Advance Pricing Arrangement Binding on the Revenue

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that where an international transaction is covered under a valid Advance Pricing Agreement (APA), the Revenue cannot subsequently disallow the same expenditure under Section 37(1) of the Income-tax Act on grounds of business expediency or alleged lack of commercial justification. 

The Tribunal observed that the APA process itself involves a comprehensive examination of functions, assets, risks, benefit tests and pricing methodology, and therefore constitutes sufficient evidence that the transaction was undertaken for legitimate business purposes.