Transfer Pricing: TPO cannot sit in judgement on commercial expediency. RBI approval means the payment is at ALP. If overall TNMM analysis done, royalty cannot be analyzed separately

The TPO is not entitled to sit on judgment on the business and commercial expediency of the assessee in paying royalty to its’ parent company as per the provisions of the Act as laid down clearly by the Delhi High Court in EKL Appliances 345 ITR 241. It is also noted that various Tribunals such as DCIT vs. Sona Okegawa Precision Forgings (ITA No. 5386/Del/2010), Hero Motocorp (ITA No 5130/Del/2010), ThyssenKrupp Industries (ITA No 6460/Mum/2012), Abhishek Auto Industries (ITA No 1433/Del/2009) have taken a view that RBI approval of the Royalty rates itself implies that the payments are at Arm’s Length and hence no further adjustment needs to be made viewed from this angle too. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company’s transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO seems erroneous. We draw support from Cadbury India (ITA No 7408/Mum/2010 and ITA No.7641/Mum/2010) wherein the ITAT upheld the use of TNMM for Royalty.