Arms Length Pricing – RBI Approvals are deemed irrelevant

Ratio of the Case: A Press note issued in relation to an FDI policy thus allowing payment of royalty amounting to a certain percentage of sales under automatic route, cannot be viewed as being done at Arms Length. The FDI policy which permits payment of a percentage of royalty is meant only for remittance of the royalty amount in foreign exchange. Thus, any such permission via a press note, does not make it relevant for determination of Arms Length Pricing under the  IT Act.

CLR Editorial Notes: The appellant and assessee has been engaged in the manufacturing and marketing of beer which uses technical know-how that has been provided by SAB Miller. The appellant/assessee had paid royalty for this technical know-how. The question now arises whether this transaction is to be viewed at arms™ length or not.

The assessee argued in relation to a Press Note (vide no. 9 of 2000) issued by the Ministry of Commerce and Industry in relation to FDI policy. Any remittance of royalty which does not exceed 5% of domestic sales and 8% of export sales, was permitted as per the Press note. The royalty paid by the assessee was within these indicated limits and hence the assessee appealed that the transaction needed to be considered at arms™ length for transfer pricing purposes.

The Tribunal rejected this plea and HELD:

Press Note no.9 of 2000 issued by the Ministry of Commerce and Industry in respect of FDI policy and prescribing the percentage of royalty to the sales allowed under automatic route cannot substitute as ALP to be determined under the provisions of the Act and Rules. FDI policy permitting certain percentage of payment of royalty is only for remittance of the amount in foreign exchange and therefore, such permission given in an entirely different context and purpose cannot be considered as relevant for determination of the ALP under I. T. Act. The RBI is only concerned with the foreign exchange and, therefore, would look into the matter from that point of view. The RBI, at the time of giving such permission would not keep in mind the provisions of the I T Act and that is the function of the income tax authorities and, cannot be validly go into such an issue. When a proper mechanism is provided under the provisions of the I. T. Act and Rules for determination of the ALP, then the approval by other than the I. T. Authorities, for the purpose of remittance/outflow of the foreign exchange, does not ipso facto, partake the character of ALP, which has to be determined as per TP regulations (Nestle India Ltd 337 ITR 103 (Del) followed).


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