Safe Harbour – The Income Tax Rules

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Safe Harbour – What is means

Safe harbour refers to a legal provision to reduce or eliminate liability in certain situations as long as certain conditions are met. In other words, it refers to the circumstances under which the Income Tax authorities shall accept the transfer price declared by the assessee and the same shall be without any question or scrutiny.

Businesses flourish only if there is certainty and safe-harbour provisions offer that certainty to them. It is a provision of the Income Tax Act that specifies that from the perspective of Transfer Pricing (TP) provisions, if the assessee fulfils certain defined circumstances, the Income Tax authorities shall accept the TP declared by the taxpayer.

Safe Harbour Rules (SHR), introduced by the Central Board of Direct Taxes (CBDT) in the year 2009, provides for circumstances in which a certain category of taxpayers can follow a simple set of rules under which transfer prices are automatically accepted by the revenue authorities.

Such safe harbour rules benefit assessees by allowing them to adopt a transfer pricing mark-up in the range prescribed, which would be acceptable to the Income Tax department with benefits of compliance relief, administrative simplicity and certainty and hence would avoid protracted litigation.

After its enactment vide the Finance (No 2) Act 2009, the first set of rules were notified on 18 September 2013 – Rules 10TA to 10TG and Form 3CEFA (for international transactions) and Rules 10TH to 10THD and Form 3CEFB (for domestic transactions) for a period of 3 years, followed by revision in 2017 in the SHR were applicable till FY 2019.

The amendment notification dated 20th May, 2020

The CBDT has notified changes in SHR vide notification no. 25/2020 [File no.370142/14/2020-TPL]/GSR-304(E) dt. 20th May, 2020.

The notification said that the rates with the changes to Rule 10TD and Rule 10TE applicable for AY 2017-18 to AY 2019-20 will continue to apply for AY 2020-21 also.

These rules are now applicable for FY 2019-20 also. In the past, these were usually made applicable for more than one year, but this time the Government seems to have decided to announce only for one year considering that businesses in FY 2020-21 would be impacted by the Covid-19 disruptions.

Example of Different Rates:

Different rates have been prescribed under these Rules for different category of international transactions; e.g. in case of international transaction related with provision of software development services, operating profit margin should not be less than 17% if the size of the transaction is up to ₹ 100 crores and 18% for size above ₹ 100 crores and up to ₹ 200 crores.

Benefits of Safe Harbour Rules:

The adoption of safe harbour rules provides many perceived benefits both for taxpayers and the revenue authorities like:

  • 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 above mentioned perceived benefit helps the taxpayers and its counterparts for better planning of intra-group transactions.

 

Power of Board to make safe harbour rules – Section 92CB of the Income Tax Act, 1961

Section 92CB defines the term Safe Harbour as circumstances under which the income tax authorities shall accept the transfer pricing declared by the assessee.

 

[92CB. (1) The determination of arm’s length price under section 92C or section 92CA shall be subject to safe harbour rules.

(2) The Board may, for the purposes of sub-section (1), make rules for safe harbour.

Explanation.—For the purposes of this section, “safe harbour” means circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee.]

 

Eligible Assessee – Rule 10TB of the Income Tax Rules, 1962

The eligible assessee has been defined in Rule 10TB. The eligible assessees are as under,

  1. is engaged in providing software development services or information technology enabled services or knowledge process outsourcing services, with in significant risk, to a non-resident associated enterprises; or
  2. has made any intra-group loan; or
  3. has provided a corporate guarantee; or
  4. is engaged in providing contract research and development services wholly or partly relating to software development, with in significant risk, to a foreign principal ; or
  5. is engaged in providing contract research and development services wholly or partly relating to generic pharmaceuticals drugs, with in significant risk, to a foreign principal; or
  6. in engaged in manufacture and export of core or non-core auto components and where ninety per cent or more of total turnover during relevant previous year is in nature of original equipment manufacturer sales; or
  7. is in receipt of low value-adding intra-group services from one or more members of its group.

It is very important to note that only eligible assessee will be entitled to apply for safe harbour provisions, therefore each and every word of definition plays vital role. The important terminologies / words are defined in the SHR.


