Final Safe Harbour Rules notified by the CBDT

 

Safe harbour refers to circumstances under which the Indian Revenue Authorities (‘IRA’)would accept the transfer price declared by the taxpayer. The Central Board of Direct Taxes (‘CBDT’) had issued Draft Safe Harbour Rules on August 14, 2013 inviting comments from various stakeholders. After considering comments received from interested parties, the CBDT has now issued final safe harbour rules on September 18, 2013.

Key changes in the final Safe Harbour Rules vis-a-vis draft Safe Harbour Rules

· The draft rules prescribed safe harbourfor two financial years (‘FYs’) - FY 2012-13 and FY2013-14. However, the final rules now prescribe safe harbour for five FYs commencing from FY2012-13. The taxpayer may opt for safe harbour regime either for one or more year subject to maximum period of five years by furnishing Form 3CEFA.

· Under the draft rules, the safe harbour option had to be exercised for each tax year separately. However, under the final rules, safe harbour option can be exercised by furnishing the prescribed Form 3CEFA with the Assessing Officer (‘AO’) on or before the due date of filing the return of income:

- For the relevant FY, in case the option is exercised only for that FY; or

- The first of the FYs, in case the option is exercised for more than one FY.

· Once safe harbour option is exercised for more than one FY, taxpayer is merely required to file a declaration in the subsequent FYs for availing the safe harbour than filing the detailed Form 3CEFA. Also, the taxpayer has been given an option to out of the safe harbour where he has earlier opted for more than one FY.

· The draft rules restricted the availability of safe harbour in the case of software development, IT enabled services (‘ITeS’) and knowledge process outsourcing services (‘KPO’)to instances where the value of these international transactions during a FY exceeded INR 1,000 mn. This monetary threshold has now been dispensed with in the final rules.

· In respect of corporate guarantee, the final rules have laid down the following conditions for availing safe harbours:

- The quantum of corporate guarantee does not exceed INR 1,000 mn; or

- In case the amount of guarantee exceeds INR 1,000 mn, the credit rating of the associated enterprise (‘AE’), done by an agency registered with the Securities and Exchange Board of India, is of the adequate to highest safety.

· Regarding definition of international transactions covered under safe harbour, the final rules make the following changes vis-a-vis the draft rules:

- Corporate guarantee now excludes letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of similar nature.

- Generic pharmaceutical drug is defined as a drug which 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.

- KPO services restricted to only those specified services which require application of knowledge and advanced analytical and technical skills.

· Safe harbour for KPO services has been reduced from cost plus 30 percent to 25 percent in the final rules.

· The final rules lay down detailed procedure for verification of the safe harbour by the Assessing Officer (‘AO’). The procedure entails the following:

- The AO to make a reference to the Transfer Pricing Officer (‘TPO’)to verify validity of safe harbour in case he has doubts. The reference has to be made within two months from the end of the month in which Form 3CEFA is received by the AO;

- After examination of facts, the TPO may pass an order deciding on the validity or otherwise of the safe harbour option exercised by the taxpayer. Nosuch order can be passed after expiry of two months from the end of the month in which reference is made by the AO to the TPO; and

- Taxpayer can approach the Commissioner against the safe harbour rejection order of the TPO within fifteen days of the date of receipt of such order. The Commissioner has to decide the matter within two months from the end of the month in which the objection is filed by the taxpayer.

· Once a safe harbour option is exercised for more than one FY by the taxpayerand the same is declared to be valid by the AO in the first FY, the AO cannot re-examine the same in respect of subsequent FYs unless there is a change in the facts and circumstances.

The following table summarises the safe harbour for various international transactions:

Eligible international transaction	Safe harbour margin
Software development services / ITeS	· Where value of services during a tax year does not exceed INR 5,000 mn - Net cost plus mark-up (NCP) of 20 percent; and · In other cases - NCP of 22 percent
KPO services	· NCP of 25 percent
Advancing of intra-group loan to wholly owned subsidiaries (‘WOS’)	· Where the value of loan advanced does not exceed INR 500 mn - Interest rate of base rate of State Bank of India (‘SBI’) as on June 30 of FY plus 150 basis points; and · In other cases - Interest rate of base rate of State Bank of India (‘SBI’) as on June 30 of FY plus 300 basis points
Providing corporate guarantee to WOS	· Where amount guaranteed does not exceed INR 1,000 mn - 2 percent per annum on the amount guaranteed · Where amount guaranteed exceeds INR 1,000 mn and credit rating of the AE is of adequate to highest safety - 1.75 percent per annum on the amount guaranteed
Contract research and development (‘R&D’) services wholly or partly relating to software development	· NCP of 30 percent
Contract R&D services wholly or partly related to generic pharmaceutical drugs	· NCP of 29 percent
Manufacture and export of auto components	· Core auto components - NCP of 12 percent · Non-core auto components - NCP of 8.5 percent