Gulf Oil Corporation Ltd vs The Asst.Commisioner Of Income Tax
2026 Latest Caselaw 82 Tel

Telangana High Court

Gulf Oil Corporation Ltd vs The Asst.Commisioner Of Income Tax on 26 March, 2026

Author: P.Sam Koshy

Bench: P.Sam Koshy

   IN THE HIGH COURT FOR THE STATE OF TELANGANA
                   AT HYDERABAD

           THE HON'BLE SRI JUSTICE P.SAM KOSHY
                                   AND
 THE HON'BLE SRI JUSTICE SUDDALA CHALAPATHI RAO

                I.T.T.A.Nos.526 of 2015 & 101 of 2017

                             DATE: 26.03.2026

Between:
Gulf Oil Corporation Ltd.,
Hyderabad.
                                                             ...Appellant

                                   AND

The Asst. Commissioner of Income tax,
Circle-2(2), Hyd.bad.
                                                            ...Respondent


COMMON JUDGMENT:

(per the Hon'ble Sri Justice P.Sam Koshy)

Heard Mr. Y.Ratnakar, learned counsel for the appellant; and

Ms. J.Sunita, learned Senior Standing Counsel for Income Tax

Department appearing on behalf of the respondent.

2. Since the issue involved in the instant appeals is one and the same,

and the parties are also the same, they are heard together and are decided

by this Common Judgment.

3. For convenience, the facts in I.T.T.A.No.526 of 2017 are discussed

hereunder.

4. The primary dispute pertains to the payment of royalty on export

sales to its Associated Enterprise (AE), Gulf Oil International Mauritius

(Inc.).

5. The facts of the case are that during the assessment year 2010-11

the appellant paid royalty of Rs.64,83,281/- on export sales amounting to

Rs.25,81,94,932/-, worked out to 2.51% of export sales. This rate was

well within the 8% limit approved by the Reserve Bank of India (for

short 'RBI') and significantly lower than the 9.41% (inclusive of taxes)

approved by the Government of India under the royalty agreement. The

Transfer Pricing Officer, however, restricted the allowance of royalty to

only 1% of export sales, resulting in an arm's length price of

Rs.25,81,949/- and consequent disallowance of Rs.39,01,332/-.

Aggrieved, the appellant challenged the Transfer Pricing Officer's order

before the Income Tax Appellate Tribunal, Hyderabad Bench 'A'. The

Tribunal, vide its order dated 20.04.2015 in ITA No.217/Hyd./2015,

confirmed the restriction imposed by the Transfer Pricing Officer

following its earlier orders on similar issues for previous assessment

years. Having exhausted the remedies before the Tribunal, the appellant

has now approached the High Court under Section 260A of the Act,

raising substantial question of law regarding the correctness of restricting

the royalty deduction to 1% when the actual payment was at arm's length

price.

6. Learned counsel for the appellant contended that entire royalty

payment of 2.51% made to Gulf Oil International Mauritius (Inc.) and its

Associated Enterprise was reasonable, commercially justified, and

computed at arm's length price.That the royalty paid during the

assessment year 2010-11 amounting to Rs.64,83,281/- on export sales of

Rs.25,81,94,932/- was well within the limits prescribed by regulatory

authorities and was supported by comprehensive benchmarking analysis.

The restriction imposed by the Transfer Pricing Officer and subsequently

confirmed by the Tribunal, resulting in a disallowance of Rs.39,01,332/-

is contended to be arbitrary, legally untenable, and not supported by the

factual matrix of the case.

7. Learned counsel for the appellant further contended that the

royalty rate of 2.51% paid to Gulf Oil International Mauritius

(Inc.)compares favorably with royalty payments made by third parties

and other subsidiaries to their respective Associated Enterprises and

parent company hubs. Moreover, the learned counsel for the appellant

presented a comparative analysis demonstrating that unrelated third

parties paid higher percentages of royalty to other hubs of the Gulf group

than what the appellant paid to Gulf Oil International Mauritius (Inc.).

Similarly, other subsidiaries within the broader corporate structure paid

higher royalty rates to their Associated Enterprises compared to the

appellant's payment. This benchmarking exercise clearly establishes that

the royalty payment was at arm's length and in line with international

transfer pricing principles. It is contended that the Tribunal's failure to

give due consideration to this comparative analysis and its mechanical

restriction of royalty to 1% without proper justification constitutes a

fundamental error in the adjudication process.

