Arm's length royalty under transfer pricing was upheld at 1% as regulatory approvals and later-year acceptance were not decisive.

Transfer pricing requires arm's length price to be determined independently on the facts of each year, and regulatory approvals under RBI or Government schemes do not by themselves establish the income-tax position because they only indicate permissible ceilings. On the facts, the authorities' view that 1% royalty on export sales represented arm's length price was upheld, as the assessee's comparables and commercial justification were found insufficient. Subsequent acceptance of the same royalty rate in later years was treated only as corroborative and not as the sole basis for the decision. No substantial question of law arose and the appeals were dismissed.

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Issues: (i) Whether the restriction of royalty on export sales to 1% instead of the 2.51% paid to the associated enterprise was justified under transfer pricing principles; (ii) Whether the assessee's acceptance of the 1% royalty rate in subsequent assessment years could be relied upon to sustain the restriction for the assessment year in question.

Issue (i): Whether the restriction of royalty on export sales to 1% instead of the 2.51% paid to the associated enterprise was justified under transfer pricing principles.

Analysis: The transfer pricing provisions constitute a self-contained code for determining arm's length price of international transactions, and the exercise must be undertaken on the facts of each case. Regulatory approvals by the RBI or the Government of India do not establish arm's length price for income-tax purposes, as they serve different statutory objectives and only indicate permissible ceilings. Comparative material relied on by the assessee was found insufficient for comparability, since arm's length determination depends on functional analysis, benefits derived, and surrounding commercial circumstances. The authorities below had examined the material and concluded that 1% represented the arm's length price, and no perversity or legal infirmity in that finding was shown.

Conclusion: The restriction of royalty to 1% was upheld and the issue was decided against the assessee.

Issue (ii): Whether the assessee's acceptance of the 1% royalty rate in subsequent assessment years could be relied upon to sustain the restriction for the assessment year in question.

Analysis: Each assessment year must ordinarily be examined independently, but the reference to subsequent acceptance was treated as only a corroborative circumstance and not the sole basis of the decision. The conduct in later years was considered relevant to the commercial necessity of the higher royalty claim, and the explanation that the lower rate was accepted merely to reduce litigation was not accepted as convincing. This factor reinforced, rather than supplanted, the transfer pricing finding already reached on the merits.

Conclusion: The subsequent-year acceptance was held to support the restriction and the issue was decided against the assessee.

Final Conclusion: No substantial question of law arose, the transfer pricing determination was sustained, and the appeals were dismissed.

Ratio Decidendi: Arm's length price in an international transaction must be determined independently on the facts of the particular year under the transfer pricing framework, and regulatory approvals or later-year acceptance do not by themselves establish or displace that determination.

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