ITAT Delhi Deletes SLS Disallowance as APA Covered Intra-Group Services

Ericsson India Pvt. Ltd. Vs JCIT (ITAT Delhi)

The appeal before the Income Tax Appellate Tribunal (ITAT), Delhi Bench, arose from the assessment order dated 22.12.2016 passed under Sections 143(3) read with 144C(3) of the Income-tax Act, pursuant to the directions issued by the Dispute Resolution Panel (DRP) under Section 144C(5) for Assessment Year 2012-13. The principal dispute concerned the disallowance of expenditure relating to intra-group “Second Line Support” (SLS) services under Section 37(1) of the Act.

The assessee, a wholly owned subsidiary of a Swedish parent company, was engaged in trading, manufacturing and assembly of telecommunication carrier equipment, providing implementation and commissioning services relating to telecommunication systems, and rendering contract telecommunication software development services. It filed its return of income declaring total income of ₹391.38 crore.

During the assessment proceedings, the matter was referred to the Transfer Pricing Officer (TPO). While the TPO accepted all international transactions undertaken by the assessee as being at arm’s length under the Transactional Net Margin Method (TNMM), the TPO determined the arm’s length price of SLS services received from associated enterprises at nil. On that basis, a transfer pricing adjustment of ₹15.77 crore was proposed. The Assessing Officer incorporated this adjustment in the draft assessment order.

The assessee filed objections before the DRP. The DRP upheld the TPO’s action and additionally directed the Assessing Officer to alternatively disallow the expenditure under Section 37(1) of the Act. Acting upon these directions, the Assessing Officer passed the final assessment order disallowing the SLS expenditure under Section 37(1). The assessee challenged this disallowance before the Tribunal.

Before the Tribunal, the assessee contended that the Assessing Officer had erred in disallowing the SLS expenditure under Section 37(1), especially when the matter had already been examined in transfer pricing proceedings. The assessee further submitted that it had entered into a unilateral Advance Pricing Agreement (APA) with the Central Board of Direct Taxes (CBDT) on 4 December 2019 covering international transactions undertaken in the system segment. The APA specifically included receipt of services such as Information Systems/Information Technology services, Second Line Support services, consulting and training services.

The Tribunal noted that the APA described the functions performed by the assessee in providing system support, repair and maintenance services. It recorded that while routine maintenance and repair services were undertaken by the assessee’s own personnel, complicated technical issues required assistance from associated enterprises. The associated enterprises provided high-end technical support relating to hardware and software repairs, emergency technical assistance through help desk services, and warranty support services. The underlying technology and processes had been developed by the associated enterprises over time and formed the basis of the services rendered by the assessee to its customers.

The assessee also highlighted that it had filed a modified return under Section 92CD in compliance with the APA and had maintained the agreed operating profit margin of 6%. The Assessing Officer himself had accepted that the assessee’s margins were in accordance with the APA while passing the APA effect order. Despite this acceptance, the addition of ₹15.77 crore relating to SLS services continued to be reflected in the computation of assessed income.

The Tribunal further took note of the treatment accorded to SLS expenditure in other assessment years. It observed that the expenditure had been allowed in preceding and subsequent years. For Assessment Years 2007-08 to 2010-11, the Tribunal had remanded the issue to the TPO, who eventually accepted the transactions as being at arm’s length. For Assessment Years 2011-12 and 2013-14 onwards, the expenditure had been allowed, with Assessment Year 2011-12 being covered under the APA. Only the assessment year under appeal had witnessed a suo motu disallowance directed by the DRP.

In view of these findings, the Tribunal upheld the assessee’s ground of appeal and directed that the disallowance made under Section 37(1) in respect of SLS expenditure be deleted. Consequently, the appeal of the assessee was allowed.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is preferred by the assessee against the order dated 22.12.2016 of the Ld. Joint Commissioner of Income Tax, Special Range-03, New Delhiu/s 143(3) r.w.s144C(3) of the Income Tax Act, 1961 with the direction of Dispute Resolution Panel -1, New Delhi dated 18.11.2016 of the Income Tax Act, 1961 u/s 144C(5) for AY: 2012-13.

2. Heard and perused the record. Ericsson India Private Limited (hereinafter referred as ‘the Appellant’ or ‘EIL,’ or ‘the Company’) is a company incorporated under the Indian Companies Act, 1956. EIL is a wholly owned subsidiary of Telefonaktiebolaget LM Ericsson, Sweden (‘LME’). LME is the ultimate holding company of all Ericsson Group Companies located in various countries across the globe.During the relevant Assessment Year (‘ AY’) 2012-13 under consideration, EIL is engaged in the business of trading, manufacturing/assembly of telecommunication carrier equipment for sale to independent customers, providing implementation, commissioning and support services related to telecommunication systems and contract telecommunication software development services.

