• By ADMIN
• Posted 21 Apr, 2025
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Is it safe to be under Safe Harbour Provisions (Transfr Pricing) of Income-tax Act

The concept of Safe Harbour under the Income Tax Act of India plays a crucial role in simplifying the transfer pricing compliance requirements for businesses engaged in international transactions. The provisions of Safe Harbour, as outlined under Section 10TD, enable an eligible assessee to declare a transfer price in respect of eligible international transactions without the risk of facing adjustments by the income-tax authorities, provided certain conditions are met.

What is Safe Harbour?

Safe Harbour refers to a set of conditions or circumstances under which the transfer price declared by an assessee for an eligible international transaction will be accepted by the Income Tax Department. This system is designed to provide clarity and reduce disputes regarding transfer pricing by establishing a set of pre-defined conditions, based on which the tax authorities will not make adjustments to the transfer price.

Eligibility for Safe Harbour

As per Rule 10TD(1), an eligible assessee who has entered into an eligible international transaction can opt for the Safe Harbour provisions, provided their declared transfer price adheres to the conditions specified under Rule 10TD(2). If the transaction is not invalidated under Rule 10TE, the transfer price declared by the assessee will be accepted by the authorities, and no further transfer pricing adjustments will be made.

Conditions for Safe Harbour

The circumstances in which an eligible international transaction qualifies for Safe Harbour are specified in Rule 10TD(2) and Rule 10TD(2A). Below is an overview of the key eligible international transactions and the required operating profit margins or interest rates:

1. 1. Software Development Services (Rule 10TC(i)):

   • Operating Profit Margin:

     • Not less than 20% where the total value of the transactions does not exceed INR 500 crore.

     • Not less than 22% if the transactions exceed INR 500 crore.

2. 2. Information Technology Enabled Services (Rule 10TC(ii)):

   • Operating Profit Margin:

     • Not less than 20% for transaction values up to INR 500 crore.

     • Not less than 22% for transactions exceeding INR 500 crore.

3. 3. Knowledge Process Outsourcing Services (Rule 10TC(iii)):

   • Operating Profit Margin: Not less than 25% for the eligible international transaction.

4. 4. Intra-group Loans (Rule 10TC(iv)):

   • For loans up to INR 50 crore: Interest rate must be at least 150 basis points above the State Bank of India’s base rate.

   • For loans exceeding INR 50 crore: Interest rate must be at least 300 basis points above the base rate.

5. 5. Corporate Guarantees (Rule 10TC(v)):

   • For sub-item (a): Commission rate not less than 2% per annum.

   • For sub-item (b): Commission rate not less than 1.75% per annum.

6. 6. Contract Research and Development (R&D) Services (Rules 10TC(vi) and 10TC(vii)):

   • For software development: Operating profit margin must not be less than 30%.

   • For generic pharmaceutical drugs: Operating profit margin must not be less than 29%.

7. 7. Manufacture and Export of Auto Components (Rules 10TC(viii) and 10TC(ix)):

   • Core Auto Components: Operating profit margin must be not less than 12%.

   • Non-Core Auto Components: Operating profit margin must be not less than 8.5%.

8. 8. Low Value-Adding Intragroup Services (Rule 10TC(x)):

   • Value Limit: The entire value of the international transaction, including a mark-up of no more than 5%, should not exceed INR 10 crore.

   • Conditions: The method of cost pooling and allocation of costs to the assessee must be certified by an accountant.

Sub-rule (2A) Provisions

Sub-rule (2A) introduces revised conditions for certain transactions, particularly for businesses with international transaction values that fall within specific ranges. These revised conditions allow for a more nuanced approach to calculating the operating profit margins, based on factors such as employee cost percentage in relation to operating expenses.

For example:

• Software Development Services: Operating profit margin must be at least 17% for transactions not exceeding INR 100 crore, or 18% for transactions exceeding INR 100 crore but less than INR 300 crore.

• Knowledge Process Outsourcing Services: The operating profit margin must meet specific thresholds depending on the value of the international transaction and the employee cost percentage.

Applicability and Assessment Period

The provisions of Safe Harbour, as laid out in sub-rules (1) and (2), are applicable for assessment years starting from 2013-14 and for the four subsequent assessment years. Additionally, sub-rule (3A) extends the applicability of these provisions for the assessment years 2017-18 through 2026-27.

No Comparability Adjustments

One of the key advantages of opting for Safe Harbour is that no comparability adjustments or allowances under section 92C(2) will be made to the transfer price declared by the eligible assessee, as long as it adheres to the specified conditions in sub-rules (1) and (2) (or sub-rule (2A)).

Conclusion

The Safe Harbour provisions offer businesses an opportunity to simplify their transfer pricing compliance by providing clear guidelines for determining acceptable transfer prices. By meeting the criteria specified in the rules, businesses can avoid prolonged disputes and ensure smoother operations. However, it is essential for businesses to carefully evaluate their eligibility and ensure they meet the required conditions to take advantage of these provisions effectively.