The Hyderabad Bench of the Income-tax Appellate Tribunal has concluded that once the Reserve Bank of India (RBI) approves a royalty rate, the royalty is deemed to be at arm’s length. Accordingly, the tribunal upheld the taxpayer’s claim that the royalty at 4% of net sales was at arm’s length, and the transfer pricing adjustment concerning the royalty payment was “deleted.” DCIT v. Owens Corning Industries (India) Pvt. Ltd. (ITA No. 549/Hyd/2014) . The taxpayer had asserted that given that the royalty payments were based on an agreement that had been previously approved by the Reserve Bank of India, the Transfer Pricing Officer could not question the royalty amounts.
The tribunal essentially agreed, and held that once approval of the royalty was obtained from the Reserve Bank of India, the royalty payment was considered to be at arm’s length. The tribunal found that the Transfer Pricing Officer was incorrect in examining the business expediency of the royalty payment.