TaxTMI 
TaxTMI 
2026 (6) TMI 936
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....019 is with reference to the A.Y. 2010-2011. The order dated 30th April 2021 is with reference to A.Y. 2011-2012 to A.Y. 2016-2017, and the order dated 17th January 2022 is with reference to A.Y. 2017-2018. 2. The two basic issues raised in all these Appeals are: (i) What is the quantum of royalty that can be brought to tax in India, which was paid by the GIA India Laboratory Private Limited (for short "GIA India") to the Respondent - Gemological Institute of America Inc. (for short "GIA US"). It is undisputed that GIA US (the Respondent - Assessee) is an Associated Enterprise (for short "AE") of GIA India. For the sake of convenience, this issue is referred to as the royalty issue. (ii) Whether GIA India is a Permanent Establishment (for short "PE") of the Respondent - GIA US in India in terms of Article 5 of the India-US Double Taxation Avoidance Agreement (for short the "India-US DTAA"). For the sake of convenience, this issue is referred to as the PE issue. 3. Both the aforesaid issues arise in A.Y. 2011-2012 to A.Y. 2016-2017. However, for A.Y. 2010-2011 and A.Y. 2017-2018, only the PE issue arises for our consideration. It is in this light that the par....
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....ndia and erred in ignoring the expression of word "through" which has been used while defining the concept of "permanent establishment" and "business profit" in article 5 and 7 of the India-USA DTAA? (f) Whether on the facts of the case and in law, the Hon'ble ITAT is justified in not considering that the assessee company was supervising and having close control over the general as well as day to day activities of GIA India Lab through its deputed personnel in its employment or control which leads to the conclusion that GIA India Lab is a PE of the assessee company? (g) Whether on the facts of the case and in law, the Hon'ble ITAT is justified in not considering that entire risk with respect to diamonds received for grading is borne by the GIA India, cost of shipping and delivery are also borne by the GIA India Lab and therefore GIA India is a PE of the assessee? 5. We must mention that for A.Y. 2017-2018, an additional issue was raised, namely, "Whether in the facts of the case and in law, the ITAT is justified in deleting the addition made on attribution of profit and royalty being effectively connected with PE under Section 44AD of the Income Tax Act, 1961 s....
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....y, on 18th February 2014, a reference was made by the Assistant Commissioner of Income Tax (International Taxation), Circle-2(3)(2) [the Assessing Officer of GIA US] to the Transfer Pricing Officer ("TPO") for computation of the Arm's Length Price ("ALP"). On 29th January 2015, the TPO passed his order under section 92CA(3) proposing a NIL adjustment. Thereafter, the Assistant Commissioner of Income Tax (International Taxation), Circle-2(3)(2), passed a draft Assessment Order dated 23rd March 2015 under Section 144C(1) read with Section 143(3) of the Income Tax Act, 1961 (for short "IT Act"). Aggrieved by the said draft Assessment Order, GIA US raised its objections before the Dispute Resolution Panel (for short the "DRP"), which issued its directions on 27th October 2015. Thereafter, the said Assistant Commissioner of Income Tax passed a final Assessment Order dated 16th December 2015 and assessed GIA US' total income at Rs. 72,88,67,984/-. This was on the basis that GIA US has a Permanent Establishment (PE) in India and therefore, as per Article 7 of the India-US DTAA, assessed the entire income of GIA US, including the aforementioned royalty income, at 42.23%. 11. Aggrieved b....
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....dia on 18th July 2018. Payments for the other Assessment Years were also made within the time stipulated as per the APA. 13. Since the ALP was now determined as per the APA entered into between the CBDT and GIA India, and the excess royalty amount paid was also refunded by GIA US to GIA India, GIA US in its Appeal pending before the ITAT (ITXA No. 386/Mum/2016), sought to raise an additional ground by its letter dated 6th November 2018, claiming that the amount of Rs. 19,44,46,788/-, which was refunded back to GIA India as per APA dated 7th May 2018, could not be regarded as its income and GIA US should not be assessed on the same. In the Appeals filed in relation to A.Y. 2012-2013 to 2013-2014, similar additional grounds were raised by GIA US before the ITAT. For A.Y. 2014-2015 to 2016-2017, this issue was raised before the DRP, and for A.Y. 2017-2018, the said claim was made by way of a revised Return of Income filed on 30th November 2018. It is pertinent to note that the revised Return of Income of GIA US for A.Y. 2017-2018 was accepted by the Assistant Commissioner of Income Tax (International Taxation), Circle-2(3) (2). 14. The appeals for A.Y. 2011-2012 to A.Y. 2016-201....
