness and substantiated economic rationale. For businesses, it highlights the necessity of meticulous documentation and adherence to tax communication protocols to avert potential disputes and adjustments.