[10TB. (1) Subject to the provisions of sub-rules (2) and (3), the ‘eligible assessee’ means a person who has exercised a valid option for application of safe harbour rules in accordance with rule 10TE, and—

 (i)  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 enterprise (hereinafter referred as foreign principal);

(ii)  has made any intra-group loan;

(iii)  has provided a corporate guarantee;

(iv) is engaged in providing contract research and development services wholly or partly relating to software development, with insignificant risk, to a foreign principal;

(v)  is engaged in providing contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal; 1[***]

(vi) is engaged in the manufacture and export of core or non-core auto components and where ninety per cent or more of total turnover during the relevant previous year is in the nature of original equipment manufacturer sales 2[; or]

3[(vii) is in receipt of low value-adding intra-group services from one or more members of its group.]

(2) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in item (i) of sub-rule (1), the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the following factors, namely:—

(a) the foreign principal performs most of the economically significant functions involved, including the critical functions such as conceptualisation and design of the product and providing the strategic direction and framework, either through its own employees or through its other associated enterprises, while the eligible assessee carries out the work assigned to it by the foreign principal;

(b)  the capital and funds and other economically significant assets including the intangibles required, are provided by the foreign principal or its other associated enterprises, and the eligible assessee is only provided a remuneration for the work carried out by it;

(c)  the eligible assessee works under the direct supervision of the foreign principal or its associated enterprise which not only has the capability to control or supervise but also actually controls or supervises the activities carried out through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis;

(d)  the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant;

(e)  the eligible assessee has no ownership right, legal or economic, on any intangible generated or on the outcome of any intangible generated or arising during the course of rendering of services, which vests with the foreign principal as evident from the contract and the conduct of the parties.

(3) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in items (iv) and (v) of sub-rule (1), the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the following factors, namely:—

(a)  the foreign principal performs most of the economically significant functions involved in research or product development cycle, including the critical functions such as conceptualisation and design of the product and providing the strategic direction and framework, either through its own employees or through its other associated enterprises while the eligible assessee carries out the work assigned to it by the foreign principal;

(b) the foreign principal or its other associated enterprises provides the funds or capital and other economically significant assets including intangibles required for research or product development and also provides a remuneration to the eligible assessee for the work carried out by it;

(c) the eligible assessee works under the direct supervision of the foreign principal or its other associated enterprise which has not only the capability to control or supervise but also actually controls or supervises research or product development, through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis;

(d)  the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant;

(e)  the eligible assessee has no ownership right, legal or economic, on the outcome of the research which vests with the foreign principal and is evident from the contract as well as the conduct of the parties.]

 

Eligible International Transactions – Rule 10TC of the Income Tax Rules, 1962

As per Rule 10TC following class of international transactions between the eligible assessee (as mentioned above) and its associated enterprise are defined as “eligible international transaction” for the purpose of SHR,

  1. Provision of software development services;
  2. Provision of information technology enabled services;
  3. Provision of knowledge process outsourcing services;
  4. Advance of intra group loan;
  5. Provision of corporate guarantee;
  6. provision of contract research and development services wholly or partly relating to software development;
  7. provision of contract research and development services wholly or partly relating to generic pharmaceuticals drugs;
  8. manufacture and export of core auto components;
  9. manufacture and export of non-core components;
  10. receipt of low value-adding intra-group services from one or more members of its group.

 

[10TC. ‘Eligible international transaction’ means an international transaction between the eligible assessee and its associated enterprise, either or both of whom are non-resident, and which comprises of:

 (i)  provision of software development services;

(ii)  provision of information technology enabled services;

(iii) provision of knowledge process outsourcing services;

(iv) advance of intra-group loan;

(v)  provision of corporate guarantee, where the amount guaranteed,—

(a)   does not exceed one hundred crore rupees; or

(b)  exceeds one hundred crore rupees, and the credit rating of the associated enterprise, done by an agency registered with the Securities and Exchange Board of India, is of the adequate to highest safety;

(vi)  provision of contract research and development services wholly or partly relating to software development;

(vii)  provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs;

(viii)  manufacture and export of core auto components; [***]

 (ix)  manufacture and export of non-core auto components [; or]

by the eligible assessee.