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....le or divergent prices for the same transaction depending on the perspective of the taxpayer or the Transfer Pricing Officer examining either side. 16. Mr. Venkatraman submitted that in this statutory setting, Section 92 assumes central importance. It provides that income arising from an international transaction shall be computed having regard to the ALP, thereby constituting the statutory bridge between the machinery contained in Chapter X and the general framework of charge and computation. Sections 92C and 92CA furnish the machinery for the determination of the ALP by the Transfer Pricing Officer. Sections 92CC and 92CD, which deal with Advance Pricing Agreements and their implementation, operate within the same framework and are likewise confined to the determination and implementation of the ALP. Section 92CC(1) expressly contemplates an agreement only for determining the ALP in relation to an international transaction. 17. Mr. Venkatraman submitted that there are specific statutory prohibitions in the IT Act against a downward adjustment in the hands of a non-APA Associated Enterprise (AE). In this regard, Mr. Venkatraman submitted that Section 92(3) imposes an express....
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.... Mr. Venkatraman relied upon Section 92CD and submitted that the statutory framework provides a limited deeming fiction for giving effect to an APA and that fiction is confined to the applicant alone (in the present case, GIA India). Under Section 92CD, the Assessee entering into an APA is permitted to furnish a modified Return which is deemed to be a Return filed under Section 139(1). It is by virtue of this statutory fiction that the ALP determined under the APA can be given retrospective effect in the case of the signatory to the APA (in the present case, GIA India). Crucially, there is no provision enabling the non-resident AE to revise its income or reopen a completed tax position on account of an Advance Pricing Agreement entered into by its Indian affiliate, and any subsequent legislative developments operate prospectively and cannot be invoked to retrospectively undo a completed tax levy. This position stands further reinforced by the subsequent legislative development introduced by the Finance Act, 2026, which substitutes Section 169(1) of the Income-tax Act, 2025. By this amendment, the statute, for the first time, extends the effect of the deeming fiction associated with....
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....as undergone the primary adjustment. Thus, the statute consistently proceeds on the basis of upward adjustment in the hands of the Indian Assessee, without any mirrored downward adjustment in the hands of the counter-party. 21. Lastly, on the royalty issue, Mr. Venkatraman submitted that Section 92C(4) read with its proviso forms a complete code governing the consequences of the determination of the ALP. The structure of the provision itself makes a clear and deliberate distinction between (i) limiting the relief available to the Assessee undergoing the transfer pricing adjustment and (ii) the express statutory bar against any corresponding adjustment in the hands of the counter-party. In this regard, Mr. Venkatraman placed heavy reliance on the second proviso to Section 92C(4). Mr. Venkatraman submitted that this proviso expressly prohibited any re-computation of income in the hands of the Associated Enterprise corresponding to the adjustment made in the case of the Assessee. He submitted that legislative intent was unambiguous, namely, once an upward adjustment was made in the hands of the tested party (GIA India), there was an express prohibition against granting a mirror dow....
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....ation of law or impossibility within the same year. As far as categories (b) and (c) are concerned, they operate at the stage of accrual itself, addressing situations where the income either never comes into existence or stands extinguished before the close of the previous year. They do not contemplate cases where income has fully accrued, has been received and accepted as income, and is thereafter sought to be altered by a subsequent voluntary act. A case like that would squarely fall in category (a). 24. Once the case of GIA US falls within category (a), then it is squarely covered by a decision of the Bombay High Court in the case of Kishinchand Chellaram and Others Vs. The Commissioner of Income-Tax Central Bombay [1955 SCC OnLine Bom 134] and which was confirmed by the Hon'ble Supreme Court in its decision in the case of Kishinchand Chellaram Vs. Commissioner of Income-tax [(1962) 46 ITR 640 (SC)]. 25. Mr. Venkatraman submitted that in the facts of the present case GIA US filed its original Return for A.Y. 2011-2012 on 10th November 2011, and APA was executed only on 7th May 2018, and the refund was paid only pursuant to the invoice raised by GIA India on 30th June 2018,....
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....c of the grading services is being provided to GIA India by GIA US. According to Mr. Venkatraman, the client will approach the lab situated in a specific country and may ask for grading services from GIA US either through that office or through GIA's direct office. In some cases, a particular office will grade the diamonds, if it is capable of the same, or it will utilise services of the lab of GIA US, Thailand or other affiliate entities. The billing will be centralised by the particular office at the global rate fixed by GIA US. The management expenses, advertisement, legal and similar expenses would be incurred by GIA US, for which GIA India would reimburse it. This operation of GIA US and GIA India is so overlapping, and the demarcation between them is very blurred. There is no real difference in the treatment accorded to clients either of GIA US or Thailand or India. From the client's perspective, he will be dealing with the GIA conglomerate which basic structure has been formalised as a joint venture business spread across multiple jurisdictions. 28. Mr. Venkatraman submitted that the Hon'ble Supreme Court in the case of Hyatt International Southwest Asia Ltd. Vs. Addition....
