Case Law Details
Gemological Institute of America Inc. Vs Add. CIT (ITAT Mumbai)
Conclusion: In terms of the provisions of section 92CE, refund of taxes could be claimed or allowed on account of secondary adjustments- even if, such secondary adjustments end up reducing the income of the foreign AE assesses as a result of partial repatriation of income. Whether the refund was voluntary or under a legal obligation, it did not really make any difference as long as the refund was bonafide and particularly when its commercial expediency was not, and rightly so, even called into question. It was deemed fit and proper to accept the claim of the assessee in substance that the amount which had been refunded by assessee to its AE could not be treated as income in the hands of assessee, and must, therefore, be reduced from its taxable income as ‘royalties’.in principle, but issue was remitted back to AO for verification of factual elements embedded in the claim of assessee.
Held: Assessee was a US based company, and it had an associated enterprise (AE) in India, by the name of GIA India Laboratory Pvt Ltd (GIA-India). During the financial period relating to the assessment years 2011-12 to 2016-17, assessee received the amounts as royalties from the said AE, i.e., GIA-India. The royalties so received by assessee company were duly offered to tax, under article 12 of the India US Double Taxation Avoidance Agreement @ 15% on a gross basis. While the authorities below had no issues about the quantum of income so offered to tax, there were certain issues with regard to the manner in which the said income is to be taxed as the stand of the authorities below has been that the assessee had a permanent establishment of the assessee in India, and the royalties so offered to tax, being attributable to such a permanent establishment, are liable to be taxed on a net basis under article 7 of the Indo US tax treaty. In the meantime, GIA India reached out to the CBDT for an Advance Pricing Agreement (APA), under section 92CC, in respect of, inter alia, the above transactions and on 7th May 2018, the APA was finally entered into between the GIA India and the CBDT. This agreement, under clause 12(a) thereof, was to “cease to be binding on parties, subsequent to it having been entered into, if (inter alia), there was failure to meet any of the critical assumptions of this agreement”. The net result of APA was that the royalties which were received by assessee company from its Indian AE, namely GIA India, were required to be partially refunded to the Indian AE. Whatever was held to be in excess of the arm’s length price arrived at under the aforesaid APA was required to be refunded. The claim of the assessee, in substance, was that the amount which had been refunded by assessee to its AE could not be treated as income in the hands of assessee, and must, therefore, be reduced from its taxable income as ‘royalties’. It was held that there was no bar, even in respect of the period prior to insertion of Section 92CE, on any secondary adjustments being made by parties to a transaction. It was also important to note that so far as APAs were concerned, under rule 10 M (1)(vi), an APA may, amongst other things, include “the conditions, if any, other than provided in the 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 were to be carried out. When an assessee was to raise an invoice on its AE abroad, that invoice was 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 were 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 assessee. It was thus not correct in terms of the provisions of section 92CE, no refund of taxes could be claimed or allowed on account of secondary adjustments- even if, for 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. Whether the refund was voluntary or under a legal obligation, it did not really make any difference as long as the refund was bonafide and particularly when its commercial expediency was not, and rightly so, even called into question. It was deemed fit and proper to accept the claim of the assessee, in principle, but remit it back to AO for verification of factual elements embedded in the claim of assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. These six appeals pertain to the same assessee, involve some common issues, and were heard together. Therefore, all six appeals are being disposed of by a consolidated order as a matter of convenience.
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