3[(x) receipt of low value-adding intra-group services from one or more members of its group,]

 

Procedure to apply for SHR – Rule 10E of the Income Tax Rules, 1961

Following procedure needs to be followed by an assessee who wishes to apply for SHR:

  • Application to Assessing Officer (AO) on or before the due date of furnishing the return in Form 3CEFA (usually 31st October).
  • The form should clearly specify the period for which the assessee wishes to apply for safe harbour rules.
  • In case of subsequent assessment years, the assessee should provide details of eligible transactions, their quantum and the profit margins or rate of commission or rate of interest.
  • The safe harbour option will not be valid of subsequent period in case the same is held has invalid by appropriate authority for preceding year (i.e. TPO or Commissioner as the case may be).
  • The assessee can opt out for safe harbour rules for any subsequent period by filing declaration to that effect to the assessing officer.
  • The assessing officer on receipt of the application is required to verify the eligibility. In case required, the assessing officer may refer the matter to TPO for ascertaining the eligibility of the assessee.
  • The assessing officer / TPO is required to give the assesse, the opportunity of being heard before rejecting the application.
  • The assessee can appeal against the rejection order of Assessing Officer / TPO within 15 days of receipt of order.

The SHR provide for a time bound procedure for determination of the eligibility of the assessee and the international transactions. In case the action is not taken by any of the income tax authorities within the prescribed time lines as provided in the rules, the option exercised by the assessee shall be treated as valid.

 

[10TE. (1) For the purposes of exercise of the option for safe harbour, the assessee shall furnish a Form 3CEFA, complete in all respects, to the Assessing Officer on or before the due date specified in Explanation 2 below sub-section (1) of section 139 for furnishing the return of income for—

 (i)  the relevant assessment year, in case the option is exercised only for that assessment year; or

(ii)  the first of the assessment years, in case the option is exercised for more than one assessment year:

Provided that the return of income for the relevant assessment year or the first of the relevant assessment years, as the case may be, is furnished by the assessee on or before the date of furnishing of Form 3CEFA.

(2) The option for safe harbour validly exercised shall continue to remain in force for the period specified in Form 3CEFA or a period of five years whichever is less:

Provided that the assessee shall, in respect of the assessment year or years following the initial assessment year, furnish a statement to the Assessing Officer before furnishing return of income of that year, providing details of eligible transactions, their quantum and the profit margins or the rate of interest or commission shown:

Provided further that an option for safe harbour shall not remain in force in respect of any assessment year following the initial assessment year, if—

 (i)  the option is held to be invalid for the relevant assessment year by the Transfer Pricing Officer under sub-rule (11) or by the Commissioner under sub-rule (8) in respect of an objection filed by the assessee against the order of the Transfer Pricing Officer under sub-rule (11), as the case may be; or

(ii)  the eligible assessee opts out of the safe harbour, for the relevant assessment year, by furnishing a declaration to that effect, to the Assessing Officer:

[Provided also that nothing contained in this sub-rule shall apply to the option for safe harbour validly exercised under sub-rule (3B) of rule 10TD.; and]

[Provided also that in case of the option for safe harbour validly exercised under sub-rule (2A) of rule 10TD, the word “three” shall be substituted for “five”.]

(3) On receipt of Form 3CEFA, the Assessing Officer shall verify whether—

 (i)  the assessee exercising the option is an eligible assessee; and

(ii)  the transaction in respect of which the option is exercised is an eligible international transaction,

before the option for safe harbour by the assessee is treated to be validly exercised.

(4) Where the Assessing officer doubts the valid exercise of the option for the safe harbour by an assessee, he shall make a reference to the Transfer Pricing Officer for determination of the eligibility of the assessee or the international transaction or both for the purposes of the safe harbour.

(5) For the purposes of sub-rule (4) and sub-rule (10), the Transfer Pricing Officer may require the assessee, by notice in writing, to furnish such information or documents or other evidence as he may consider necessary, and the assessee shall furnish the same within the time specified in such notice.

(6) Where—

(a)  the assessee does not furnish the information or documents or other evidence required by the Transfer Pricing Officer; or

(b)  the Transfer Pricing Officer finds that the assessee is not an eligible assessee; or

(c)  the Transfer Pricing Officer finds that the international transaction in respect of which the option referred to in sub-rule (1) has been exercised is not an eligible international transaction,

the Transfer Pricing Officer shall, by order in writing, declare the option exercised by the assessee under sub-rule (1) to be invalid and cause a copy of the said order to be served on the assessee and the Assessing Officer:

Provided that no order declaring the option exercised by the assessee to be invalid shall be passed without giving an opportunity of being heard to the assessee.