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....ereof, what can be brought to tax in India are royalties "paid" to GIA US by GIA India. He submitted that the word "paid" denotes only that amount which is actually and eventually paid i.e. the amount that remains or is by agreement with GIA India, retained by GIA US. The clear provisions of the India-US DTAA and the well settled position under the IT Act provide that only the retained amount that GIA US is entitled to, can be regarded as its income chargeable to tax. What was received initially but thereafter returned cannot be regarded as "paid" to GIA US. By the plain common meaning of the word and use of this terminology, the DTAA incorporates the doctrine of real income. In support of the proposition that only the real income can be brought to tax, Mr. Mistri placed reliance on the following decisions:- (a) Godhra Electricity Co. Ltd. Vs. CIT (1997) 225 ITR 746 (SC) (b) CIT Vs. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) (c) CIT Vs. Lok Housing & Construction Ltd. (2015) 58 taxmann.com 179 (Bom) (d) FGP Ltd. Vs. CIT (2010) 326 ITR 444 (Bom) (e) CIT Vs. M.P. Audyogik Kendra Vikas Nigam (Raipur) Ltd. (1997) 227 ITR 799 (MP) (f)....
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....misconceived, as more particularly held by the ITAT in the impugned order. 32. Mr. Mistri submitted that the reliance placed by the Revenue on Section 92(3) is wholly misplaced. The sine qua non for the application of Section 92(3) is that a computation of income should be made under sub-section (1) in the case of the same person to whom Section 92(3) is sought to be applied. It is only if a person is subject to a computation under Section 92(1) that any question can arise as to whether such computation has the effect of reducing the income chargeable to tax, nevertheless, in the case of the same person. He submitted that the Revenue is completely confused when it seeks to rely upon a Section 92(1) computation in the case of GIA India and then applies Section 92(3) to GIA US. This is completely unstateable and patently erroneous from a plain reading of Section 92(1). Mr. Mistri submitted that Section 92 only proscribes a downward adjustment in a case where a reduction in income is claimed without repayment of the excess. Section 92(3) could have no application in the present case where the differential royalty of Rs. 19,44,46,788/- has been repaid by GIA US, and its claim is bas....
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....x in India is only Rs. 49,08,99,451/-, and not the amount initially received by GIA US from GIA India of Rs. 68,53,46,239/-, especially when the excess amount of Rs. 19,44,46,788/- was refunded back to GIA India. 35. As far as the decision relied upon by the Revenue in the case of Kishinchand Chellaram (supra) is concerned, Mr. Mistri submitted that the same is clearly distinguishable on the facts. He submitted that in this case, even though the shareholder was compelled to return the dividend, the fact of payment of the dividend was not (and in view of Section 16 could not be) obliterated, but there was a separate event of its repayment. It is in this light the Hon'ble Supreme Court held that in view of the deeming provisions that the dividend became income of the year in which it was declared/paid. He submitted that the factual situation in the present case is completely different and hence, the aforesaid decision can have no application. In any event, Mr. Mistri submitted that much water has flown since the decision rendered in Kishinchand Chellaram (supra), and now it is well settled that (i) only real income can be taxed and (ii) claims can be made before the ITAT by raisin....
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....Revenue that these factual findings are in any way perverse or contrary to the facts on record. In these circumstances, he submitted that as far as the PE issue is concerned, the same does not give rise to any substantial question of law and hence are not required to be entertained at all. FINDINGS:- 38. We have heard the learned counsel for the parties at length. We have also perused the papers and proceedings in the above Appeals including the written submissions tendered by the parties. 39. As mentioned earlier, in the present Appeals, there are two issues that need to be decided. The first issue is regarding the quantum of royalty that can be brought to tax in India in the hands of GIA US [questions (a) to (c) reproduced earlier]. The second issue is whether GIA India is a PE of GIA US in India in terms of Article 5 of the India-US DTAA [questions (d) to (g) reproduced earlier as well as the additional question raised in A.Y.2017-18 and reproduced earlier]. We will deal with these issues independently. REASONING AND CONCLUSIONS ON THE PE ISSUE: 40. Since these are the two issues that need to be decided, we will first focus our attention on the issue whether the G....
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....nt-facing risks, etc., and also GIA India bears the risk of loss or damage to articles while in transit to and from GIA US and also during the time when the articles are at or in the facilities of GIA US. Looking at these facts, the ITAT found that the economic risks of gem grading services rendered by GIA US vis-à-vis stones/diamonds of the customers of GIA India were borne by GIA India, and hence there was no joint venture arrangement between GIA US and GIA India. The ITAT also took into consideration the provisions of Article 5(6) of India-US DTAA, which provided that the mere fact that a company has a controlling interest in the other company did not, by itself, without anything more, construe the other company to be its PE. The ITAT therefore found that GIA US does not have a "fixed place" PE in India. To come to this finding, the ITAT also took support of a decision of the Delhi High Court in the case of DIT Vs. E-Funds IT Solution [(2014) 364 ITR 256 (Delhi)], and which was affirmed by the Hon'ble Supreme Court in (2017) 399 ITR 34 (SC), where the facts were very similar to the facts in the case before the ITAT. 42. Thereafter, the ITAT also went on to examine whet....
