The Central Board of Direct Taxes (CBDT) recently notified the revised Safe Harbor Rules. The Notification incorporates some necessary amendments in the rules issued by the Board in the ear 2013.
The Income Tax Act, 1961 was amended in the year 2009 so as to include section 92CB with an aim to reduce the increasing number of transfer pricing audits and litigation.
The term “Safe Harbour” denotes circumstances in which the Tax Authorities shall accept without undertaking a detailed scrutiny, the transfer price declared by the taxpayer in respect of its international transactions with related parties. The Board, on 18.09.2013, notified the âsafe harbourâ rules.
As per the 2013 rules, Safe harbour, i.e. minimum revenue/margin has been prescribed for certain sectors/transactions, implying that if an eligible taxpayer is earning not less than specified revenue/margins in respect of its transactions with its related parties (being non-residents), no further income shall be imputed to it by virtue of application of transfer pricing regulations. Transactions such as software development services, IT enabled services, KPOs, Loan to 100% overseas subsidiaries, Corporate Guarantee for wholly owned subsidiary etc were recognized as eligible international transactions under the rules.
A taxpayer, who wants to avail the benefit of the rules, is required to make an application giving necessary details of transactions to the appropriate authority before due date for filing return of income for the relevant year. The rules were largely criticized due to higher margins and no relief at all from compliance burden.
As per the present ameded rules, Receipt of low value-adding intra-group services, is recognized as an eligible international transaction.
The present Notification reduces the prescribed safe harbor margins for the above eligible international transactions.
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 shall continue to remain in force for two immediately succeeding years thereafter, i.e. up to A.Y. 2019-2020.
- 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.
- A new category of transactions being âReceipt of Low Value-Adding Intra-Group Servicesâ has been introduced.
- The new safe harbour regime is available for transactions limited to Rs. 200 crore in provision of software development services, provision of information technology-enabled 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.
Read the full text of the Notification below.