2.1 The appellant filed its income tax return declaring an income of INR 3,91,38,33,940/- on November 29, 2012. During the course of assessment proceedings, the appellant’s case was referred to the Deputy Commissioner of Income Tax, Transfer Pricing Officer, Circle 1(2)(2), New Delhi, (Ld. TPO). The Ld. TO while accepting all international transactions undertaken by the Appellant to be at arm’s length under TMM, ascertained the arm’s length price for Second Line Support (‘SLS’) services received by the appellant from its AEs to NIL. Based on the same, the Ld. TPO issued directions dated November 18, 2016 proposing an adjustment of INR 15,77,01,789. The Ld. AO relied upon the Ld. TPO’s order and passed a draft assessment order as provided u/s 144C (1) of the Act.

2.2 Against this addition, the appellant filed objections before the DRP and the DRP passed the directions dated October 18, 2016, and upheld the action of the TPO. The DRP further at para 7.4.5, directed the AO to alternatively, disallow the payment under section 37(1) of the Act.

2.3 The AO passed the final assessment order dated December 22, 2016, wherein, disallowance under section 37(1) of the Act made. Thereafter the Applicant filed the Appeal before this Tribunal.

3. At the time of arguments ld. Counsel has addressed on grounds no. 3, which arises out of disallowance of Infra Group Services pertaining to ‘second line support services’ under section 37(1) of the Act.

4. The contention of ld. Counsel is that Ld. AO, pursuant to the directions of the DRP, erred on facts and in law in inadvertently disallowing the expenses claimed towards intra group services under section 37(1) when a disallowance was made under section 92CA by the Ld. TPO.

5. Ld. Counsel has submitted that the appellant entered into a Unilateral APA with the Central Board of Direct Taxes (‘CBDT’) on 4 December 2019 in respect of the international transactions undertaken by the appellant in the System Segment. Copy of the APA has been enclosed from pg no 625 to 668 of the paperbook, volume 2.The transaction relating to SLS services has already been examined in depth by the CBDT under the APA between the CBDT and the appellant. Clause 3 of the APA mentions the various international transactions covered under the APA. Serial no (x) of covered transactions includes receipt of services (Information Systems / Information Technology or IS/IT, Second Line Support, Consulting, Training etc.)”.Further, Appendix I mentions the details of covered transactions. At serial no 9, one of the covered transactions include “Receipt of services (IS/IT, Second Line Support, Consulting, Training etc.)”Serial number (iii) on “Provision of system support / repair and maintenance services” under the section titled “Functions performed by EIL” in the APA states as under: (bold and underlining ours):

“iii. Provision of system support / repair and maintenance services – FIL also provides post implementation equipment support and maintenance services to its customers. These services range from hardware and software support to complete management of a network. At the most basic level, maintenance services consist of network performance checks, ensuring that the network is operating to its full potential.At its most complex level, this service area extends to complete management of an outsourced network – from site acquisition to full end-to-end service assurance.

The above system support services are extremely critical for the customers of EIL, as faults in the systems (especially of emergency nature) can prove to be very costly for the customer/ operator. All routine maintenance and repair services are undertaken by EIL using its own personnel. However, to take care of complicated technical problems, EIL utilises the services of the AEs. Further, in case of high-end technical support relating to repair of hardware/software, EIL obtains the same from the As manufacturer of the equipment. Further, for technical emergency services, EIL has round-the-clock access to help desk services from the AEs. The AEs also provide warranty support services to EIL wherever EIL gives warranty to its end-customers.

With regard to the aforementioned function, the underlying technology, process, platform/ application etc. have been developed by the AEs over the years. This forms the basis of the services being rendered by EIL to the customers.”

6. The Appellant has duly filed the modified return of income under section 92CD of the Income Tax Act, 1961 on November 20, 2024, in due compliance with the APA. Further, the appellant has also maintained the prescribed 6% operating profit margin as agreed at para 6.1 of the APA. This has been accepted by the AO while passing the APA effect order for this year at para 6 of the APA effect order.