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....rchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of goods or merchandise; or (c) he habitually secures those orders in India wholly or almost wholly for the enterprise. The Tribunal also noted the provisions of Article 5(5), which stipulates that an agency PE excludes any business activity carried out through a broker, general commission agent, or any other agent having an independent status, if such broker, general commission agent, or any other agent having independent status acts in the ordinary course of business. Having examined the provisions of Articles 5(4) and 5(5), the ITAT thereafter applied those provisions to the facts of the present case. The ITAT came to the conclusion that GIA India is an independent and separate legal entity in India, which is engaged in rendering grading services. Further, considering the functions and the risks assumed by GIA India vis-à-vis its business activities in India, the ITAT found that GIA India is an independent entity which is rendering grading services to its clients in India and bears all the service risks, as well ....
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....e of a higher capacity (more than 1.99 carats), it is only in those circumstances that GIA India would forward those stones for grading purposes to GIA US or to other enterprises of the GIA Group, depending upon the service requirement. These were independent and individual transactions and can never be termed as one which could take the colour of a joint venture arrangement, a service PE or an agency PE as contemplated under Article 5 of the India-US DTAA. This is more so when one takes into consideration that the entire risk in relation to the stones forwarded by GIA India to GIA US on behalf of its own customers was borne entirely by GIA India, and no risk was attached whatsoever to GIA US. 46. Once these are the facts, and it has not even been contended before us, and correctly so, that these factual findings are either perverse or contrary to the record, we are clearly of the view that the questions raised by the Revenue on the PE issue, namely questions (d) to (g), as well as the additional question raised in A.Y. 2017-2018, do not give rise to any substantial question of law requiring an answer by this Court. Hence, questions (d) to (g) reproduced earlier, as well as the ....
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....for A.Y. 2010-2011 to 2013-2014. As mentioned earlier, after a prolonged negotiation, an APA was entered into on 7th May 2018 between GIA India and the CBDT inter alia determining the ALP of the royalty payable by GIA India to GIA US, and also requiring the excess royalty received by GIA US to be repaid back to GIA India. It is on this basis that GIA US refunded to GIA India the excess amount of royalty in the amount of Rs. 19,44,46,788/-. Since the excess amount was refunded, it was GIA US' case that now what could be taxed in India under Article 12 of the India-US DTAA (Article relating to royalty and fees for technical services) was Rs. 49,08,99,451/- [i.e. Rs. 68,53,46,239 minus Rs. 19,44,46,788]. It therefore raised an additional ground in the Appeal filed before the ITAT, which was pending. This was allowed by the ITAT in the order dated 30th April 2021. According to the Revenue, this could not be done for two reasons: (i) as elaborated earlier, the transfer pricing provisions did not permit any downward adjustment in the income; and (ii) such a ground could not be raised and relief sought in an Appeal that was filed prior to the APA being entered into between GIA India and t....
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....ch benefit, service or facility, as the case may be. (2A) Any allowance for an expenditure or interest or allocation of any cost or expense or any income in relation to the specified domestic transaction shall be computed having regard to the arm's length price. (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or sub-section (2A) or the determination of the allowance for any expense or interest under sub-section (1) or sub-section (2A), or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) or sub-section (2A), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction or specified domestic transaction was entered into." (emphasis supplied) 52. Section 92(1) stipulates that any income arising from an international transaction shall be computed having regard to the ALP. The determination of the ALP is to be done by the Transfer Pricing Office....
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....d (4) are reproduced hereunder:- "(3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction or specified domestic transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction or specified domestic transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction or specified domestic transaction in accordance with sub-sections (....
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....92D(3); the Assessing Officer may proceed to determine the ALP in relation to the said international transaction on the basis of such material or information or document available with him. 56. Sub-section (4) stipulates that where the ALP is determined by the Assessing Officer [under sub-section (3)], he may compute the total income of the Assessee having regard to the ALP. What is important for our purposes, and on which much stress was laid by the Revenue, was the second proviso to Section 92C(4). The second proviso to Section 92C(4) stipulates that where the total income of an Associated Enterprise (GIA India) is computed under this sub-section on determination of Arm's Length Price paid to another Associated Enterprise (GIA US) from which tax has been deducted or was deductible under the provisions of Chapter XVIIB, the income of the other Associated Enterprise (GIA US) shall not be recomputed by reason of such determination of Arm's Length Price in the case of the first-mentioned Enterprise (GIA India). 57. On a plain reading of the second proviso of Section 92C(4), at first blush, the argument canvassed by the Revenue appears to carry much weight. However, we find that....
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....income of an Assessee engaged in international transactions with its Associated Enterprises. The Assessee was required to declare his income in accordance with the APA. Except in certain cases, where there was a change in law and facts, or the agreement is occasioned by fraud or misrepresentation, the APA would be binding. Thereafter, the Karnataka High Court examined the provisions of Section 92C(1) as well as provisions of Section 92C(4) along with its two provisos and came to the conclusion that it was apparent from a plain reading of sub-section (4) of Section 92C that the same would be inapplicable. It held that the said sub-section requires the Assessing Officer to compute the total income, having regard to the ALP determined by the Assessing Officer under sub-section (3) of Section 92C. In turn, Section 92C(3) provided that the Assessing Officer can proceed to determine the Arm's Length Price only in cases where he is of the opinion that (a) the price charged or paid in an international transaction, has not been determined in accordance with sub-sections (1) and (2) of Section 92C; or (b) that information and documentation relating to the international transaction has not be....
