ITAT Mumbai Orders AO to Give Effect to APA on Royalty Payment: GIA India Laboratory Pvt. Ltd. vs DCIT

Case Overview

The Mumbai Bench of the Income Tax Appellate Tribunal, in GIA India Laboratory Pvt. Ltd. Vs DCIT (ITAT Mumbai), adjudicated a multi-faceted appeal involving three substantive issues — a transfer pricing adjustment concerning royalty payments made to an Associated Enterprise (AE), denial of deduction under Section 80G of the Income Tax Act, 1961, and matters pertaining to TDS credit, credit for taxes paid, and interest under Section 244A. The Tribunal's ruling provides significant clarity on how Advance Pricing Agreements interact with assessment proceedings, the perpetual validity of Section 80G approvals post the Finance Act, 2009, and the mechanism for proper grant of tax credits.

Issue 1: Transfer Pricing Adjustment on Royalty Payment to AE

Background of the Dispute

The Assessing Officer (AO) issued a draft assessment order dated 25 September 2023 under Section 144C(1) of the Income Tax Act, 1961, proposing an upward adjustment of ₹66,96,52,179/- to the total income of the assessee. This adjustment arose from the royalty paid by the assessee to its AE. The AO computed the arm's length price (ALP) of royalty at 53% by relying on an earlier Advance Pricing Agreement (APA) dated 7 May 2018. The Dispute Resolution Panel (DRP) subsequently upheld this adjustment, leaving the assessee with no option but to approach the Tribunal.

APA Signed with CBDT — A Game Changer

At the time of hearing before the ITAT, the Authorised Representative of the assessee brought a critical development to the Tribunal's attention. The assessee had entered into a Unilateral Advance Pricing Agreement with the CBDT on 27 March 2025, under which the royalty payment to the AE was specifically identified as a covered international transaction.

The relevant extract from the APA, as reproduced before the Bench, reads as follows:

"The covered international transaction of payment of royalty shall be considered to be at arm's length in a previous year, if the payment made by the Applicant in respect of the said transaction does not exceed an amount which represents 53.5% of the operating profit of India Graded Segment of the relevant previous year. Further, it is clarified that the operating profits for the purpose of this sub-item shall be the operating profit of India Graded Segment determined after reduction of payment for all operating expenses but before any deduction on account of royalty."

Modified Return Filed Under Section 92CD

In accordance with the terms of the newly executed APA, the assessee computed the royalty at ₹3,12,12,95,549/-, which translated into an upward adjustment of approximately ₹66.36 crore — marginally lower than the ₹66.96 crore computed by the AO. Following the conclusion of the APA, the assessee filed a modified return of income in terms of Section 92CD of the Income Tax Act, 1961.

The assessee's representative urged the Tribunal to direct the AO to give full effect to the APA and the modified return filed pursuant to it.

Tribunal's Direction

The Departmental Representative did not raise any specific objection and simply stated that the order may be passed as per the provisions of law. After considering the submissions, the Tribunal directed the AO to give effect to the Unilateral Advance Pricing Agreement signed with CBDT and pass the consequential order accordingly, recognising that the assessee had already filed a modified return enhancing its income in compliance with the APA.