(7) If the assessee objects to the order of the Transfer Pricing Officer under sub-rule (6) or sub-rule (11) declaring the option to be invalid, he may file his objections with the Commissioner, to whom the Transfer Pricing Officer is subordinate, within fifteen days of receipt of the order of the Transfer Pricing Officer.

(8) On receipt of the objection referred to in sub-rule (7), the Commissioner shall after providing an opportunity of being heard to the assessee pass appropriate orders in respect of the validity or otherwise of the option exercised by the assessee and cause a copy of the said order to be served on the assessee and the Assessing Officer.

(9) In a case where option exercised by the assessee has been held to be valid, the Assessing officer shall proceed to verify whether the transfer price declared by the assessee in respect of the relevant eligible international transactions is in accordance with the circumstances specified in sub-rule (2) 4[or, as the case may be, sub-rule (2A)] of rule 10 TD and, if it is not in accordance with the said circumstances, the Assessing Officer shall adopt the operating profit margin or rate of interest or commission specified in sub-rule (2) [or, as the case may be, sub-rule (2A)] of rule 10TD.

(10) Where the facts and circumstances on the basis of which the option exercised by the assessee was held to be valid have changed and the Assessing Officer has reason to doubt the eligibility of an assessee or the international transaction for any assessment year other than the initial Assessment Year falling within the period for which the option was exercised by the assessee, he shall make a reference to the Transfer Pricing Officer for determination of eligibility of the assessee or the international transaction or both for the purpose of safe harbour.

Explanation.—For purposes of this sub-rule the facts and circumstances include:—

(a)  functional profile of the assessee in respect of the international transaction;

(b)  the risks being undertaken by the assessee;

(c)  the substantive contractual conditions governing the role of the assessee in respect of the international transaction;

(d)  the conduct of the assessee as referred to in sub-rule (2) or sub-rule (3) of rule 10TB; or

(e)  the substantive nature of the international transaction.

(11) The Transfer Pricing Officer on receipt of a reference under sub-rule (10) shall, by an order in writing, determine the validity or otherwise of the option exercised by the assessee for the relevant year after providing an opportunity of being heard to the assessee and cause a copy of the said order to be served on the assessee and the Assessing Officer.

(12) Nothing contained in this rule shall affect the power of the Assessing Officer to make a reference under section 92CA in respect of international transaction other than the eligible international transaction.

(13) Where no option for safe harbour has been exercised under sub-rule (1) by an eligible assessee in respect of an eligible international transaction entered into by the assessee or the option exercised by the assessee is held to be invalid, the arm’s length price in relation to such international transaction shall be determined in accordance with the provisions of sections 92C and 92CA without having regard to the profit margin or the rate of interest or commission as specified in sub-rule (2) 6[or, as the case may be, sub-rule (2A)] of rule 10TD.

(14) For the purposes of this rule,—

 (i)  no reference under sub-rule(4) shall be made by an Assessing Officer after expiry of a period of two months from the end of the month in which Form 3CEFA is received by him;

(ii)  no order under sub-rule (6) or sub-rule (11) shall be passed by the Transfer Pricing Officer after expiry of a period of two months from the end of the month in which the reference from the Assessing officer under sub-rule(4) or sub-rule (10), as the case may be, is received by him;

(iii) the order under sub-rule (8) shall be passed by the Commissioner within a period of two months from the end of the month in which the objection filed by the assessee under sub-rule (7) is received by him.

(15) If the Assessing Officer or the Transfer Pricing Officer or the Commissioner, as the case may be, does not make a reference or pass an order, as the case may be, within the time specified in sub-rule (14), then the option for safe harbour exercised by the assessee shall be treated as valid.]

 

Minimum criteria for Safe Harbour and Applicable rates in case of eligible transactions – Rule 10TD of the Income Tax Rules, 1962

Minimum limit for Safe Harbour and applicable rates in case of various sectors are prescribed in the transfer pricing rules, as per Rule 10TD(2) applicable from AY 2013-14 to AY 2017-18 and Rule 10TD(2A) applicable from AY 2017-18 to AY 2019-20 (now extended to AY 2020-21 as per the notification dt. 20th May, 2020)

 

[10TD. (1) Where an eligible assessee has entered into an eligible international transaction and the option exercised by the said assessee is not held to be invalid under rule 10TE, the transfer price declared by the assessee in respect of such transaction shall be accepted by the income-tax authorities, if it is in accordance with the circumstances as specified in sub-rule (2) [or, as the case may be, sub-rule (2A)].