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.... income has been furnished under the provisions of Section 139 for any assessment year relevant to a previous year to which such agreement applies, such person shall furnish, within a period of three months from the end of the month in which the said agreement was entered into, a modified return in accordance with and limited to the agreement. (2) Save as otherwise provided in this section, all other provisions of this Act shall apply accordingly as if the modified return is a return furnished under Section 139." 19. The provisions of Sections 92CD(1) of the Act are unambiguous and even if a return has been filed prior to an Assessee entering into an APA, he is entitled to furnish a modified return declaring his income in accordance with the terms of the APA. Subject to certain exceptions, the APA is binding both on the Assessee and the Revenue. 20. It is clear that the scheme of providing for an APA is to remove any uncertainty as to the determination of an income of an Assessee engaged in international transactions with associated enterprises. The Assessee is required to declare his income in accordance with the APA. Except in certain cases, where there....
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....tage not exceeding three per cent of the latter, as may be notified by the Central Government in the Official Gazette in this behalf, the price at which the international transaction or specified domestic transaction has actually been undertaken shall be deemed to be the arm's length price:] Provided also that where more than one price is determined by the most appropriate method, the arm's length price in relation to an international transaction or specified domestic transaction undertaken on or after the 1st day of April, 2014, shall be computed in such manner as may be prescribed and accordingly the first and second proviso shall not apply. Explanation-For the removal of doubts, it is hereby clarified that the provisions of the second proviso shall also be applicable to all assessment or reassessment proceedings pending before an Assessing Officer as on the 1st day of October, 2009. (2A) Where the first proviso to sub-section (2) as it stood before its amendment by the Finance (No. 2) Act, 2009 (33 of 2009), is applicable in respect of an international transaction for an assessment year and the variation between the arithmetical mean referred t....
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....essee having regard to the arm's length price so determined: Provided that no deduction under section 10A "or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section: Provided further that where the total income of an associated enterprise is computed under this sub-section in determination of the arm's length price paid to another associated enterprise from which tax has been deducted or was deductible under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise. 22. It is apparent from a plain reading of sub-section (4) of Section 92C of the Act that the same is inapplicable. The said sub-section requires the AO to compute the total income, having regard to the ALP determined by the AO under sub-section (3) of Section 92-C of the Act. 23. Sub-section (3) of Section 92C provides that the AO can proceed to determine the ALP only in cases he ....
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....-section (4) of Section 92C, and not otherwise. It is only when Section 92C(3) comes into play that Section 92C(4) is attracted and consequently its provisos. If the Arm's Length Price is determined on the basis of an APA, Section 92C(3) has no application, and consequently neither does Section 92C(4) or its 2 provisos. We therefore find that though the Karnataka High Court was examining the first proviso to Section 92C(4), the ratio laid down therein would equally apply to the second proviso to Section 92C(4) as well. Hence, the reliance placed on the second proviso to Section 92C(4) cannot and does not assist the Revenue in contending that GIA US ought to be taxed on the amount of Rs. 68,53,46,239/- that was initially received by it and offered to tax, and not the amount of Rs. Rs. 49,08,99,451/- which is the amount that was ultimately retained by GIA US after it refunded the amount of Rs. 19,44,46,788/- to GIA India. 60. The next provision on which reliance was placed by the Revenue was Section 92CE(3) regarding primary and secondary adjustments to contend that these provisions do not operate to recompute or reduce the taxable income and are confined to the Assessee who has u....
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....e or reduction in the loss, as the case may be, of the assessee, the excess money or part thereof, as the case may be, which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed in such manner as may be prescribed. Explanation.-For the removal of doubts, it is hereby clarified that the excess money or part thereof may be repatriated from any of the associated enterprises of the assessee which is not a resident in India. (2A) Without prejudice to the provisions of sub-section (2), where the excess money or part thereof has not been repatriated within the prescribed time, the assessee may, at his option, pay additional income-tax at the rate of eighteen per cent on such excess money or part thereof, as the case may be. (2B) The tax on the excess money or part thereof so paid by the assessee under sub-section (2A) shall be treated as the final payment of tax in respect of the excess money or part thereof not repatriated and no further credit therefor shall be claimed ....
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....ment, thereby removing the imbalance between the cash accounts and the actual profit of the Assessee. This provision in no way assists the Revenue in contending that the Revenue can bring to tax the amount of Rs. 68,53,46,239/- initially received by GIA US from GIA India and not the amount of Rs. 49,08,99,451/-, which was the amount ultimately retained by GIA US towards payment of its royalty because of the APA entered into by GIA India with the CBDT. In fact, on this issue, we find that the discussion of ITAT at paragraphs 19 and 20 is the correct understanding regarding primary and secondary adjustments as contemplated in Section 92CE. For the sake of convenience, the same are reproduced as under:- "19. Section 92 CE, as introduced by the Finance Act 2017 w.e.f. 1st April 2018, provides where a primary adjustment to transfer price has been made suo motu by the assessee in his return of income, made by the Assessing Officer has been accepted by the assessee, is determined by an advance pricing agreement entered into by the assessee under section 92CC, on or after the 1st day of April, 2017, is made as per the safe harbour rules framed under section 92CB; or is arising as ....
