The High Court for the State of Telangana has dismissed appeals filed by Gulf Oil Corporation Ltd., upholding a transfer pricing adjustment that restricted royalty payments on export sales to 1% of turnover. The ruling came from a Division Bench comprising Justice P. Sam Koshy and Justice Suddala Chalapathi Rao on March 26, 2026.
The dispute centred on royalty payments made by the company to its associated enterprise, Gulf Oil International Mauritius (Inc.). For the assessment year 2010–11, the company paid royalty at 2.51% of export sales, amounting to over ₹64 lakh on exports exceeding ₹25.8 crore. However, the Transfer Pricing Officer (TPO) determined that only 1% of export sales qualified as the arm’s length price and disallowed the excess amount.
The Income Tax Appellate Tribunal had earlier upheld this restriction, prompting the company to approach the High Court under Section 260A of the Income Tax Act. The key legal question was whether the royalty paid at 2.51% could be considered compliant with arm’s length pricing principles.
The company argued that its royalty payments were well within limits approved by regulatory authorities, including the Reserve Bank of India and the Government of India, and were supported by benchmarking studies comparing similar transactions. It also contended that unrelated parties and other group subsidiaries paid higher royalty rates, reinforcing the commercial justification of its payments.
However, the Court rejected these arguments, emphasizing that regulatory approvals do not determine arm’s length pricing under tax law. It clarified that transfer pricing provisions under Sections 92 to 92F of the Income Tax Act form a self-contained framework that requires independent evaluation based on comparability and economic analysis.
The Bench noted that merely staying within regulatory ceilings does not automatically validate a transaction as being at arm’s length. It further observed that the comparative data presented by the company lacked sufficient functional analysis and did not establish true comparability with independent transactions.
Importantly, the Court also took note of the company’s conduct in subsequent years, where it had accepted a 1% royalty rate. While acknowledging that each assessment year is separate, the Bench held that such acceptance undermined the company’s claim that a higher rate was commercially necessary.
On the allegation of inconsistency, the Court found the explanation that the lower rate was accepted to avoid litigation unconvincing. It concluded that the Tribunal’s findings were based on factual appreciation and did not suffer from any legal infirmity.
Dismissing both appeals, the Court held that no substantial question of law arose in the case and affirmed the Tribunal’s decision restricting the royalty deduction to 1%.