Transfer Pricing: RBI approval has no relevance on issue of Arms Length Price

The assessee was engaged in the manufacturing and marketing of beer using technical know-how provided by SAB Miller. The assessee paid royalty for the technical know-how and the question arose whether the same was at arms’ length. One of the arguments advanced by the assessee was that as under Press Note no. 9 of 2000 issued by the Ministry of Commerce and Industry in relation to FDI policy, remittance of royalty not exceed 5% of domestic sales and 8% of export sales was permitted, the royalty paid by it which was within those limits should be considered as being at arms’ length for transfer pricing purposes. HELD by the Tribunal rejecting the plea:

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).