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....under an agreement entered into under section 90 or 90A of the Income-tax Act. 45.4 It is also provided that where as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assessee to such associated enterprise and the interest on such advance, shall be computed as the income of the assessee; in the manner as may be prescribed. 45.5 It is also further provided that such secondary adjustment shall not be carried out if, the amount of primary adjustment made in the case of an assessee in any previous year does not exceed one crore rupees or the primary adjustment is made in respect of an assessment year commencing on or before 1st April, 2016. 45.6 Applicability: This amendment takes effect from 1st April, 2018 and will, accordingly, apply from assessment year 2018-19 and subsequent years. [Emphasis, by underlining, supplied by us] 20. Quite clearly, Section 92C....
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....he Act or these rules" and, therefore, as long as an APA refers to secondary adjustments, whether specifically permissible under the law or not, these secondary adjustments are to be carried out. It is also important to bear in mind the fact that no secondary adjustment can anyway be unilateral in nature. When an assessee is to raise an invoice on its AE abroad, that invoice is to be accounted for by the entity issuing the invoice as also by the entity receiving the invoice. These two facets of the transactions are two sides of the same coin Section 92CE(3)(v) aptly defines, consistent with the first principles as well, 'secondary adjustment' means an adjustment in the books of account of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of the primary adjustment, thereby removing the imbalance between a cash account and actual profit of the assessee." It is, therefore, not correct to say that when an APA requires an assessee to raise debit notes or invoices on its AE abroad, it is open to the AE abroad to ignore those in....
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....or example, as in this case, such secondary adjustments end up reducing the income of the foreign AE assesses as a result of partial repatriation of income. A lot of emphasis is then placed by the learned CIT(DR) on the claim that the action of the assessee, in partially refunding the royalty amount to the GIA India, i.e., Indian AE, was voluntary inasmuch as the assessee was not a party to the APA. Nothing, however, turns on this plea. Whether the refund was voluntary or under a legal obligation, it does not really make any difference as long as the refund is bona fide and particularly when its commercial expediency is not, and rightly so, even called into question. None of the objections taken by the DRP or raised by the learned CIT(DR), for the detailed reasons, set out above, really impresses us." 62. In light of the aforesaid discussion, we find that the reliance placed on Section 92CE also does not assist the Revenue in their cause. To put it in a nutshell, the transfer pricing provisions discussed earlier do not come to the aid of the Revenue to contend that the amount of Rs. 68,53,46,239/- initially received by GIA US from GIA India is the amount that has to be brought t....
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.... of deemed income apart) to see that ultimately it is the real income of the Assessee which alone is brought to tax and not any artificial or notional income that may be said to have accrued to him. The facts of the case were that the Assessee company was the managing agent of Gujarat Paper Mills Ltd. The A.Y. was 1950-1951, and during the accounting year, a commission of Rs. 1,17,644/- was earned by the Assessee. At the instance of the managed company, namely Gujarat Paper Mills Ltd., the Assessee company surrendered Rs. 97,000/-. The Income-tax Officer accepted this position, but the Commissioner of Income-tax disapproved the same and served a notice on the Assessee company under Section 33B(1) of the Income Tax Act, 1922. He passed an order directing the Income-tax Officer to include the amount of Rs. 97,000/- in the Assessee company's total income for the A.Y. 1950-1951. The matter was carried to the Tribunal, and one of the contentions urged on behalf of the Assessee company was that clause 5 of the managing agency agreement authorised the managed company to cut down a portion of the commission earned by the managing company and that therefore, surrender of Rs. 97,000/- was ju....
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....e before us, the income of managing agency commission is credited in the books in one year and has been surrendered by him in the next year. In such a case, his income accrues in the year in which it is entered in the books and if the surrender is not made and entered in the same year, no question of real income can arise. It is said that the surrender can, if at all, be taken into consideration only in the year in which it is made, i.e., in the next accounting year, and according to learned counsel for the Revenue, in that next year also, he would not be able to avail of the same as an item of expenditure because it could have no bearing on the managing agency commission that may accrue to him in that year. Therefore, so the argument for the Revenue had to run, unless the surrender was made in the very year in respect of which the commission became due, the amount of the commission, even if it was wholly surrendered, would yet remain liable to tax. In support of his argument, Mr. Joshi relied on the following observations of their Lordships of the Privy Council in CIT v. Chitnavis [1932] 2 Comp. Cas. 464: "For the purpose of computing yearly profits and gains, each year i....
