GEMOLOGICAL INSTITUTE OF AMERICA, INC.,UNITED STATES vs. THE ASSISTANT COMMISSIONER OF INCOME-TA (INTERNATIONAL TAXATION) - CIRCLE 2(3)(2), MUMBAI

Since common grievance is involved in both these appeals, they were heard together and are disposed off by this common order for the sake of convenience and brevity.

The common grievance read as under:- "1: 0 Re.: General: 1: 1 The Assessing Officer / the Dispute Resolution Panel have erred in assessing the total income of the Appellant at Rs.5,18,83,68,139/- against the returned income of Rs.4,54,85,72,730/- thereby determining the tax liability of Rs.47,22,91,830/- against the refund claimed of Rs.72,51,140/- while returning the income for the year. 1: 2 The Appellant craves leave to add, alter, amend and/or substitute all or any of the foregoing grounds of appeal at or before the hearing of the appeal. 2: 0 Re: Validity of re-assessment proceedings: 2: 1 The Assessing Officer / the Dispute Resolution Panel has erred in re-opening the Appellants assessment u/s.148 of the Income-tax Act, 1961. 2: 2 The Appellant submits that considering the facts and circumstances of the case and the law prevailing on the subject the re-opening u/s.148 of the Income-tax Act, 1961 was in excess of juri iction and is also otherwise bad in law. 2: 3 The Appellant submits that the proceedings u/s.148 of the Income-tax Act, 1961 were not in accordance with law and consequently ought to be struck down. Without prejudice to the foregoing: 3: 0 Re.: Holding that the Appellant has a 'Permanent Establishment' ("PE") in India:: 3: 1 The Assessing Officer / the Dispute Resolution Panel have erred in holding that the Appellant has a 'Permanent Establishment' ("PE") in India. 3: 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, it has no PE in India and the stand taken by the Assessing Officer/the Dispute Resolution Panel in this connection is erroneous, misconceived and not in accordance with law. 3 : 3 The Appellant submits that the Assessing Officer/the Dispute Resolution Panel has erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material to hold that the Appellant had a PE in India. Further the Assessing Officer / the Dispute Resolution Panel have also failed to consider the contrary material and evidence adduced by the Appellant. 3 : 4 The Appellant submits that the Assessing Officer/the Dispute Resolution Panel's stand that the Appellant has a PE in India be struck down. Re.; Holding that the Appellant ha* a business connection In India: The Assessing Officer / the Dispute Resolution Panel have erred in holding that the Appellant has a 'business connection' in India. The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, It has no business connection in India and the stand taken by the Assessing Officer/the Dispute Resolution Panel In this regard is erroneous, misconceived and not In accordance with law. The Appellant submits that the Assessing Officer/the Dispute Resolution Panel has erred in arriving at various unwarranted and erroneous conclusions unsupported by any relevant material to hold that the Appellant had a business connection in India. Further he also failed to consider the contrary material and evidence adduced by the Appellant. 4 : 4 The Appellant submits that the Assessing Officer/the Dispute Resolution Panel's stand that the Appellant has a business connection In India be struck down. Without prejudice to the foregoing

