RBI Approval Doesn’t Establish ALP for Royalty | HC

Case Details: Gulf Oil Corporation Ltd. vs. Asst. Commissioner of Income-tax – [2026] 186 taxmann.com 1134 (Telangana)

Judiciary and Counsel Details

• P. Sam Koshy & Suddala Chalapathi Rao, JJ.

Facts of the Case

The assessee paid royalty to its associated enterprise at 2.51% on export sales. The rate was within the RBI-approved limit of 8% and below the Government of India-approved rate of 9.41% under the royalty agreement.
The Transfer Pricing Officer (TPO) restricted the royalty allowance to 1% of export sales, resulting in an arm’s length price of Rs. 25.82 Lakhs and a consequent disallowance of Rs. 39.01 Lakhs. The lower authorities upheld the TPO’s order. The matter reached before the Telangana High Court.

High Court Held

The High Court held that the reliance on regulatory approvals granted by the RBI and the Government of India was misplaced. The RBI approval concerns foreign exchange regulations and the remittability of foreign exchange. In contrast, the Government of India’s approval under the erstwhile FERA/FEMA regime concerned broader policy considerations relating to technology transfer and industrial development. These approvals do not and were never intended to determine the arm’s length price for income tax purposes under the transfer pricing provisions of the Income Tax Act.

The fact that a particular rate has been approved by regulatory authorities does not create any presumption that the same rate represents the arm’s length price. The regulatory ceiling merely indicates the maximum permissible rate for regulatory compliance purposes, not the actual market-driven price that independent parties would negotiate.

An approval permitting payment of royalty up to 8% or 9.41% does not mean that any payment below such ceiling is automatically at arm’s length. Further, the determination of arm’s length price requires not merely a superficial comparison of royalty rates but a detailed functional analysis examining the nature and extent of services rendered, the value of intangibles transferred, the benefits derived by the recipient, the economic circumstances of the parties, and numerous other factors that may affect pricing in transactions between independent parties.

The TPO conducted a detailed examination of the royalty payments and concluded that the 2.51% rate was not an arm’s-length price in light of the specific facts and circumstances of the assessee’s case. The Tribunal also examined this determination and found no infirmity in the reasoning or methodology adopted by the Transfer Pricing Officer. The Tribunal’s finding that the royalty of 1% of export sales represents the arm’s length price is a finding of fact based on an appreciation of the evidence and materials on record. Thus, no substantial question of law arose for consideration.

List of Cases Reviewed

• Kinetic Honda Motor Ltd. v. Jt. CIT [2001] 77 ITD 393 (Pune) (para 20) distinguished
• Gulf Oil Corporation Ltd. v. Asstt. CIT IT Appeal No. 217 (Hyd.) of 2015, dated 30-4-2015 (para 24) affirmed

List of Cases Referred to

• Gulf Oil Corporation Ltd. v. Asstt. CIT [IT Appeal No. 217 (Hyd.) of 2015, dated 30-4-2015] (para 5)
• Kinetic Honda Motor Ltd. v. Jt. CIT [2001] 77 ITD 393 (Pune) (para 16)