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....st depend and its decision turn on its own facts and circumstances and that is how we prefer to deal with this case. The leading facts to our mind are these. The assessee company had surrendered a part of its managing agency commission for a series of years. A chart showing such surrender is on the record and forms part of the case. The managing agency agreement, the material and relevant part of which we have already set out, in terms contains a provision affecting the quantum of the commission payable by the managed company to the managing company. The proviso must be read as part and parcel of clause 5 and so read, the clause makes it abundantly clear that the quantum of the remuneration that the managing company would ultimately receive would depend on the sufficiency of profits to pay a dividend in the manner there stated. If the profits are not sufficient, the managing company is under a legal obligation to forgo a part of its commission. The amount of commission to be forgone for the purpose of making up such deficit however is not to exceed 1/3rd of the entire commission which the managing company would otherwise become entitled to receive in a particular year. ....
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....be regarded as of cogency in the context of the present point of real income and if it be remembered that the surrender was made at the time of ascertaining the quantum of the commission payable to the assessee company and further if it be remembered, as now found by the Tribunal, that the surrender was made bona fide and on grounds solely of commercial expediency, it seems very difficult to us to see how the Revenue is justified in contending that the real income of the assessee was something different than the amount of Rs. 20,000, which was shown by it at the time of assessment as its income from managing agency commission. To accede to that suggestion would lead to a result highly unfair, though that is not a consideration which can be permitted to influence us in deciding any matter when we have to give effect to the provisions of a fiscal enactment. At the same time, we would not be justified in being unmindful of the consequences of any opinion which we may give on a reference. The enquiry must depend mainly on the broad aspects and the facts and circumstances of the particular case and not on any wire-drawn technicality. Now the argument of Mr. Palkhivala before us....
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....real income of the accounting year. The opinion we give is in no respect out of harmony with any statutory provision, the decisions on the question of accrual of income or the principle that income-tax is annual in its structure." (emphasis supplied) 65. The next decision, which discussed the concept of real income, is the decision of the Hon'ble Supreme Court in Godhra Electricity Co. Ltd. Vs. Commissioner of Income-tax [1997] 91 Taxman 351 (SC). The facts of this case were that the Assessee company, a licensee to generate supply of electricity to its consumers, enhanced the charges for electricity and motive power in 1963. Suits filed by the consumers challenging the enhancement were allowed by the lower Courts except the Division Bench of the High Court. The Hon'ble Supreme Court in 1969 ultimately decided the case in favour of the Assessee. Shortly thereafter, the Under Secretary of the Government of Gujarat wrote a letter advising the Assessee company to maintain the status quo for the rates to the consumers for at least 6 months. During this period, the consumers also filed another representative Suit wherein an interim injunction was granted and finally decreed i....
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.... submitted that in the facts and circumstances of this case it must be held that no real income had accrued to the assessee-company on account of enhanced charges for electricity since the assessee-company was not able to recover the said enhanced charges from the consumers in view of the protected litigation during the period from 1963 to 1969 and thereafter on account of the letter from the Under Secretary to the Government of Gujarat dated 19-3-1969 asking the assessee-company not to charge the enhanced rates for at least six months and the subsequent suit (Suit No. 118 of 1969) filed by the consumers in 1969 and the taking over of the management of the assessee-company by the Collector, Godhra in pursuance of the order passed under rule 115(2). It has been urged that though the assessee-company was following the mercantile system of accounting but in the mercantile system also tax can be imposed only if there is real income and income-tax cannot be imposed on hypothetical income. The learned counsel has placed reliance on the decisions of this Court in CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144, CIT v. Birla Gwalior (P.) Ltd. [1973] 89 ITR 266, Poona Electric Supply Co. ....
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....pra) where the assessee maintained its accounts on the mercantile system. In that case this Court, after referring to the decision in Morvi Industries Ltd. v. CIT [1971] 82 ITR 835, which was also a case where the accounts were maintained on mercantile system, has said: "Hence it is clear that this court in Morvi Industries case did emphasise the fact that the real question for decision was whether the income had really accrued or not. It is not a hypothetical accrual of income that has got to be taken into consideration but the real accrual of the income." (p. 273) In Poona Electric Supply Co. Ltd.'s case (supra) this Court has said: .. Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act " (p. 530) In that case the Court has approved the following principle laid down by the Bombay High Court in KM. Kashiparekh & Co. Ltd.'s case (supra): The principle of real income is not to be so subordinated as to amount virtually to a negation of it when a surrender or concession or rebate in respect of managing agency commission is made, agreed to or gi....
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....ve suits of the consumers followed by the letter of the Under Secretary to the Government of Gujarat and the subsequent suit of the consumers and during the pendency of the subsequent suit the management of the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, and the undertaking was subsequently transferred to the Gujarat State Electricity Board. 14. The question whether there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity has to be considered by taking the probability or improbability of realisation in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee-company in respect of the enhanced charges for supply of electricity which were added by the ITO while passing the assessment orders in respect of the assessment years under consideration. The AAC was right in deleting the said addition made by the ITO and the Tribunal had rightly held that the claim at the increased rates as made by the assessee- company on the basis of which necessary entries were made ....