0 Re.: Attribution: 5:1 The Assessing Officer/the Dispute Resolution Panel have erred in holding that 50% of its receipts are attributable to the alleged PE of the Appellant in India. 5: 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject no part whatsoever of its receipts are attributable to the alleged PE in India and the stand taken by the Assessing Officer / the Dispute Resolution Panel in this regard is incorrect, illegal, arbitrary, baseless, not in accordance with law and hence ought to be struck down. Without prejudice to the foregoing: 6: 0 Re.: Estimation of gross profit: 6:1 The Assessing Officer / the Dispute Resolution Panel have erred in holding that the 20.31% of the receipts attributable to the alleged Indian operations ought to be considered as profits of the PE taxable in India. 6:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject, even if it is held that the Appellant has a PE in India no further income can be taxed in India as the alleged PE has been remunerated at an arm's length and hence the stand taken by the Assessing Officer / the Dispute Resolution Panel in respect thereof is incorrect, erroneous, misconceived and illegal and hence ought to be struck down. 6:3 The Appellant submits that the Assessing Officer be directed to accept the total income as returned. 7: 0 Re.: Treating the "royalty" received during the year u/s.44DA of the Income-tax Act, 1961: 7:1 The Assessing Officer / the Dispute Resolution Panel have erred in holding that the royalty income is "effectively connected" with the alleged PE of the Appellant in India and is therefore taxable u/s.44DA of the Income-tax Act, 1961. 7:2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject and in particular the provisions of the India-USA DTAA1, the Assessing Officer / the Dispute Resolution Panel the "royalty" received by It during the year under consideration is not taxable u/s.44DA of the Income-tax Act, 1961 since it does not have any PE in India and hence the stand taken by the Assessing Officer / the Dispute Resolution Panel in respect thereof is incorrect, erroneous, misconceived and illegal and hence ought to be struck down. 7 : 3 The Appellant submits that the Assessing Officer be directed to tax the "royalty" income in accordance with the provisions of section 9(1)(vi) of the Income-tax Act, 1961 read with Article 12 of the India-USA DTAA. 8:0 Re; Taxation of royalty income: 8 : 1 The Appellant submits that the amount taxable in terms of section 115A of the Income-tax Act, 1961 and Article 12(2) of the India-USA Double Taxation Avoidance Agreement ['DTAA'] should be restricted to the amount determined in accordance with the Advanced Pricing Agreement ['APA'], if any, entered into by GIA India Laboratory Private Limited with the Central Board of Direct Taxes ['CBDT']. 8 : 2 The Appellant submits that considering the facts and circumstances of its case, and the law prevailing on the subject, the amount of royalty taxable in its hands for the year under consideration should be restricted to the amount in accordance with the APA. 8 : 3 The Appellant submits that the Assessing Officer be directed to consider the royalty income worked out in terms of the APA and to re-compute its total income and tax thereon accordingly. 9 : 0 Re: Restricting the taxation of royalty income effectively connected to the PE: 9 : 1 The Appellant submits that in case it is held that any part of royalty income is effectively connected to the alleged PE of the Appellant then such amount should be restricted to the amount in accordance with the APA, if any, entered into by GIA India Laboratory Private Limited with the CBDT. 9 : 2 The Appellant submits that considering the facts and circumstances of its case, and the law prevailing on the subject, the amount of royalty, if held to be connected to the alleged PE, should be restricted to the amount in accordance with the APA. 9 : 3 The Appellant submits that the Assessing Officer be directed to consider the royalty income, if any, connected to the alleged PE, to be restricted to the amount determined in accordance with the APA and to re-compute its total income and tax thereon accordingly.

Briefly stated the facts of the case are that the assessee is incorporated in the United States of America. It performs dossier and full diamond grading services, coloured stone services, pearl reports, identification, inscription and origin reports. Assessee is a tax resident of the United States of America. During the course of the scrutiny assessment proceedings, the assessee was asked to showcause as to why the receipts of Rs.6,33,01,21,777/- (AY 2019-20) should not be treated to be attributable to PE in India and royalty receipts of Rs.4,54,85,72,730/- (AY 2019-20) should not be held to be received from the business connection /PE u/s 44DA of the Act has held in the assessment order passed in earlier AYs and taxed in similar lines as in earlier assessment years. Basis the findings in earlier assessment orders and following the directions of the DRP, the AO computed the total income for AY 2019-20 as under:- AY 2019-20 Particulars Business Income attributable to PE as discussed in Para 14.24 above 63,97,95,409 Royalty income attributable to PE as discussed in Para 14.25 above 454,85,72,730 Total Income (rounded off) 518,83,68,139 AY 2022-23 Particulars of Income Amount in INR Dividend as per return of income 96,34,905/- Business Income attributable to PE as discussed in Para 14.24 84,62,64,886/- above @ 40%+SC+Cess Royalty income attributable to PE as discussed in Para 14.25 above 6,63,83,30,779/- @40%+SC+Cess Total Income (rounded off) 749,42,30,570/-

