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Statement by CBDT on Safe Harbour Rules Under Section 92CB of the Act
In order to reduce the increasing number of transfer pricing audits and prolonged
disputes, the Finance (No.2) Act, 2009 w.r.e.f 1.4.2009 inserted a new section 92CB to
provide that determination of arm's length price under section 92C or Section 92CA
shall be subject to safe harbour rules. Vide this amendment, the Government of India
had empowered the CBDT to make Safe Harbour rules. "Safe harbour" was defined to
mean circumstances in which the income-tax authorities shall accept the transfer price
declared by the assessee.
Thereafter, the issuance of the Safe Harbour Rules was examined and discussed at
various points of time, but no finality could be reached. Since a number of
representations were received from different stakeholders to prescribe the safe harbour
rules, the Prime Minister on July, 30, 2012 approved the constitution of a Committee to
Review Taxation of Development Centres and the IT sector consisting of Shri N.
Rangachary, Chairman of the Committee and three others (hereinafter called the
Rangachary Committee) with broad terms of reference as under:
1. Engage in consultations with stakeholders and related government
departments to finalize the approach to Taxation of Development Centres and
suggest any circulars that need to be issued.
2. Engage in sector-wise consultations and finalize the safe harbour provisions
announced in Budget 2010, sector-by-sector. The Committee will also suggest
any necessary circulars that may need to be issued.
3. Examine issues relating to taxation of IT sector and suggest any clarifications
that may be required
Subsequently, the Government of India vide OM dated 12th September, 2012
approved the considered suggestion of the Rangachary Committee that it may finalize
the Safe Harbour Rules in the following sector/ activities:
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(i) IT Sector
(ii) ITES Sector
(iii) Contract R&D in the IT and Pharmaceutical Sector
(iv) Financial transactions-Outbound loans
(v) Financial Transactions-Corporate Guarantees
(vi) Auto Ancillaries-Original Equipment Manufacturers
The Rangachary Committee consulted various stakeholders including sector related
government departments, NASSCOM, CII, FICCI, ASSOCHAM, ICAI, etc. and submitted six
reports on Taxation of Development Centres and IT Sector and other sectors as referred
to in the OM dated 12th September, 2013.
On the basis of the recommendations of the Rangachary Committee in the first
report on Taxation of Development Centres and IT Sector (which was posted on the
website of the income tax department www.incometaxindia.gov.in on 30th June, 2013),
CBDT has issued the following circulars:
· Circular No. 1/2013 dtd. 17th January, 2013 on issues relating to Export of
Computer Software under sections 10A, 10AA and 10B of the Act.
· Circular No. 6/2013 dtd. 29th June, 2013 on Conditions Relevant to Identify
Development Centres engaged in Contract R&D Services with Insignificant Risk.
The Government of India has considered the other five reports of the Rangachary
Committee. The major recommendations of the Rangachary Committee have been
accepted, with some modifications, and the following decisions have been taken by
Government:
(1) Safe harbour for the sectors recommended by the Rangachary Committee shall be
applicable for two assessment years beginning from 2013-14.
(2) Safe harbour for various sectors, subject to certain ceilings, shall be as under
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SNo International Transaction Circumstances
(1) (2) (3)
1. Provision of software The operating profit margin declared in
development services other than relation to operating expense incurred is 20
contract R&D where the total per cent or more.
value of international transaction
does not exceed Rs 100 crore
2. Provision of information The operating profit margin declared in
technology enabled services relation to operating expense is 20 per
other than contract R&D where cent. or more.
the total value of international
transaction does not exceed Rs
100 crore
3. Provision of information The operating profit margin declared in
technology enabled services relation to operating expense is 30 per
being knowledge processes cent. or more.
outsourcing services other than
contract R&D where the total
value of international transaction
does not exceed Rs 100 crore
4. Advancing of intra-group loan to The Interest rate declared in relation to the
wholly owned subsidiary where international transaction, is equal to or
the amount of loan does not greater than the base rate of State Bank of
exceed Rs 50 crore . India (SBI) as on 30th June of the relevant
previous year plus 150 basis points.
5. Advancing of intra-group loans to The Interest rate declared in relation to the
wholly owned subsidiary where international transaction is equal to or
the amount of loan exceeds Rs. greater than the base rate of SBI as on 30th
50 crore. June of the relevant previous year plus 300
basis points.
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6. Providing explicit corporate The commission or fee declared in relation
guarantee to wholly owned to the international transaction is at the
subsidiary where the amount rate of 2 per cent or more per annum on
guaranteed does not exceed Rs. the amount guaranteed.
100 crore.
7. Provision of specified contract The operating profit margin declared in
research and development relation to operating expense incurred is 30
services wholly or partly relating per cent. or more.
to software development.
8. Provision of contract research The operating profit margin declared in
and development services relation to operating expense incurred is 29
wholly or partly relating to per cent. or more.
generic pharmaceutical drugs.
9 Manufacture and export of core The operating profit margin declared in
auto components relation to operating expense is 12 per
cent. or more.
10. Manufacture and export of non- The operating profit margin declared in
core auto components. relation to operating expense is 8.5 per
cent. or more.
(3) Safe harbour rules shall not be applicable in respect of an international transaction
entered into with an associated enterprise located in any country or territory notified
under section 94A of the Income-tax Act, 1961, or in a no tax or low tax country or
territory.
(4) Safe harbour rules shall be applicable only where a taxpayer exercises his option to
be governed by such rules in a specified form to be furnished before the due date of
filing of return.
(5) Where the Transfer Pricing Officer is of the opinion that the option exercised by the
assessee is valid, he shall intimate acceptance of transfer price declared by the assessee
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to the assessing officer and the assessee within a period of six months from the end of
the month in which reference under section 92CA is received from the assessing officer.
Where he is of the opinion that the option exercised is not valid, he shall proceed to
determine the arm's length price in respect of the international transactions entered into by
the assessee in accordance with sections 92C and 92CA without having regard to the sfae
harbour margin or price as specified in the rules.
(6) A taxpayer opting for safe harbour rules shall not be allowed to invoke Mutual
Agreement Procedure (MAP) provided under the relevant DTAAs.
(7) Where the safe harbour rules are not applicable in the case of an assessee, engaged
in providing contract research and development services with insignificant risks, the
Transactional Net Margin Method (TNMM) shall be considered as the most appropriate
method for the determination of arm's length price unless it is shown by the assessee
that it is not feasible to apply this method in the facts and circumstances of the case.
The draft rules along with the Second to the Sixth report of the Rangachary Committee
have been posted on the website of the Income-tax Department. All stakeholders are
requested to provide their comments, if any, by 26th August, 2013 to the Director
(FT&TR) at her email id batsala.yadav@nic.in
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