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....made in accordance with the method of accounting regularly employed by the assessee. It may be either the cash system where entries are made on the basis of actual receipts and actual outgoings or disbursements; or it may be the mercantile system where entries are made on accrual basis, that is to say, accrual of the right to receive payment and the accrual of the liability to disburse or pay. However, in both cases unless there is real income, there cannot be any income-tax. Considering the facts before it, the Court said that although the assessee-company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply of electricity made to its consumers, no real income had accrued to the assessee-company in respect of those enhanced charges in view of the fact that soon after the assessee-company decided to enhance the rate, representative suits were filed by the consumers which were decreed by the Court and utlimately, after various proceedings which took place, the assessee-company was not able to realise the enhanced charges. The Court held that no real income had accrued to the assessee-company and, hence, the ent....
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....l on record. That is a course permissible, provided the factual findings can be termed as perverse or vitiated by any error of law apparent on the face of the record. In the present case, the argument was, that this income which was declared could not have been thereafter termed as such. It not being realised as the Sale Agreements have been cancelled. 11. In that regard, we find that the Tribunal was informed by the Revenue that there is a doubt about the cancellation of the relevant Agreements. That cancellation is not genuine and bona fide. The other argument was that these are Agreements with sister concerns and therefore in the first place, there was some deliberate exercise and with a view to avoid paying the legitimate taxes. In any event, the Agreements being subsequently cancelled supports the Revenue's version as above. 12. On both counts, the Tribunal has in a detailed discussion of more than 40 paragraphs found that there is no substance in the objections of the Revenue. If the Revenue is trying to show that the relevant transactions were sham and not real, then it has to bring in satisfactory material. The Tribunal found in paras 37 to 40 of the i....
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....yalty paid by GIA India to GIA US that could be taxed in the hands of GIA US. Was it the figure of Rs. 68,53,46,239/-, which was initially paid, or is the amount of Rs. 49,08,99,451/-, which is the amount that is finally retained by GIA US after refunding the amount of Rs. 19,44,46,788/-as mandated by the APA entered into by GIA India and CBDT. 71. By virtue of the India-US DTAA, royalty paid by GIA India to GIA US is to be taxed as per Article 12, which reads thus:- "ARTICLE 12 - Royalties and fees for included services - 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services de....
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....ayment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid : (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a) ; (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payments; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services). 6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties ....
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....le 12 of the US - India DTAA is that only the royalties that are paid by GIA India to GIA US can be taxed in India. To our mind, and especially considering the facts of the present case, the word "paid" appearing in Article 12 would denote that amount which is actually and eventually paid i.e. the amount that remains or is retained by GIA US by virtue of the APA entered into between GIA India and the CBDT. We say this because we find that one of the critical assumptions in the APA between GIA India [the Associated Enterprise of the GIA US (the Assessee)], and the CBDT, was that if payment of royalty by GIA India to GIA US exceeds the ALP (Arm's Length Price) as determined in the APA, GIA India shall raise the appropriate invoice on GIA US to recover the aforesaid excess payment made and show the respective excess amounts as additional income in the modified Return. Under Rule 10F(f), a critical assumption means the factors and assumptions that are so critical and significant that neither party entering into an agreement will continue to be bound by the agreement if any of the factors or assumptions are changed. It is thus clear that one of the fundamental assumptions of the APA ent....
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....ght to be taxed in the hands of GIA US, has already been declined as a deduction in the hands of GIA India, and, correspondingly, higher income has been brought to tax in the hands of GIA India. This treatment would clearly be incongruous inasmuch as what has been treated as income in the hands of the recipient of royalty (GIA US) has not been treated as expenditure in the hands of the person paying the royalty in question (GIA India). What is thus admittedly not treated as paid by the payer of royalty is being sought to be treated as what is received by the recipient of the royalty. This, to our mind, and as correctly held by the ITAT in its impugned judgment dated 30th April 2021, is wholly incongruous. We are therefore clearly of the view that when one takes all these factors into consideration, coupled with the fact that under the IT Act, only real income in the hands of the Assessee can be taxed, the quantum of royalty that could be brought to tax for A.Y. 2011-2012 was the amount of Rs. 49,08,99,451/- and not the amount of Rs. 68,53,46,239/-. 75. This now leaves us to deal with the decision that was relied upon by the Department rendered by the Hon'ble Supreme Court in the....
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....soon as dividend was paid, credited or distributed or deemed to have been paid or distributed to the shareholders and IT Act contained no provision for altering the incidence of liability to pay tax on the dividend, merely because it was found that in declaring dividend and paying it, the company violated the prohibition relating to payment of dividend in the Indian Companies Act. In fact, the Hon'ble Supreme Court went on to hold that even if the shareholders agree to refund the amounts received by them as dividend, the original character of the receipt as dividend was not thereby altered. In ascertaining whether liability to pay Income Tax on dividends arose, a resolution of the company whereby payments made to the shareholders as dividend were to be treated as loans could not retrospectively alter the character of the payment and thereby exempt it from liability which had already attached thereto, was the finding of the Hon'ble Supreme Court. The Hon'ble Supreme Court, in fact, also went on to hold that a payment made as dividend by the company to its shareholders does not lose that character merely because it is paid out of the capital. Under the IT Act, the liability to pay ta....