The aforementioned conclusion of the AO is based upon the following findings of the DRP:- “5.2 During the course of hearings it has been brought to the notice of the panel that for the AY 2010-11, identical issues in the assessees own case has been decided in its favour by the Hon'ble ITAT. The assessee has placed reliance on these orders. With respect to the decisions of Hon'ble ITAT in the case of the assessee, which have been relied upon, we find that the issues involved are recurring in nature. Appeal has been filed before Hon'ble High Court u/s 260A of the Income Tax Act. Thus, the issues involved are yet to receive finality from higher judicial forums. Dispute Resolution Panel, though a quasi-judicial body, does not represent a pure judicial setup. It is a forum constituted for the purpose of resolution of disputes between the Assessing Officer (AO) and the assessee to the extent possible, related to the draft order proposed by the AO, before a final order is passed. It is important to note that the Panel does not deal with the final order and it does not issue an order as such, but only directions are issued to the AO. As per section 144C(4), the directions are issued by the DRP for the guidance of the AO to enable him to complete the assessment. As per section 144C(5), the DRP, while issuing directions, has to rely on the draft order; objections filed by the assessee; evidences furnished by the assessee; report, if any, of the AO, Valuation Officer or TPO or any other authority; records relating to the draft order; evidences collected by, or caused to be collected by, it; and result of any enquiry made by, or caused to be made by it. It can be concluded that as per the provisions of Sec. 144C(4)and 144C(5), the directions of the DRP are of the nature of guidance to the AO so as to en able him to complete the assessment. The documents on which reliance is to be placed by the DRP are the factual documents available with the AO, submissions made by the assessee and further inquiries, if any, conducted by the DRP. As mentioned earlier, the functions of the DRP are more in the nature of dispute resolution between the assessee and the AO, for the issues which have not been handled correctly by the AO (whether in favour of the assessee or against the assessee). On the issues which have not been handled correctly by the AO, the DRP issues appropriate directions u/s.144C(5). As such, the DR does not deal with an appeal filed by the assessee arising from a final order issued by the AO. It has been held by Hon'ble Bombay High Court in the case of Vodafone India Service (P.) Ltd.[2013] 37 taxmann.com 250 (Bombay) that, ''The proceeding before the DRP is not an appeal proceeding but a correcting mechanism in the nature of a second look at the proposed assessment order by high functionaries of the revenue keeping in mind the interest of the assessee. It is a continuation of the Assessment proceedings till such time a final order of assessment which is appealable is passed by the Assessing Officer." It is also pertinent to point out that in earlier years, both the Department as well as the assessee had a right to appeal against the order of DRP. However, now only the assessee has a right to appeal against the final assessment order framed by the AO after incorporating the directions of the DRP and the Department does not have any such right of appeal. Under these new circumstances, the decision of the Panel cannot be challenged by the Department. It is pertinent to point out that if the DRP for the year under consideration arrives at a conclusion, which is against the Department and in favour of the assessee, especially on a legal issue which has not yet attained judicial finality there will be no recourse available for collecting the revenue attributable to the said issue if the said issue is eventually decided by higher judicial forums in favour of the Department. Hence, with due respect to the order of the Hon'ble ITAT, in order to just keep the issue alive and to protect the interest of revenue, the DRP is of the considered opinion that facts remaining the same as in AY 2015-16, there is no reason to take a different stand this year. Accordingly, the ground of objection no. 1 to 3 of the assessee are rejected." This Panel approves, includes and respectfully follows the directions of the erstwhile Panel on the self-same issue. The above finding and reasoning of the DRP for the preceding and subsequent A.Y.s is relevant to the case of this A.Y. Therefore, the same is made applicable to the case at hand for the sake of consistency and reasonability.

4 Discussion and Direction of the DRP: Panel notes that the material facts and the applicable law attending to the issue remain the same in the instant A.Y. 2019-20 as in the A.Y. 2017-18, A.Y. 2018-19, A.Y.2020- 21 and A.Y. 2021-22. Therefore, respectfully following the direction of the DRP in A.Υ. 2017-18, A.Y. 2018-19, A.Y.2020-21 and A.Y. 2021-22, the grounds of objection No. 4 to 6 are dismissed. From the above, it is crystal clear that the findings of the AO / DRP are based on the findings given in earlier AY.

We have the benefit of the orders of the Co-ordinate Benches in earlier AYs. The relevant findings of the Co-ordinate Bench in ITA No. 1138/Mum/2015; AY 2010-11, read as under:- “15. GIA India Lab is an independent/separate legal entity in India which is engaged in rendering of grading services. Further, considering the functions and the risks assumed by GIA India Lab vis-à-vis its business activities in India (as has been recorded in the transfer pricing study report - which functional and risk analysis has been accepted by the Transfer Pricing Officer both in the case of GIA India Lab and in the case of the assessee company), GIA India Lab is an independent entity which is rendering grading services to its clients in India. GIA India Lab also bears service risk and all client facing risks vis-à-vis the stones sent to the assessee company for grading purposes (as has been recorded in the Transfer Pricing Study Report). Hence, GIA India Lab is not acting in India on behalf of the assessee company. Further, GIA India Lab is not having any authority to conclude contracts and has neither concluded any contracts on behalf of the assessee company nor has it secured any orders for the assessee company in India. Thus, GIA india Lab cannot be regarded as 'agency PE' of the assessee company in India.

