ITAT Mumbai on APA, Transfer Pricing and Section 80JJAA: Key Takeaways from Schindler India Pvt. Ltd. vs DCIT

1. Background of the Case

Schindler India Pvt. Ltd., engaged in the business of designing, supplying, installing, testing and commissioning elevators and escalators, was subjected to a scrutiny assessment for Assessment Year 2017-18 pursuant to a reference for transfer pricing scrutiny under Section 92CA(1) of the Income Tax Act 1961.

The assessee had filed its return of income on 29.11.2017 declaring total income of Rs. 224,02,10,890/-. The case was referred to the Transfer Pricing Officer (TPO) for benchmarking several international transactions reported in Form 3CEB.

The ld. TPO passed an order under Section 92CA(3) making a significant adjustment of Rs. 107,84,40,265/- by determining the Arm’s Length Price (ALP) of certain international transactions at NIL. These related to:

• Payment of royalty
• Payment for IT support and SAP system charges
• Payment of management recharge

The TPO’s view was that the assessee had not sufficiently demonstrated the need, actual rendition, and benefits derived from these services.

The draft assessment order under Section 143(3) r.w.s. 144C(1) incorporated the entire transfer pricing adjustment. While the Assessing Officer (AO) noted that such expenditure could also be disallowed under Section 37(1), no separate disallowance under that section was actually made in the draft or final assessment order on this count.

Subsequently, the Dispute Resolution Panel (DRP) upheld the TP adjustment and also recorded observations justifying disallowance under Section 37(1) on grounds of lack of business purpose, though the final assessment order still contained only the TP addition.

Additionally, the AO disallowed the assessee’s claim of deduction under Section 80JJAA amounting to Rs. 64,11,872/- on the ground that necessary documents were not produced.

Other issues raised included:

• Non-grant of prepaid tax credit
• Non-grant of Dividend Distribution Tax (DDT) credit
• Levy of interest under Section 234B and Section 234C

The assessee carried the matter in appeal before the ITAT Mumbai.

2. Transfer Pricing Adjustments and Subsequent APA

2.1 Nature of TP Adjustments

The TPO proposed the following adjustment to the ALP of international transactions:

The ALP was determined at NIL based on the TPO’s application of a “need–evidence–benefit” test, holding that the assessee had not proved the necessity of such services, their actual rendition, or the benefits obtained.

2.2 APA Entered with CBDT

During the pendency of the appeal, a material development took place. The assessee entered into a unilateral Advance Pricing Agreement (APA) with the Central Board of Direct Taxes (CBDT) dated 15.10.2024 under Section 92CC.

Key features of this APA:

• It covers FYs 2015-16 to 2019-20, including the relevant previous year FY 2016-17 (AY 2017-18).
• It also extends to FYs 2011-12 to 2014-15 through roll-back provisions.
• The APA specifically encompasses the same international transactions that were the subject matter of the TP adjustment:
  • Royalty
  • IT support and SAP system charges
  • Management recharge

In view of this APA, the assessee submitted before the Tribunal that: