Form 3 CEB Archives

All about Safe Harbor Rules in India- Know the Safe Harbor rates in India The concept of Safe Harbor Rules: Transfer pricing (TP) provisions are aimed at ensuring that transactions entered into between related parties are carried out on an arm’s length basis. Globally, TP has helped governments to address concerns of irregular margins and profit shifting and also in keeping a check on possible tax leakages in cross-border intra-group transactions. In this article, we'll be discussing Safe Harbor Rule in India and Safe Harbor Rates. Safe Harbor refers to a legal provision to reduce or eliminate liability in certain situations as long as certain conditions are met. A safe Harbor is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule. Safe Harbors provide 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. Safe Harbor Rules in Indian Transfer Pricing Regime: To put indifferently, from the perspective of Transfer Pricing (‘TP’) provisions the SHR provides a window for the taxpayers wherein in case of defined circumstances the income-tax authorities shall accept the TP declared by the taxpayer. In India Section 92CB of the Income Tax Act (‘ITA’) defines the term Safe Harbor as circumstances under which the income tax authorities shall accept the transfer pricing declared by the assessee. Read to know more on Transfer pricing at Arm's length in India 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 Harbor Rules in India has been defined in Rule 10TB. 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. 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 The assessee who is engaged in providing contract research and development services wholly or partly relating to generic pharmaceuticals drugs, with insignificant risk, to a foreign principal An assessee engaged in manufacture and export of core or non-core auto components and where ninety percent or more of total turnover during the relevant previous year is in nature of original equipment manufacturer sales Who is in receipt of low-value-adding intra-group services from one or more members of its group? Note: It is very important to note that only eligible assessee will be entitled to apply for safe Harbor provisions, therefore each and every word of definition plays a vital role. The important terminologies/words are defined in the SHR. Safe Harbor Rates for the Fiscal year 2020-21 With the new notification, dated May 20, CBDT notified changes to Rule 10TD and 10TE of the Income Tax Rules, 1962, relating to SHR that provide that rates applicable from assessment year (AY) 2017-18 to 2019-20 will continue to apply for AY 2020-21 as well. 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. The following table shows the relevant safe harbor rates and thresholds for specific types of international transactions: Type of international transaction Monetary threshold Safe harbor rates Software development services and information technology-enabled services Up to INR 1 billion 17% INR 1 billion to INR 2 billion 18% Knowledge process outsourcing services Up to INR 2 billion, where employee cost to total cost ratio is: Up to 40% 18% 40% to 60% 21% More than 60% 24% Contract research and development services relating to software development, or generic pharmaceutical drugs Up to INR 2 billion 24% Intragroup loans denominated in INR CRISIL (formerly Credit Rating Information Services of India Limited) rating of the associated enterprise (AE): One year marginal cost of funds lending rate of State Bank of India as of 1 April 2019 plus: AAA to A (or equivalent) 175 basis points (bps) BBB-, BBB, BBB+ (or equivalent) 325 bps BB to B (or equivalent) 475 bps C to D (or equivalent) 625 bps Credit rating of AE not available, and aggregate of loans advanced to AEs as of 31 March 2020 does not exceed INR 1 billion 425 bps Intra Group loans denominated in foreign currency CRISIL rating of AE: Six month’s LIBOR of the relevant currency as of 30 September 2019 plus: AAA to A (or equivalent) 150 bps BBB-, BBB, BBB+ (or equivalent) 300 bps BB to B (or equivalent) 450 bps C to D (or equivalent) 600 bps Credit rating of AE not available, and aggregate of loans advanced to AEs as of 31 March 2020 does not exceed INR 1 billion 400 bps Provision of corporate guarantee No threshold 1% of the amount guaranteed Manufacture and export of core auto components No threshold Operating cost plus 12% Manufacture and export of non-core auto components No threshold Operating cost plus 8.5% Receipt of low value-adding intragroup services (IGS) The total value of IGS does not exceed INR 100 million Value of transactions cannot include a margin of more than 5% Taxpayers opting for the safe harbor rules for FY 2019-20 must file Form 3CEFA with the Assessing Officer on or before the due date for submitting the return of income for FY 2019-20 (i.e., by 30 November 2020). The return must be filed either before, or with Form 3CEFA. Suggested Read: All about filing the form 3CEB- Everything you should know