Before parting, we may also note the reference made by the Ld. Representative to the assessment concluded by the Assessing Officer for assessment year 2009-10. It was explained that during the assessment proceedings for assessment year 2009-10, a similar query i.e. why GIA India Lab should not be construed as PE of the assessee company in India was raised, but after considering the detailed response furnished by assessee vide reply letter dated 02 November 2012, no addition whatsoever was made, which is evident from the Assessment Order (AY 2009-10) dated 26 March 2013. Thus, in this background it was all the more incumbent upon the Revenue in this year to discharge its onus as to why a different stand is being adopted, especially in the face of the fact that the nature and source of income in question remains the same. Therefore, on this aspect also, we are not inclined to uphold the stand of the assessing authority.

Before parting, we may also refer to the reliance placed by the Ld. DR on the judgment in the case of Formula One World Championship Ltd. (supra). In that case, the assessee was a U.K tax resident who obtained licence over all commercial rights in FIA Formula One World Championship. For this purpose, the assessee (foreign tax payer) entered into a contract with J.P. Sports (an Indian concern) by way of which it granted to J.P. Sports the right to host, stage and promote Formula One Grand Prix of India event at Motor racing Circuit owned by J.P. Sports. After examining all the relevant agreements, the case of the Revenue was that the Circuit located in India constituted a PE of assessee (i.e. the foreign tax payer) in India. The Hon'ble High Court concluded that since the assessee (foreign tax payer) had full access to the Circuit and could dictate as to who was authorised to access the Circuit and organising any other event on the Circuit was not permitted, the said Circuit constituted a PE of the foreign tax payer, i.e. Formula One World Championship Ltd., in India. The said decision of the Hon'ble High Court was approved by the Hon'ble Supreme Court. The aforesaid decision, in our view, stands on an entirely different fact-situation. In the present case, there is no material to show that the assessee dictates to the Indian subsidiary as to what activities it is authorised to engage in. We have also noted earlier that the Indian subsidiary is operating in an independent manner and there is nothing to show that factually speaking the Indian subsidiary constitutes a PE of the assessee in India. Thus, on account of difference in fact-situation, the reliance placed by the Ld. DR in the case of Formula One World Championship Ltd. (supra) is misplaced.

In view of the aforesaid discussion, in our considered view, the Assessing Officer has erred in invoking section 9 of the Act and/or Article 5 of the India-USA DTAA in order to say that the assessee company has a PE in India. Thus, assessee succeeds on this issue."

Since we have held that the assessee does not have any PE in India, the issues raised vide Ground Nos.4, 5, 6 & 7 become infructuous.

Ground No. 9 relates to taxing the royalty received during the year u/s 44DA of the Act. The issue for both the AYs under consideration can be understood from the following charts:- AY: 2019-20 Particulars Royalty income offered to tax by the Appellant (A) Date Amount (in Rs.) 4,54,85,72,731 Date of the Final Assessment Order passed u/s.147 r.w.s.144C(13) of the Income-tax Act, 1961 30 December 2024 Date when the Advance Pricing Agreement ["APA"] was concluded between GIA India Laboratory Private Limited and the Central Board of Direct Taxes 27 March 2025 Date of the invoice/debit note raised by GIA India Laboratory Private Limited for the differential royalty to be repaid by the Appellant post 25 April 2025 Date of re-payment of excess royalty by the Appellant 13 June 2025 Date when modified return of income was filed by GIA India Laboratory Private Limited in terms of section 92CD post the conclusion of the APA 26 June 2025 - Amount of royalty disallowed by GIA India Laboratory Private Limited consequent to the APA signed on 27 March 2025 in the modified return of income (B) 80,36,56,590 Reduced royalty taxable in the hands of the Appellant (C) = (A) - (B) 3,74,49,16,141 Corresponding relief claimed by the Appellant for the Assessment Year 2019-2020 80,36,56,590 ***This space has been left blank intentionally. P.TO*** AY: 2022-23 Particulars Royalty income offered to tax by the Appellant (A) Amount (in Rs.) 6,61,16,50,579 Date of the Final Assessment Order passed u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 24 December 2024 Date when the Advance Pricing Agreement ("APA") was concluded between GIA India Laboratory Private Limited and the Central Board of Direct Taxes 27 March 2025 Date of the invoice/debit note raised by GIA India Laboratory Private Limited 25 April 2025 Date of re-payment of excess royalty by the Appellant 18 June 2025 Date when modified return of income was filed by GIA India Laboratory Private Limited in terms of section 92CD post the conclusion of the APA (B) 27 June 2025 - Amount of royalty disallowed by GIA India Laboratory Private Limited consequent to the APA signed on 27 March 2025 1,19,54,42,515 (C) = (A) - (B) Reduced royalty taxable in the hands of the Appellant 5,41,62,08,064 Corresponding relief claimed by the Appellant for the Assessment Year 2022-23 1,19,54,42,515

