Synopsis

The Revenue challenged the ITAT’s orders allowing the assessee (GIA US, a US-based company) to reduce its taxable royalty income based on an Advance Pricing Agreement (APA) entered into by its Indian Associated Enterprise (GIA India). The APA determined the arm’s length royalty at a lower amount, and GIA US refunded the excess royalty to GIA India. The High Court held that: (i) only the “real income” (amount ultimately retained) can be taxed; (ii) the word “paid” in Article 12 of the India-US DTAA means the amount actually and eventually paid/retained; (iii) the transfer pricing provisions do not bar such reduction; (iv) GIA India is not a Permanent Establishment of GIA US in India as it is an independent entity bearing all risks, with no fixed place, service PE, or agency PE.

1. Heading of the judgment

High court of judicature at bombay ordinary original civil jurisdiction

Income tax appeal no. 945 of 2022 (and connected matters)

Commissioner of income-tax, (it)-2 (appellant) vs. Gemological institute of america inc. (respondent)

Coram: hon’ble mr. justice b.p. colabawalla and hon’ble mr. justice firdosh p. pooniwalla

Core Law: Income Tax Act, 1961 – Sections 9(1)(i), 80-IA, 92, 92C, 92CC, 92CD, 92CE – Transfer pricing – Advance Pricing Agreement (APA) – Permanent Establishment (PE) – India-US DTAA – Articles 5, 7, 12 – Doctrine of real income – Secondary adjustment.

Court: High Court of Judicature at Bombay (Ordinary Original Civil Jurisdiction)
Coram: Hon’ble Mr. Justice B.P. Colabawalla and Hon’ble Mr. Justice Firdosh P. Pooniwalla (Division Bench)
Date of Judgment: June 16, 2026 (Reserved on April 24, 2026)
Case Nos.: Income Tax Appeal No. 945 of 2022 and connected matters
Citation: 2026:BHC-OS:13178-DB

2. Legal framework

Major laws and provisions involved:

• Income Tax Act, 1961 – Sections 9(1)(i) (income deemed to accrue/arise in India), 80-IA (deduction for infrastructure development), 92 (computation of income from international transactions having regard to ALP), 92C (computation of ALP), 92CA (reference to TPO), 92CC (Advance Pricing Agreement), 92CD (modified return pursuant to APA), 92CE (secondary adjustment), 115A (tax on royalty)

• India-US Double Taxation Avoidance Agreement (DTAA) – Article 5 (Permanent Establishment), Article 7 (Business Profits), Article 12 (Royalties and Fees for Included Services)

• Income Tax Rules, 1962 – Rule 10M (contents of APA), Rule 10F(f) (critical assumptions)

Subject matter of the judgment:

Whether a non-resident Associated Enterprise (AE) can reduce its taxable royalty income in India based on an Advance Pricing Agreement (APA) entered into by its Indian AE, where the APA determines a lower arm’s length royalty and the excess royalty is refunded; and whether the Indian AE constitutes a Permanent Establishment (PE) of the foreign AE under the India-US DTAA.

Key legal principles applied:

• Real income doctrine: Under the Income Tax Act,

... Upgrade to a Premium Plan to view the full judgment.