Saturday, June 25, 2016

RBI approved royalty rate has only persuasive value, it isn't conclusive to determine ALP

The issue before the Delhi ITAT was as under:


Whether rate of Royalty/FTS approved by RBI is always at ALP?


The Delhi ITAT held as under:


1) The jurisdictional High Court in case of CIT v. Nestle India Ltd. [2011] 11 taxmann.com 106 made following observation:

‘The Tribunal is not correct in observing that since the permission is given by the RBI, the reasonableness and genuineness of the expenditure could not have been gone into by the AO. The purpose for which such permission is given by the RBI is totally di erent. 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 IT Act and that is the function of the IT authorities and, therefore, they can validly go into such an issue'


2) It is explicitly clear from the enunciation of law by the Delhi High Court that the grant of permission by the RBI to payment of royalty is not sacrosanct for the purposes of the Act and, can be examined by the Assessing O icer to ascertain its excessiveness.

3) The RBI provides for maximum permissible rate of royalty, etc., which can be paid. Such rate of royalty as permitted is applicable to all the manufacturing activities across the board with a few exceptions. Thus, at best, the rate of royalty approved by the RBI has a persuasive value in the process of determination of ALP but it could not be considered as conclusive. Therefore, it could not be accepted that the payment of royalty and fees for technical services at ALP simply on the ground that it was paid at the maximum rate stipulated by the RBI. - Gruner India (P.) Ltd. v. DY. CIT - [2016] 70 taxmann.com 240 (Delhi - Trib.)

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