AO Can’t Disallow Intra-Group Service Expenses U/s 37 Once Transaction Is Covered Under APA: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of Ericsson India Pvt. Ltd., holding that once an international transaction and its components are covered under an Advance Pricing Agreement (APA), the Assessing Officer cannot subsequently disallow the same expenditure under Section 37(1) of the Income Tax Act on the ground of lack of business expediency. The bench of Anubhav Sharma (Judicial Member) and Naveen Chandra (Accountant Member) deleted the disallowance of ₹15.77 crore relating to Second Line Support (SLS) services received by Ericsson from its associated enterprises. The dispute related to Assessment Year 2012–13. Ericsson India Pvt. Ltd., a wholly owned subsidiary of Telefonaktiebolaget LM Ericsson, Sweden, is engaged in manufacturing and assembling telecommunication carrier equipment, providing support and implementation services, and undertaking telecommunication software development activities. The company had filed its return declaring an income exceeding ₹391 crore. During transfer pricing proceedings, the Transfer Pricing Officer (TPO) accepted the arm’s length nature of all international transactions except payments made for Second Line Support services. The TPO determined the arm's length price of these SLS services at nil and proposed an adjustment of approximately ₹15.77 crore. The DRP subsequently upheld the action and additionally directed the Assessing Officer to alternatively disallow the amount under Section 37(1). Before the Tribunal, Ericsson argued that the SLS transactions had already undergone detailed scrutiny under a Unilateral APA entered into with the Central Board of Direct Taxes (CBDT) on 4 December 2019. The company submitted that receipt of services such as Information Technology support, Second Line Support, consulting and training were specifically included among covered transactions under the APA. The company further highlighted that under its business model, maintenance and support functions for telecom equipment were critically important. Routine issues were handled internally, whereas highly complex technical problems required assistance from associated enterprises possessing specialised technical expertise and access to underlying technology developed over several years. The arrangement also provided round-the-clock access to helpdesk support and technical emergency services. Ericsson also submitted that it had complied with the APA conditions and filed a modified return under Section 92CD while maintaining the agreed operating profit margin of 6%. Despite this, the Assessing Officer continued to retain the ₹15.77 crore addition while computing assessed income. The Tribunal noted that similar expenditure had been consistently allowed in earlier and later assessment years. It also referred to the company's own case for Assessment Year 2007–08 where it had already been recognised that SLS services were necessary for business operations and represented a legitimate business expenditure incurred for addressing complex technical issues that could not be resolved internally. The Bench reiterated that tax authorities cannot sit in judgment over commercial wisdom and decide whether an assessee should have incurred a particular expenditure. Referring to judicial principles laid down in earlier decisions, it observed that whether or not to enter into a business arrangement remains within the domain of the taxpayer and not the tax authorities. The Tribunal observed that the APA process itself involves an extensive examination of functions performed, assets employed, risks undertaken, benefit tests and cost allocation methodologies. Therefore, once the transaction has been examined and accepted through the APA mechanism under Section 92CC, the same becomes binding on both the department and the taxpayer. Any subsequent disallowance under Section 37(1) would effectively undermine the purpose and binding nature of the APA framework. The ITAT allowed Ericsson's appeal and directed deletion of the disallowance made under Section 37(1), granting relief of ₹15.77 crore to the company. Case Details Case Title: Ericsson India Pvt. Ltd. Versus JCIT Citation: JURISHOUR-1360-ITA-2026(DEL) Case No.: ITA No.1093/Del/2017 Date: 22.05.2026 Counsel For Appellant: Paras S. Savla, Adv. (Virtual) Counsel For Respondent: Dharm Veer Singh, CIT, DR Click Here To Read Order Read More: IGI Airport Customs Busts Rs. 48 Crore Hydroponic Weed Smuggling Racket, Two Thai Nationals Held

AO Can’t Disallow Intra-Group Service Expenses U/s 37 Once Transaction Is Covered Under APA: ITAT

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