8. Learned counsel for the appellant further contended that the

royalty rate approved by the RBI was 8% of export sales, and the

Government of India had approved a royalty rate of 9.41% (inclusive of

taxes) under the applicable royalty agreement. The actual royalty paid at

2.51% was substantially lower than both these approved rates, being less

than one-third of the RBIapproved limit and approximately one-fourth of

the Government of India-approved rate.Therefore, the existence of such

regulatory approvals creates a strong presumption in favor of the

reasonableness of the transaction and the Tribunal erred in disregarding

this crucial aspect.

9. Learned counsel for the appellant also challenged the Tribunal's

reliance on the appellant's acceptance of the 1% royalty restriction for

the subsequent assessment years 2007-08 and 2008-09 as justified for

restricting the deduction for the assessment year 2010-11. According to

the learned counsel for the appellant, the acceptance of 1% rate in

subsequent years was a pragmatic decision made to minimize litigation

and reduce the quantum of tax disputes, considering the overall litigation

burden under the Income Tax Act and this acceptance was expressly

stated to be without prejudice to the appellant's rights and was specific to

those assessment years. Therefore, each assessment year constitutes a

separate and independent unit of assessment, and the concession granted

for one year cannot form the basis for denying legitimate deductions in

another year. Thus, the Tribunal's approach of applying the acceptance

for subsequent years retrospectively to assessment year 2010-11 violates

fundamental principles of tax law and ignores the settled legal position

that each assessment year must be evaluated on its own merits based on

the facts and circumstances applicable to that specific year.

10. Lastly, the learned counsel for the appellant asserts that the

questions raised in this appeal are substantial questions of law that

require the intervention of the Hon'ble High Court particularly in the

light of the pending Special Leave Petition before the Hon'ble Supreme

Court on identical issues for theassessment year 2006-07. Therefore, he

prays for the setting aside of the Tribunal's order and restoration of the

full deduction of royalty paid at 2.51% of export sales, which represents

the actual commercial reality of the transaction which is fully justified

under applicable transfer pricing regulations and principles.

11. Per contra, the learned Senior Standing Counsel for Income Tax

Department contended that the transaction involving the sale of shares

by the appellant to M/s.Hinduja Ventures Ltd. was a collusive

arrangement designed to create an artificial long-term capital loss. That

the appellant had transferred an undertaking worth Rs.63,74,14,000/- (as

per book value) in exchange for Rs.97,60,000/- shares and subsequently

sold these shares for a mere Rs.2.10 crores resulting in a claimed capital

loss of Rs.61,64,14,000/-.Further,no reasonable person would part with

an undertaking of such substantial value in exchange for shares that were

then sold at a price 'not even worth the value of a paper'. Since both

M/s.Hinduja Ventures Ltd. and the assessee belonged to the same

Hinduja group, therefore this was a fabricated transaction between

associated enterprises aimed at offsetting the capital loss against long-

term capital gains from the sale of land.

12. Learned Senior Standing Counsel for Income Tax Department

further contended that the Dispute Resolution Panel (DRP) upheld the

Assessing Officer's view and rejected the assessee's objections where the

assesseehad misrepresented facts, valuation reports and the valuation of

its assets and shares with the deliberate intention of claiming a long-term

capital loss and creating artificial loss, and therefore, the claimed capital

loss should be disallowed.Thus, the sale of shares at such a drastically

reduced price, especially between group companies, could not be

considered a genuine business transaction conducted at arm's length.

13. Learned Senior Standing Counsel for Income Tax Department

further contended that the Transfer Pricing Officer conducted a detailed

examination of the royalty payments made by the appellant to Gulf Oil

International Mauritius (Inc.) and determined that the rate of 2.51% paid

on export sales was not at arm's length price andthe benchmarking

analysis conducted by the appellant was flawed and did not adequately

demonstrate that the royalty payment was comparable to transactions

between independent enterprises operating under similar circumstances.

The Transfer Pricing Officer applied the appropriate methodologies to

arrive at the arm's length price of 1% of export sales which was deemed

reasonable considering the services rendered, the benefits derived by the

appellant, and the market conditions prevailing during the assessment

year. Therefore, the disallowance of Rs.39,01,332/- representing the

excess payment over 1% was correctly computed and legally sustainable.

