ITAT Bangalore’s Ruling in Wipro GE Healthcare Pvt. Ltd. Vs ACIT: Royalty and Transfer Pricing Adjustments Revisited

1. Background of the Appeal

The dispute in Wipro GE Healthcare Pvt. Ltd. Vs ACIT (ITAT Bangalore) concerns the assessee’s challenge to a final assessment passed under Section 143(3) read with Section 144C(13) of the Income Tax Act 1961 for Assessment Year 2018-19.

The assessee is a joint venture of General Electric Company, USA and Wipro Limited. Its business model spans:

  • Contract manufacturing of medical diagnostic imaging equipment, ultrasound systems, patient monitoring and X-ray systems
  • Provision of engineering and software development services
  • Distribution of medical diagnostic imaging equipment, therapy equipment, and life sciences products, including after-sales service

The final assessment comprised substantial transfer pricing (TP) adjustments and certain corporate tax disallowances. The key additions disputed before the Tribunal were:

  • TP adjustments aggregating to Rs.2,19,25,70,261 comprising:

    • Royalty: Rs.9,41,83,707
    • Distribution (trading) segment: Rs.1,24,42,65,469
    • Software development segment: Rs.85,35,47,785
    • Interest on delayed trade receivables: Rs.5,73,300

  • Other disallowances totalling Rs.46,61,17,921 relating to:

    • Disallowance of lease payment on financial lease under Section 37: Rs.10,08,65,471
    • General disallowance under Section 37: Rs.36,52,52,459

The assessee also raised a ground regarding non-grant of TDS credit of Rs.24,17,326.

General grounds (Ground Nos.1 to 11) were held to be academic and not requiring separate adjudication. The Tribunal then addressed each substantive issue separately.

2. Royalty Adjustment of Rs.9,41,83,707

2.1 Nature of the Royalty Claim

The assessee had paid royalty of Rs.9,41,83,707 to its group entity towards use of technology and brand support. The royalty was linked to advanced remote monitoring and maintenance capabilities provided by the GE group using satellite-based systems, which:

  • Enabled continuous monitoring and remote service of high-end medical equipment
  • Provided a technological advantage otherwise impossible for the assessee to replicate at a reasonable cost
  • Enhanced the commercial value and reliability of equipment supplied in the Indian market

2.2 Earlier ITAT Directions in Assessee’s Own Case

In prior years, the Tribunal had already considered the same royalty issue. In IT(TP)A 40/Bang/2011 & 1647/Bang/2013 (AYs 2005-06 & 2006-07), while following directions issued for AYs 2002-03 to 2004-05, the Tribunal had clearly instructed that:

In case no proper comparable for royalty is available, the TPO/AO shall treat the royalty as part of the international transaction in the trading segment and regard it as an operating cost while computing the margin of that trading segment.

This approach had been consistently followed in:

  • AYs 2002-03 to 2004-05 (where the TP adjustment on royalty was ultimately deleted in effect orders)
  • AYs 2005-06 & 2006-07 – reiterated in IT(TP)A 701 & 702/Bang/2021 dated 05.08.2021
  • AY 2012-13 – IT(TP)A 703/Bang/2021 dated 07.10.2022
  • AY 2016-17 – ITA 285/Bang/2021 dated 03.02.2023
  • AY 2017-18 – ITA 291/Bang/2022 dated 15.03.2023

In the later orders, the Tribunal emphasised that if the royalty is treated as part of operating costs in the trading segment, and the resulting margin of the assessee exceeds that of the comparable (e.g., M/s. Advance Micronic Devices Ltd.), no separate TP adjustment on royalty is warranted.

2.3 TPO’s Approach in the Impugned AY

Despite this consistent judicial position, in AY 2018-19 the TPO:

  • Did not identify any valid comparable for benchmarking royalty under Rule 10B(3)
  • Did not integrate royalty into the trading segment as operating cost
  • Simply treated the ALP of royalty as NIL, relying on earlier DRP directions in AY 2014-15 which held that the assessee was not eligible to pay royalty itself

The entire royalty payment of Rs.9,41,83,707 was accordingly added as a TP adjustment under Section 92CA.

2.4 ITAT’s Finding on Royalty

The Tribunal noted that:

  • The issue had been repeatedly decided in favour of the assessee in earlier assessment years, on identical facts
  • The TPO had not complied with the binding directions of the Tribunal in earlier years
  • Judicial discipline requires consistency unless there is a material change in facts or law, which the Revenue failed to demonstrate

Relying particularly on the decisions in: