This Tax Alert summarizes Bombay High Court (HC) ruling [1] in the case of CIT v. Gemological Institute of America Inc (Taxpayer/GIA US) which held that refund of excess royalty repaid in tax year 2018-19 pertaining to tax year 2010-11 pursuant to Advance Pricing Agreement (APA) entered by Taxpayer’s Indian subsidiary/associated enterprise (AE) with tax authority is not taxable in tax year 2010-11.
The Taxpayer initially received royalty of ₹685.34M from its Indian subsidiary (GIA India) in tax year 2010-11. However, pursuant to an APA entered by GIA India on 7 May 2018 covering roll back period including tax year 2010-11 with critical assumption of refund by the Taxpayer of excess royalty within a stipulated period, GIA India invoiced excess royalty of ₹194.44M to the Taxpayer in tax year 2018-19 which the Taxpayer refunded in the same year. By way of additional ground of appeal before the Mumbai Income Tax Appellate Tribunal, the Taxpayer claimed that royalty income taxable for tax year 2010-11 is the net amount of ₹490.09M after reducing the excess royalty refunded of ₹194.44M. The Tribunal upheld the Taxpayer’s claim. On further appeal by the tax authority, the Bombay HC ruled in favor of the Taxpayer by affirming the Tribunal ruling.
The Bombay HC held that the prohibitions in Transfer Pricing (TP) provisions from corresponding downward adjustments or correlative relief apply if the arms’ length price (ALP) is determined by the tax authority and for the same taxpayer. They do not apply where ALP is determined through an APA between the tax authority and taxpayer’s counter party – more particularly, where the taxpayer has refunded the excess royalty. The Bombay HC also applied the principle of “real income” in the context of reference to “paid” in Article 12 [2] of India US Double Tax Avoidance Agreement (DTAA) to hold that the Taxpayer is taxable on the actual royalty income which it was entitled to receive pursuant to APA entered by its AE with the tax authority
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