Bombay High Court Rules That Post-APA Refunded Royalty Cannot Be Treated as Taxable Income — Real Income Doctrine Applied

Case Reference

Pr Commissioner Of Income Tax vs Gemological Institute Of America Inc
Bombay High Court | Decided on: 16 June 2026

Background and Factual Matrix

The Gemological Institute of America Inc. (hereinafter referred to as "GIA US"), a prominent US-based gem grading and certification organisation, occupied a central role in the international diamond industry. Given that a substantial portion of the global diamond cutting and polishing operations was concentrated in India, GIA US established a wholly owned Indian subsidiary — GIA India Laboratory Private Limited ("GIA India") — on 26th September 2007 to provide localised grading services for diamonds within India.

To facilitate operations, GIA US furnished GIA India with the requisite technical expertise, specialised equipment, and operational know-how, for which royalty was charged to GIA India. This arrangement was broadly similar to subsidiaries established by GIA US in other jurisdictions such as Thailand and Botswana.

During the initial years of operation, GIA India faced technological and capacity limitations, restricting it to grading diamonds not exceeding 1.99 carats. Diamonds above this threshold or in excess of GIA India's grading capacity were forwarded to GIA US or other group entities under a GIA Gem Grading Services Agreement, the pricing of which was accepted by the Indian Tax Authorities as being at arm's length.

For Assessment Year 2011-12, GIA US filed its Return of Income on 10th November 2011, declaring total income of Rs. 68,53,46,239/-, being the royalty received from GIA India, and offered the same to tax. A revised return was also filed on 6th September 2012 reflecting the same figure.

The case was subsequently selected for scrutiny, and since the transaction involved an international dealing, a reference was made on 18th February 2014 by the Assessing Officer to the Transfer Pricing Officer ("TPO") under Section 92CA(3) of the Income Tax Act, 1961. On 29th January 2015, the TPO issued his order proposing a NIL adjustment.

Following the draft Assessment Order dated 23rd March 2015 passed under Section 144C(1) read with Section 143(3) of the Income Tax Act, 1961, GIA US raised objections before the Dispute Resolution Panel ("DRP"). The DRP issued its directions on 27th October 2015. Thereafter, a final Assessment Order dated 16th December 2015 was passed, assessing GIA US's total income at Rs. 72,88,67,984/-, premised on the existence of a Permanent Establishment ("PE") of GIA US in India and applying a tax rate of 42.23% under Article 7 of the India-US Double Taxation Avoidance Agreement ("India-US DTAA").

The Advance Pricing Agreement: A Pivotal Development

Well before any reference was made to the TPO in the case of GIA India (reference date being 16th December 2013), GIA India had proactively filed an application dated 22nd March 2013 under Section 92CC of the Income Tax Act, 1961, seeking an Advance Pricing Agreement ("APA") with the Central Board of Direct Taxes ("CBDT") covering AYs 2014-15 to 2018-19. A separate rollback application under Section 92CC(9A) was also filed on 30th March 2015, covering AYs 2010-11 to 2013-14.

After extended negotiations, CBDT entered into an APA dated 7th May 2018 with GIA India. Among other things, the APA:

• Determined the Arm's Length Price ("ALP") of royalty payable by GIA India to GIA US for each of the relevant assessment years
• Required GIA US to refund the excess royalty already received, back to GIA India within a stipulated timeline
• Required GIA India to raise invoices for the excess royalty amounts and file modified returns, reducing its original royalty deduction claims accordingly

For AY 2011-12 specifically:

GIA India raised an invoice dated 30th June 2018 for the excess amount, and GIA US duly remitted Rs. 19,44,46,788/- back to GIA India on 18th July 2018. Corresponding refund transactions were effected for other assessment years within the stipulated timeframes.

Proceedings Before the ITAT