14. Lastly, the learned Senior Standing Counsel for Income Tax

Department further contended that the appellant's acceptance of the 1%

royalty rate for subsequent assessment years 2007-08 and 2008-09

contended that this acceptance demonstrates the appellant's own

acknowledgment that payments exceeding 1% were not commercially

justified or necessary. The appellant here cannot take inconsistent

positions across different assessment years, claiming higher deductions

for the assessment year 2010-11 while accepting lower rates for

subsequent years. While the appellant urges that each assessment year is

independent, however, the pattern of acceptance in subsequent years is a

relevant consideration in determining the arm's length nature of the

transaction for the assessment year 2010-11. It was also emphasized that

the Tribunal correctly took into account this subsequent conduct of the

appellant as it reflects the commercial reality and the actual value of

services rendered by Gulf Oil International Mauritius (Inc.). Therefore,

the mere existence of regulatory approvals from the RBI or the

Government of India does not automatically validate the transaction for

transfer pricing purposes, as these approvals are granted for different

regulatory objectives and do not conclusively establish that the

transaction is at arm's length under the Income Tax Act.

15. Having heard the contentions put forth on either side and on

perusal of records, the questionsthat arise for consideration in the instant

appeal are:-

a) Whether the Tribunal was justified in restricting the allowance of

royalty on export sales to only 1% of the sales against 2.51% paid

by the appellant to the Gulf Oil International Mauritius (Inc.)

(Associated Enterprise)?

b) Whether the Tribunal was correct in confirming the disallowing

payment of royalty on export sales to Gulf Oil International

Mauritius (Inc.) in excess of 1% of export sales, based on the

appellant's acceptance of such restriction for the subsequent

assessment years 2007-08 and 2008-09?

16. The first and principal contention of the appellant is that the entire

royalty payment of 2.51% made to Gulf Oil International Mauritius

(Inc.) was at arm's length price and should have been allowed in full. The

appellant has placed considerable reliance on three factors, i.e.,

i. Regulatory approvals granted by the RBI and the Government of

India;

ii. Comparative analysis showing that third parties and other

subsidiaries paid higher royalty rates; and

iii. The decision of the Pune Bench of the Income Tax Appellate

Tribunal in Kinetic Honda Motor (P) Ltd. vs. Joint

Commissioner of Income Tax (77 ITD 393).

17. We find that these contentions, while appearing persuasive at first

glance, do not withstand closer scrutiny when examined in the context of

the statutory framework governing transfer pricing under the Income Tax

Act. The provisions contained in Sections 92 to 92F of the Income Tax

Act constitute a self-contained code for determining the arm's length

price of international transactions between associated enterprises. The

fundamental objective of these provisions is to ensure that such

transactions are conducted at prices that would have prevailed between

independent parties operating at arm's length under comparable

circumstances. The determination of arm's length price is a factual

exercise that must be undertaken on a case-by-case basis, considering the

specific facts and circumstances of each transaction.

18. The appellant's reliance on regulatory approvals granted by the

RBI and the Government of India is misplaced for several reasons.

Firstly, these approvals are granted for entirely different regulatory

purposes. The RBI approval is concerned with foreign exchange

regulations and the remittability of foreign exchange, while the

Government of India approval under the erstwhile FERA/FEMA regime

was concerned with broader policy considerations relating to technology

transfer and industrial development. These approvals do not and were

never intended to determine the arm's length price for income tax

purposes under the transfer pricing provisions of the Income Tax Act.

The statutory scheme for determining arm's length price is distinct and

independent and is governed by specific methodologies prescribed under

Section 92C of the Income Tax Rules.

19. Secondly, the fact that a particular rate has been approved by

regulatory authorities does not create any presumption that the same rate

represents the arm's length price. The regulatory ceiling merely indicates

the maximum permissible rate for regulatory compliance purposes, not

the actual market-driven price that independent parties would negotiate.

An approval permitting payment of royalty up to 8% or 9.41% does not

mean that any payment below such ceiling is automatically at arm's

length. The appellant's argument would lead to the absurd conclusion

that any payment made within the regulatory limits would be immune

from transfer pricing scrutiny, thereby rendering the entire transfer

pricing regime ineffective.

20. Thirdly, the decision in Kinetic Honda Motor (P) Ltd.(supra)

cited by the appellant does not support the proposition that regulatory

approvals conclusively establish arm's length price. That decision must

be understood in its own factual context and cannot be mechanically

applied to different fact situations. Moreover, even if that decision had

held such a proposition,it would not bind this Court, particularly when

the statutory provisions clearly mandate an independent determination of

arm's length price based on prescribed methodologies.