7. However, we find that as per para 6 of the APA effect order dated 31 March 2022, the AO duly accepts that the appellant’s margin is in compliance with the APA.However,while computingthe assessedincome for the year, addition of INR15,77,01,789/- on account of SLS services has still been made.At outset ld. Counsel has pointed out that that in preceding as well as subsequent years, the expenditure has been allowed and there was no reason to bifurcate and make arbitrary disallowance. Summary of other years is provided to the bench and for convenience we reproduce the same here under:

7.1 Thus based on the principle of consistency, alone the disallowance made by the AO/DRP should be deleted.

7.2 Reliance in this regard reliance is further placed by the ld. Counsel on the decision of the Tribunal inAppellant’s own case for AY 2007-08, wherein it was held as under:

“29. We have carefully considered the rival submissions in the light of material placed before us. The facts have already been discussed in detail in the above part of this order. Mainly it is the case of the Revenue that assessee does not require to make any payment with regard to Second Line Support (SLS) obtained by it from its AE. As against that it is the case of the assessee that SLS services have been availed to minimum level where the assessee on its own is not able to resolve the problem as most of the problems have been resolved at the level of the assessee. It has been submitted that during the relevant assessment year the assessee has received customer service request to the tune of 11,108 out of which 1,245 have been addressed for SLS. No doubt that equipment has been supplied by the parent company of the assessee and the parent company of the assesses, who has supplied the instruments, can only resolve the complicated problems.

During the warranty period, it is the liability of the parent company to resolve the problem without any charge. Therefore, reference to the warranty period is not relevant in the present case more particularly as AMC itself stands on different footings for which separate revenue has been received by the assessee. Supply of equipments is one thing and service of the equipments after the warranty period is another thing. In commercial words it is well known that after the expiry of warranty period the AMC is obtained for the faultless working of the equipment. The assessee is receiving separate consideration on account of AMC after the expiry of the warranty period and the figures relating to that have already been mentioned. The gross revenue has been earned at Rs.118,94,04,863/-. To ensure the faultless working of the equipment the assessee, as a matter of business expediency. has to resolve all the problems relating to that instrument. The assessee has its own set up for resolving the minor problems which it has resolved at its own.

The assessee is aware of the fact that it has to incur expenditure with respect to each of the SLS invoked by him, therefore, from the data it is clear that minimum number of problems have been referred to the AE. Therefore, for availing the services of the A for resolving the complicated problems the prerogative is of the assessee and the Department cannot say that the assessee does not require to make any payment for resolving the complicated problems of the instruments. Anybody obtaining AMC must have intention that the instrument which he is operating for his use should run continuously and effectively and it is for that purpose only one would avail AMC. Anticipating that some problems may not be resolved at the level of the assessee’s own staff available with as the said staff may not be having the skill upto the level which requires to resolve complicated problem and in turn assessee adopted a mode according to which it is ensured that all the problems arising in the functioning of the instrument are efficiently resolved. That decision of the assessee is business expediency of the assessee so that the customers to whom the instruments have been supplied remain satisfied about the functioning of the equipment. Therefore, we find no force in the claim of the Revenue that for availing these services the assessee was not required to make any payment.

The assessee has the right to enter into an arrangement according to which its business interests are protected and for protection of such interests of the business of the assessee, it has entered into an agreement with its AE. To hold that is the prerogative of the assessee to see and decide the business expediency, the reference can be made to the decision of Hon’ble Delhi High Court referred to by learned AR in the case of CIT vS.EKLAppliances Ltd. (supra) wherein their Lordships have observed that even Rule 108(1)(a) does not authorize disallowance of any expendtture on the ground that i was not necessary or prudent for the assessee to have incurred the same or that in view of the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. Whether or not to enter into the transaction is for the assessee to decide. It will be relevant to reproduce these observations of their Lordships which is contained in para 22 of the order as under:

“22. Even Rule 108(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in view of the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 1 OB. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorized.”

30. Keeping in view the aforementioned decision of Hon’ble Delhi High Court, we are of the opinion that it will be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee. “

7.3 Hence, the expenditure relating to SLS services has already been examined and accepted by the Tribunal in earlier assessment years.

8. Even otherwise, during the hearing of the appeal bench had expressed its opinion that once a transaction or its sub parts are examined under APA then there is no justification under law to make disallowance u/s 37(1) of the Act. However, Ld. DR had vehemently opposed the said view of the bench and submitted that even after APA an expenditure can be examined under section 37(1) of the Act. We had given ld. DR opportunity to file his submission on this so that same can be dealt more logically if given in the form of written submissions but no written submissions were filed, so we assume that ld. DR, had opposed the view of the bench for mere sake of opposing.

9. We are thus of firm opinion to conclude 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 need-rendition-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. Reliance for this can be placed on the decision inSchindler India (P.) Ltd. Versus DCIT, ITA NO. 724 (Mum) of 2022 order dated 31/12/ 2025where in a co-ordinate bench decision in YKK India (P) Ltd. v. Dy. CIT (2016) 72 taxmann.com 201 (Del), is relied.

10. We thus sustain the corresponding ground and allow the appeal. The impugned disallowance u/s 37(1) shall stand deleted.

Order pronounced in the open court on 22.05.2026