(2) The circumstances referred to in sub-rule (1) in respect of the eligible international transaction specified in column (2) of the Table below shall be as specified in the corresponding entry in column (3) of the said Table:—

 

Sl. No.

Eligible International Transaction

Circumstances

 

(1)

(2)

(3)

 

1.

Provision of software development services referred to in item (i) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is –

(i) not less than 20 per cent, where the aggregate value of such transactions entered into during the previous year does not exceed a sum of five hundred crore rupees; or

(ii) not less than 22 per cent, where the aggregate value of such transactions entered into during the previous year exceeds a sum of five hundred crore rupees.

 

2.

Provision of information technology enabled services referred to in item (ii) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is –

 (i)  not less than 20 per cent, where the aggregate value of such transactions entered into during the previous year does not exceed a sum of five hundred crore rupees; or

(ii) not less than 22 per cent, where the aggregate value of such transactions entered into during the previous year exceeds a sum of five hundred crore rupees.

 

3.

Provision of knowledge process outsourcing services referred to in item (iii) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 25 per cent.

 

4.

Advancing of intra-group loans referred to in item (iv) of rule 10TC where the amount of loan does not exceed fifty crore rupees.

The Interest rate declared in relation to the eligible international transaction is not less than the base rate of State Bank of India as on 30th June of the relevant previous year plus 150 basis points.

 

5.

Advancing of intra-group loans referred to in item (iv) of rule 10TC where the amount of loan exceeds fifty crore rupees.

The Interest rate declared in relation to the eligible international transaction is not less than the base rate of State Bank of India as on 30th June of the relevant previous year plus 300 basis points.

 

6.

Providing corporate guarantee referred to in sub-item (a) of item (v) of rule 10TC.

The commission or fee declared in relation to the eligible international transaction is at the rate not less than 2 per cent per annum on the amount guaranteed.

 

7.

Providing corporate guarantee referred to in sub-item (b) of item (v) of rule 10TC.

The commission or fee declared in relation to the eligible international transaction is at the rate not less than 1.75 per cent. per annum on the amount guaranteed.

 

8.

Provision of contract research and development services wholly or partly relating to software development referred to in item (vi) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 30 per cent.

 

9.

Provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs referred to in item (vii) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 29 per cent.

 

10.

Manufacture and export of core auto components referred to in item (viii) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 12 per cent.

 

11.

Manufacture and export of non-core auto components referred to in item (ix) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 8.5 per cent.

 

 

 

 

[(2A) The circumstances referred to in sub-rule (1) in respect of the eligible international transaction specified in column (2) of the Table below shall be as specified in the corresponding entry in column (3) of the said Table:—

 

Sl. No.

Eligible International Transaction

Circumstances

 

(1)

(2)

(3)

 

1.

Provision of software development services referred to in item (i) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is –

 (i) not less than 17 per cent, where the value of international transaction does not exceed a sum of one hundred crore rupees; or

 (ii) not less than 18 per cent, where the value of international transaction exceeds a sum of one hundred crore rupees but does not exceed a sum of two hundred crore rupees.

 

2.

Provision of information technology enabled services referred to in item (ii) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is –

  (i) not less than 17 per cent, where the aggregate value of such transactions entered into during the previous year does not exceed a sum of one hundred crore rupees; or

 (ii) not less than 18 per cent, where the aggregate value of such transactions entered into during the previous year exceeds a sum of one hundred crore rupees but does not exceed a sum of two hundred crore rupees.

 

3.

Provision of knowledge process outsourcing services referred to in item (iii) of rule 10TC.

The value of international transaction does not exceed a sum of two hundred crore rupees and the operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is –

  (i) not less than 24 per cent. and the Employee Cost in relation to the Operating Expense is at least sixty per cent.

 (ii) not less than 21 per cent. and the Employee Cost in relation to the Operating Expense is forty per cent. or more but less than sixty per cent. or

(iii) not less than 18 per cent and the Employee Cost in relation to the Operating Expense does not exceed forty per cent.

 

4.

Advancing of intra-group loans referred to in item (iv) of rule 10TC where the amount of loan is denominated in Indian Rupees (INR).

