Problem: What Path I should add here after -i.As it has to be some physical path I am guessing.
It doesn't need to be a full path. If you're including the bat and the *sql files in the same folder in the Temp directory then simply specify the filename. E.g. sqlcmd -S MyServerName -i TestSQLCMD.sql
2.How will it actually update the Database.
I'm not sure I understand this question? Sqlcmd executes your SQL script which has SQL queries to update/change/delete databased. See sqlcmd Utility.
3.Again the path if its of the applications folder then, it will be different for a 32 Bit and the 64 Bit as in 64 Bit machine the App gets installed in Program Files (x86) folder as compare to Program Files for a 32 Bit machine.
I don't use sqlcmd, however isn't the executable defined in PATH? That is, if you type "sqlcmd" in a command window isn't sqlcmd run? That is, you don't need to specify the full path.