21. As regards the comparative analysis presented by the appellant

showing that the third parties and other subsidiaries paid higher royalty

rates to their respective hubs, the Transfer Pricing Officer and the

Tribunal examined this analysis and found it to be inadequate and

unreliable for establishing comparability. The determination of arm's

length price requires not merely a superficial comparison of royalty

rates, but a detailed functional analysis examining the nature and extent

of services rendered, the value of intangibles transferred, the benefits

derived by the recipient, the economic circumstances of the parties, and

numerous other factors that may affect pricing in transactions between

independent parties.The record shows that the Transfer Pricing Officer

conducted a detailed examination of the royalty payments and concluded

that the rate of 2.51% was not at arm's length price based on the specific

facts and circumstances of the appellant's case. The Tribunal also

examined this determination and found no infirmity in the reasoning or

methodology adopted by the Transfer Pricing Officer. The Tribunal's

finding that the royalty at 1% of export sales represents the arm's length

price is a finding of fact based on appreciation of evidence and materials

on record.

22. The appellant has not demonstrated any perversity or legal

infirmity in the Tribunal's findings. The mere fact that the appellant

disagrees with the factual conclusions reached by the Transfer Pricing

Officer and affirmed by the Tribunal does not render those conclusions

erroneous in law. The comparative analysis presented by the appellant

was duly considered by the authorities below, and their rejection of the

same as inadequate for establishing arm's length price is a matter of

factual appreciation that cannot be reopened in this appeal.The

appellant'scontention that the Tribunal erred in relying on its acceptance

of 1% royalty for the assessment years 2007-08 and 2008-09 to restrict

the deduction for the assessment year2010-11, arguing that each

assessment year is independent.

23. While this Bench accepts that each assessment year must be

assessed independently, the Tribunal's reference to subsequent years was

not the primary basis for its decision. The restriction to 1% was based on

the Transfer Pricing Officer's determination of arm's length price after

detailed examination. The reference to subsequent acceptance was

merely an additional circumstance reinforcing this determination. The

appellant's conduct in subsequent years is relevant in evaluating whether

royalty at 2.51% was commercially necessary. If the appellant genuinely

believed 2.51% was essential, it is unclear why it would accept 1% for

immediately succeeding years. The explanation that this was to minimize

litigation is unconvincing. The appellant cannot adopt inconsistent

positions across years based on litigation convenience.The acceptance of

1% for subsequent years demonstrates that the appellant could continue

operations and derive benefits even with the restricted deduction,

undermining its argument that 2.51% was necessary and at arm's length.

24. Having examined the contentions raised by the appellant, we find

that no substantial question of law arises from the impugned order

passed by the Tribunal.The Tribunal applied the correct legal principles

and followed the proper methodology prescribed under the transfer

pricing provisions, and the fact that the Tribunal's conclusion is adverse

to the appellant does not make it erroneous in law. The appellant has

placed reliance on the pendency of a Special Leave Petition before the

Hon'ble Supreme Court in relation to assessment year 2006-07 involving

similar issues, but the mere pendency of proceedings before a higher

forum does not constitute a ground for admitting an appeal under Section

260A of the Income Tax Act or for interfering with the impugned order.

Each case must be decided on its own merits based on the facts and

circumstances applicable to that case, and unless and until the Hon'ble

Supreme Court pronounces a decision laying down a different principle

of law, the orders of the authorities below must be given effect to, and

this Bench cannot keep matters in abeyance based on speculative

possibilities of future judicial developments. Accordingly, we find that

no substantial question of law arises from the impugned order passed the

Tribunal.

25. It is also pertinent to note that while the assessment year 2006-07

involving a similar issue is pending before the Hon'ble Supreme Court,

the appellant in the subsequent years 2007-08 and 2008-09 accepted the

allowance of export royalty at 1% and did not challenge the same with

respect to this issue. Moreover, after the passage of two subsequent years

in which the appellant acquiesced to the 1% limitation, the appellant

filed the present appeal for the assessment year 2010-11 raising serious

doubts about the bona fides of the challenge and suggests an inconsistent

approach adopted merely for litigation convenience rather than based on

genuine commercial necessity or legal conviction.

26. I.T.T.A.No.526 of 2015 thus fails and is accordingly dismissed and

consequently I.T.T.A.No.101 of 2017 also stands dismissed.

27. As a sequel, miscellaneous petitions pending if any, shall stand

closed. However, there shall be no order as to costs.

________________ P.SAM KOSHY, J

_______________________________ SUDDALA CHALAPATHI RAO, J

Date: 26.03.2026 GSD