APA‑Covered Intra‑Group Service Payments Not Disallowable u/s 37(1): ITAT Deletes ₹15.77 Cr Adjustment on Ericsson India’s SLS Expenses [Read Order]

In a recent ruling, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that once intra‑group service payments are covered under an Advance Pricing Agreement (APA), they cannot be disallowed under Section 37(1) of the Income Tax Act, 1961.

The Tribunal deleted a ₹15.77 crore adjustment made on the company’s Second Line Support (SLS) expenses, holding that the disallowance was contrary to the binding nature of the APA and inconsistent with the principle of business expediency.

The case arose from the assessment year 2012‑13, where the Transfer Pricing Officer (TPO) had determined the arm’s‑length price of SLS services received from Ericsson’s overseas affiliates at nil, leading to an addition of ₹15.77 crore. The Dispute Resolution Panel (DRP) upheld the adjustment and directed the Assessing Officer to alternatively disallow the payment under Section 37(1).

Before the Tribunal, appellant Ericsson India Pvt. Ltd. argued that the SLS transactions were already examined and accepted under its APA signed with the Central Board of Direct Taxes (CBDT) in 2019, which explicitly covered receipt of technical and support services from group entities. The company also pointed out that similar expenses had been allowed in preceding and subsequent years, emphasizing the need for consistency.

The Bench, comprising Judicial Member Anubhav Sharma and Accountant Member Naveen Chandra, observed that the APA process involves detailed scrutiny of functions, assets, and risks, and once concluded, it is binding on both the taxpayer and the department. Disallowing the same expenditure under Section 37(1), the Tribunal said, would “nullify the effect of the binding APA.”

Citing earlier rulings, including Schindler India (P) Ltd. v. DCIT and YKK India (P) Ltd. v. Dy. CIT, the Tribunal held that the existence of an APA is conclusive proof that the transactions were undertaken for business purposes. It therefore directed the deletion of the disallowance, affirming that APA‑covered intra‑group service payments cannot be questioned on grounds of business necessity once accepted under transfer‑pricing review.

The bench ruled that “We thus sustain the corresponding ground and allow the appeal. The impugned disallowance u/s 37(1) shall stand deleted”.

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