The interest rate declared in relation to the eligible international transaction is not less than the one-year marginal cost of funds lending rate of State Bank of India as on 1st April of the relevant previous year plus,-

  (i) 175 basis points, where the associated enterprise has CRISIL credit rating between AAA to A or its equivalent;

 (ii) 325 basis points, where the associated enterprise has CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent;

(iii) 475 basis points, where the associated enterprise has CRISIL credit rating between BB to B or its equivalent;

(iv) 625 basis points, where the associated enterprise has CRISIL credit rating between C to D or its equivalent; or

 (v) 425 basis points, where credit rating of the associated enterprise is not available and the amount of loan advanced to the associated enterprise including loans to all associated enterprises in Indian Rupees does not exceed a sum of one hundred crore rupees in the aggregate as on 31st March of the relevant previous year.

 

5.

Advancing of intra-group loans referred to in item (iv) of rule 10TC where the amount of loan is denominated in foreign currency.

The interest rate declared in relation to the eligible international transaction is not less than the six-month London Inter-Bank Offer Rate of the relevant foreign currency as on 30th September of the relevant previous year plus, –

  (i) 150 basis points, where the associated enterprise has CRISIL credit rating between AAA to A or its equivalent;

 (ii) 300 basis points, where the associated enterprise has CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent;

(iii) 450 basis points, where the associated enterprise has CRISIL credit rating between BB to B or its equivalent;

(iv) 600 basis points, where the associated enterprise has CRISIL credit rating between C to D or its equivalent; or

(v) 400 basis points, where credit rating of the associated enterprise is not available and the amount of loan advanced to the associated enterprise including loans to all associated enterprises does not exceed a sum equivalent to one hundred crore Indian rupees in the aggregate as on 31st March of the relevant previous year.

 

6.

Providing corporate guarantee referred to in sub-item (a) or sub-item (b) of item (v) of rule 10TC.

The commission or fee declared in relation to the eligible international transaction is at the rate not less than one per cent per annum on the amount guaranteed.

 

7.

Provision of contract research and development services wholly or partly relating to software development referred to in item (vi) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24 per cent, where the value of the international transaction does not exceed a sum of two hundred crore rupees.

 

8.

Provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs referred to in item (vii) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24 per cent, where the value of the international transaction does not exceed a sum of two hundred crore rupees.

 

9.

Manufacture and export of core auto components referred to in item (viii) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 12 per cent.

 

10.

Manufacture and export of non-core auto components referred to in item (ix) of rule 10TC.

The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 8.5 per cent.

 

11.

Receipt of low value-adding intra-group services in item (x) of rule 10TC.

The entire value of the international transaction, including a mark-up not exceeding 5 per cent., does not exceed a sum of ten crore rupees:

Provided that the method of cost pooling, the exclusion of shareholder costs and duplicate costs from the cost pool and the reasonableness of the allocation keys used for allocation of costs to the assessee by the overseas associated enterprise, is certified by an accountant.]

(3) The provisions of subrules (1) and (2) shall apply for the assessment year 2013-14 and four assessment years immediately following that assessment year.

[(3A) The provisions of sub-rules (1) and (2A) shall apply for the assessment year 2017-18 and two assessment years immediately following that assessment year:

Provided that where an eligible assessee is eligible to exercise option under sub-rule (2) or, as the case may be, sub-rule (2A) above, the assessee shall have the right to choose the option which is most beneficial to him.]

[(3B) The provisions of sub-rules (1) and (2A) shall apply for the assessment year 2020-21]

(4) No comparability adjustment and allowance under the second proviso to sub-section (2) of section 92C shall be made to the transfer price declared by the eligible assessee and accepted under sub-rules (1) and (2) 5[or, as the case may be, (2A)] above.

(5) The provisions of sections 92D and 92E in respect of an international transaction shall apply irrespective of the fact that the assessee exercises his option for safe harbour in respect of such transaction.]

 

Safe harbour rules not to apply in certain cases – Rule 10TF of the Income Tax Rules, 1962

Safe harbour rules shall not apply if an Associate Enterprise is located in any country or territory notified under Section 94A of the Act, or a country or territory which is subjected to low tax (less than 15% tax rate).

 

[10TF. Nothing contained in rules 10TA, 10TB, 10TC, 10TD or rule 10TE shall apply in respect of eligible international transactions entered into with an associated enterprise located in any country or territory notified under section 94A or in a no tax or low tax country or territory.]