Similar quarrel was considered by the Co-ordinate Bench in ITA No. 386/Mum/2016, 1836 and 7174/Mum/2017 and others for AY 2011-12 to 2016-17. The background of the impugned quarrel can be further understood by the following observations of the Co-ordinate Bench:- "

While almost all the issues in these appeals are stated to be fully covered by a decision of the coordinate bench, in the assessee's own case for the assessment year 2010-11 [reported as Gemological Institute of America Inc Vs. ACIT (2019) 178 ITD 620 (Mum)l, there is one issue that is required to be decided by us on the first principles, and that is concerning the impact of Advance Pricing Agreement being signed by the assessee's Indian associated enterprises, namely GIA India Laboratory Pvt Ltd, with the Central Board of Direct Taxes, in terms of which a part of the royalty received by the assessee company from its Indian AE had to refund to the Indian AE. As learned representatives fairly agree, the short question requiring our adjudication, on this point, is whether the amount so refunded by the assessee company to its Indian AE, in terms of the APA terms, can still be taxed in the hands of the assessee company as its income. As learned representatives fairly agree, that is the core issue requiring our adjudication, even though learned CIT(DR) puts it rather differently as whether, given the framework of law on transfer pricing, any such adjustment in royalty income can be allowed to the assessee as a result of an APA to which the assessee is not even a party. Whichever way one looks at it, the core issue really is whether or not the quantification of royalty income in the hands of the assessee will stand reduced by the refund granted by the assessee tin terms of the APA that the assessee's AE has entered into with the CBDT. Revenue is fiercely resisting this claim, for the reduction in the taxable income of the assessee, on technicalities as also on merits. We will take up this issue first. While related ground of appeal for all the assessment years before us are materially similar even if not rather satisfactorily worded, except for the changes in figures, we are reproducing below the related ground of appeal for the assessment year 2011-12 for ready reference: 8:0 Re: Taxation of royalty income at Rs.49,08,99,451 8:1 The Appellant submits that the amount taxable in terms of Article 12(2) of the India-USA Double Taxation Avoidance Agreement [DTAA] should be restricted to Rs.49,08,99,451/ which is in accordance with the Advanced Pricing Agreement ["APA"] dated 07 May 2018 entered into by GIA India Laboratory Private Limited. 8:2 The Appellant submits that considering the facts and circumstances of its case, and the law prevailing on the subject, the amount of royalty taxable in its hands in its hands for the year under consideration should be restricted to Rs.49,08,99,451/- in accordance with the APA.

3 The Appellant submits that the Assessing Officer be directed to consider the royalty income worked out in terms or the APA and to re- compute its total income and tax thereon accordingly."

After considering the year-wise working of the royalty payable and the adjustment made based on the working given by the assessee, the issue related to the amounts refunded by the assessee to its AE in India, namely, GIA India, to be reduced from the computation of its income from the royalties and the Co-ordinate bench held as under:- “21. In view of the above discussions, as also bearing in mind the entirety of the case, we are of the considered view that, in principle, the claim of the assessee deserves to be accepted. However, as learned CIT(DR) rightly points out, factual aspects with respect of these claims, i.e., with respect to verifications and quantum of actual refunds of royalties by the assessee, have not been examined at any stage. We, therefore, deem it fit and proper to accept the claim of the assessee, in principle, but remit it back to the Assessing Officer for verification of factual elements embedded in the claim of the assessee. Ordered, accordingly."

Respectfully following the findings of the Co-ordinate Bench (supra), we accept the claim of the assessee in principle but remit it back to the AO for verification of factual elements embedded in the scheme of the assessee has held by the CO-ordinate Bench in its order discussed hereinabove. Accordingly, Ground No. 9 is allowed with above directions.

In the result, appeals of the assesse are allowed partly for statistical purposes. Order pronounced in the Court on 9th September, 2025 at Mumbai. (ANIKESH BANERJEE) JUDICIAL MEMBER Mumbai, Dated 09/09/2025 *SC SPS (NARENDRA KUMAR BILLAIYA) ACCOUNTANT MEMBER आदेश की प्रतिलिपि अग्रेषित/