Once Covered Under Section 92CC Binding APA, Business Expediency Cannot Be Reopened: ITAT

The ITAT Delhi has ruled in favour of the appellant company, Ericsson India Private Limited, by deleting a disallowance amounting to Rs 15.77 crore made under Section 37(1) of the Income Tax Act for Assessment Year 2012-13.

Initially, the assessee had declared a total income of Rs 319.38 crore in its return of income for the year under consideration. During the assessment of the return, it was noted that during the relevant year, the assessee had made certain payments to its associated enterprises (AEs) for “Second Line Support” (SLS) services. These services involved technical assistance for handling complex telecom equipment problems that could not be resolved by the company’s own staff. The Transfer Pricing Officer (TPO) had earlier determined the arm’s length price of these services at nil, which led to the disallowance.

The assessee claimed that the services in question were necessary for maintaining telecom networks and making sure ongoing assistance is provided to the customers without delays or downtime. The company also flagged that it had entered into an Advance Pricing Agreement (APA) with the Central Board of Direct Taxes (CBDT), which specifically covered such intra-group support services. The APA had already examined the nature of services, business needs, and pricing methodology.

When an appeal was filed in the ITAT Delhi, the tribunal had noted that once a transaction is covered under a binding APA under Section 92CC, the tax department cannot disregard it and again question the business purpose of the same expenditure under Section 37(1). It noted that the APA process involves a detailed examination of functions performed, risks, benefits, and cost allocation.

The ITAT further flagged that similar expenses had been allowed in earlier and later assessment years. Relying on the principle of consistency and earlier rulings in the assessee’s own cases, the Tribunal held that the disallowance was unjustified. Accordingly, the impugned disallowance of Rs 15.77 crore was dismissed, and an appeal was allowed.

The tribunal held that, “where a transaction or its components have been covered under APA under section 92CC, the same is binding on both the Department and the assessee. The APA process involves a detailed examination of the Functions, Assets, and Risks (FAR), the needrendition-benefit test, and the cost allocation methodology for the impugned transactions. Therefore, the very existence of the APA is conclusive proof that the transactions were undertaken for business purposes. To disregard the APA by AO and the disallowance of the same expenditure under section 37(1) on the ground of lack of business expediency, though in this case no reasons were even mentioned in the impugned order, would nullify the effect of the binding APA.”