 

Mutual Agreement Procedure not to apply – Rule 10TG of the Income Tax Rules, 1962

If the assessee has been allowed the Safe Harbour rates as per these provisions, it shall not be entitled to invoke mutual agreement procedure under any other agreement for avoidance of DTAA between India and that country.

 

[10TG. Where transfer price in relation to an eligible international transaction declared by an eligible assessee is accepted by the income-tax authorities under section 92CB, the assessee shall not be entitled to invoke mutual agreement procedure under an agreement for avoidance of double taxation entered into with a country or specified territory outside India as referred to in section 90 or 90A.]

 

Definitions – Section 10TA of the Income Tax Rules, 1962

The various terms mentioned in Rule 10TB to Rule 10G are defined in Rule 10A.

 

[10TA. For the purposes of this rule and rule 10TB to rule 10TG,—

[(a) “accountant” means an accountant referred to in the Explanation below sub-section (2) of section 288 of the Act and includes any person recognised for undertaking cost certification by the Government of the country where the associated enterprise is registered or incorporated or any of its agencies, who fulfils the following conditions, namely:—

  (I) if he is a member or partner in any entity engaged in rendering accountancy or valuation services then,—

  (i) the entity or its affiliates have presence in more than two countries; and

 (ii) the annual receipt of the entity in the year preceding the year in which cost certification is undertaken exceeds ten crore rupees;

 (II) if he is pursuing the profession of accountancy individually or is a valuer then,—

  (i) his annual receipt in the year preceding the year in which cost certification is undertaken, from the exercise of profession, exceeds one crore rupees; and

 (ii) he has professional experience of not less than ten years.]

[(aa)] “contract research and development services wholly or partly relating to software development” means the following, namely:—

  (i)  research and development producing new theorems and algorithms in the field of theoretical computer science;

 (ii)  development of information technology at the level of operating systems, programming languages, data management, communications software and software development tools;

(iii)  development of Internet technology;

(iv)  research into methods of designing, developing, deploying or maintaining software;

(v)  software development that produces advances in generic approaches for capturing, transmitting, storing, retrieving, manipulating or displaying information;

(vi)  experimental development aimed at filling technology knowledge gaps as necessary to develop a software programme or system;

(vii) research and development on software tools or technologies in specialised areas of computing (image processing, geographic data presentation, character recognition, artificial intelligence and such other areas);or

(viii) upgradation of existing products where source code has been made available by the principal [, except where the source code has been made available to carry out routine functions like debugging of the software];

(b)  “core auto components” means,—

 (i)  engine and engine parts, including piston and piston rings, engine valves and parts cooling systems and parts and power train components;

(ii)  transmission and steering parts, including gears, wheels, steering systems, axles and clutches;

(iii)  suspension and braking parts, including brake and brake assemblies, brake linings, shock absorbers and leaf springs;

(c) “corporate guarantee” means explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short-term or long-term borrowing.

Explanation.—For the purposes of this clause, explicit corporate guarantee does not include letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of similar nature;

[(ca) “employee cost” includes,—

   (i) salaries and wages;

  (ii) gratuities;

 (iii) contribution to Provident Fund and other funds;

 (iv) the value of perquisites as specified in clause (2) of section 17 of the Act;

  (v) employment related allowances, like medical allowance, dearness allowance, travel allowance and any other allowance;

 (vi) bonus or commission by whatever name called;

(vii) lump sum payments received at the time of termination of service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments;

(viii) expenses incurred on contractual employment of persons performing tasks similar to those performed by the regular employees;

 (ix) outsourcing expenses, to the extent of employee cost, wherever ascertainable, embedded in the total outsourcing expenses:

Provided that where the extent of employee cost embedded in the total outsourcing expenses is not ascertainable, eighty per cent of the total outsourcing expenses shall be deemed to be the employee cost embedded in the total outsourcing expenses;

  (x) recruitment expenses;

 (xi) relocation expenses;

(xii) training expenses;

(xiii) staff welfare expenses; and

(xiv) any other expenses related to employees or the employment;]

(d) “generic pharmaceutical drug” means a drug that is comparable to a drug already approved by the regulatory authority in dosage form, strength, route of administration, quality and performance characteristics, and intended use;

(e) “information technology enabled services” means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:—

 (i)  back office operations;

(ii)  call centres or contact centre services;

(iii) data processing and data mining;

