29 Dec
SAFE HARBOUR RULES
To curb the rising frequency of transfer pricing audits and protracted disputes, the Finance (No.2) Act of 2009, effective from April 1, 2009, introduced a new provision, Section 92CB. This section stipulated that the determination of the arm’s length price under Section 92C or Section 92CA would be subject to safe harbor rules.
Through this amendment, the Indian government granted the Central Board of Direct Taxes (CBDT) the authority to formulate safe harbor rules. The term “safe harbor” was defined to encompass situations in which the income-tax authorities would acknowledge the transfer price declared by the assessee.
Benefits Of Safe Harbor Rules in India- To The Taxpayers And Revenue Authorities:
- Advance information or knowledge about the range of profits or prices to qualify for SHR. This brings certainty in transactions.
- Elimination of the possibility of litigation between the taxpayers and the revenue authorities.
- Automatic approvals and self-assessment procedures.
- Ease in compliance.
- Reduction in compliance cost.
The Eligible Assessees under Safe Harbor Rules:
The eligible assessee under Safe Harbour Rules in India has been defined in Rule 10TB. The Board has now amended Rule 10TD(3B) to further extend the applicability of Safe Harbour Rules until Assessment Year 2023- 24.
The eligible assessee is as under:
- An assessee who is engaged in providing software development services or information technology-enabled services or knowledge process outsourcing services, with insignificant risk, to a non-resident associated enterprises.
- Â Who has made any intra-group loan
- Who has provided a corporate guarantee
- Who is engaged in providing contract research and development services wholly or partly relating to software development, with insignificant risk, to a foreign principal.
- Who is engaged in manufacture and Export of core or Non-core Auto Components
- Who is engaged in Low value-adding Intra-group Services
Eligible International Transaction Currently Subject To Safe Harbour Rules:
The salient features of the new Safe Harbour Regime are:
It has come into effect from 1st of April, 2017, i.e. A.Y. 2017-18 and Assessees eligible under the present safe harbour regime up to AY 2017-18 shall also have the right to choose the safe harbour option most beneficial to them.
- The new safe harbour regime is available for transactions limited to Rs. 200 crore in provision of software development services, provision of information technologyenabled services, provision of knowledge process outsourcing services, provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs.
- In respect of transactions involving provision of software development services and provision of information technology-enabled services, safe harbour margins have been reduced to peak rate of 18% from 22% in the previous regime.
- In respect of transactions involving provision of knowledge process outsourcing services, a graded structure of 3 different rates of 24%, 21% and 18% has been provided, based on employee cost to operating cost ratio, replacing the single rate of 25% in the previous regime.
- In respect of transactions involving provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs, safe harbour margins have been reduced to 24% from 30% and 29% respectively in the previous regime.
- Risk spreads on intra-group loans denominated in foreign currency will be benchmarked to the 6-month London Inter-Bank Offer Rate (LIBOR) as on 30th September of the relevant year and on loans denominated in Indian Rupees to the 1- year SBI MCLR as on 1st April of the relevant year.
- The safe harbour regime is optional to taxpayers.