(iv) insurance claim processing;

(v)  legal databases;

(vi) creation and maintenance of medical transcription excluding medical advice;

(vii) translation services;

(viii) payroll;

(ix)  remote maintenance;

 (x)  revenue accounting;

(xi)  support centres;

(xii) website services;

(xiii) data search integration and analysis;

(xiv) remote education excluding education content development; or

(xv) clinical database management services excluding clinical trials,

but does not include any research and development services whether or not in the nature of contract research and development services;

(f)  “intra-group loan” means loan advanced to wholly owned subsidiary being a non-resident, where the loan—

  (i)  is sourced in Indian rupees;

 (ii)  is not advanced by an enterprise, being a financial company including a bank or a financial institution or an enterprise engaged in lending or borrowing in the normal course of business; and

(iii)  does not include credit line or any other loan facility which has no fixed term for repayment;

(g) “knowledge process outsourcing services” means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:—

 (i)  geographic information system;

(ii)  human resources services;

(iii) engineering and design services;

(iv) animation or content development and management;

(v)  business analytics;

(vi) financial analytics; or

(vii) market research,

but does not include any research and development services whether or not in the nature of contract research and development services;

[(ga) “low value-adding intra-group services” means services that are performed by one or more members of a multinational enterprise group on behalf of one or more other members of the same multinational enterprise group and which,—

   (i) are in the nature of support services;

  (ii) are not part of the core business of the multinational enterprise group, i.e., such services neither constitute the profit-earning activities nor contribute to the economically significant activities of the multinational enterprise group;

 (iii) are not in the nature of shareholder services or duplicate services;

 (iv) neither require the use of unique and valuable intangibles nor lead to the creation of unique and valuable intangibles;

  (v) neither involve the assumption or control of significant risk by the service provider nor give rise to the creation of significant risk for the service provider; and

 (vi) do not have reliable external comparable services that can be used for determining their arm’s length price, but does not include the following services, namely:—

  (i) research and development services;

 (ii) manufacturing and production services;

(iii) information technology (software development) services;

(iv) knowledge process outsourcing services;

 (v) business process outsourcing services;

(vi) purchasing activities of raw materials or other materials that are used in the manufacturing or production process;

(vii) sales, marketing and distribution activities;

(viii) financial transactions;

(ix) extraction, exploration, or processing of natural resources; and

 (x) insurance and reinsurance;]

(h) “non-core auto components” mean auto components other than core auto components;

(i)  “no tax or low tax country or territory” means a country or territory in which the maximum rate of income-tax is less than fifteen per cent;

(j)  “operating expense” means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including [costs relating to Employee Stock Option Plan or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee, reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee, amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of those associated enterprises and which relate to normal operations of the assessee and] depreciation and amortisation expenses relating to the assets used by the assessee, but not including the following, namely:—

 (i)  interest expense;

(ii)  provision for unascertained liabilities;

(iii) pre-operating expenses;

(iv) loss arising on account of foreign currency fluctuations;

(v)  extraordinary expenses;

(vi) loss on transfer of assets or investments;

(vii) expense on account of income-tax; and

(viii) other expenses not relating to normal operations of the assessee:

[Provided that reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee shall be at cost:

Provided further that amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of the associated enterprises and which relate to normal operations of the assessee shall be at cost;]

(k)  “operating revenue” means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations [including costs relating to Employee Stock Option Plan or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee] but not including the following, namely:—

 (i)  interest income;

(ii)  income arising on account of foreign currency fluctuations;

(iii) income on transfer of assets or investments;

(iv) refunds relating to income-tax;

(v)  provisions written back;

(vi) extraordinary incomes; and

(vii) other incomes not relating to normal operations of the assessee.

(l)  “operating profit margin” in relation to operating expense means the ratio of operating profit, being the operating revenue in excess of operating expense, to the operating expense expressed in terms of percentage;

[(la) “relevant previous year” means the previous year relevant to the assessment year in which the option for safe harbour is validly exercised;]

(m) “software development services” means,—

 (i)  business application software and information system development using known methods and existing software tools;

(ii)  support for existing systems;

(iii) converting or translating computer languages;

(iv) adding user functionality to application programmes;

(v)  debugging of systems;

(vi) adaptation of existing software; or

(vii) preparation of user documentation,

but does not include any research and development services whether or not in the nature of contract research and development services.]

 

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