Few Concepts on Safe Harbor Rules:

Ø  Exemption from TP documentation if international transaction is less than one crore and no TP audit is international transaction is less than 15 Crore.

Ø  The transfer price contained in the safe harbor rules shall be applicable for five years beginning from financial year (FY) 2012-13.

Ø  The safe harbor rules, optional for a taxpayer, contain the conditions and  circumstances under which the norms/margins would be accepted by the Tax Authority and the related compliance obligations 

Ø  The taxpayer has flexibility in electing the years to be governed by the safe harbor rules within the five year period

Ø  Where a taxpayer’s transfer price is accepted by the Tax Authority under the safe harbor rules, the taxpayer shall not be entitled to invoke the mutual agreement procedure (MAP) under an applicable tax treaty.

Ø  Any taxpayer who has entered into an eligible international transaction and who wishes to exercise the option to be governed by the safe harbor rules is required to file a specified form (Form 3CEFA) and furnish it before the due date for filing the tax return.

Ø  International transactions and applicable safe harbor transfer price

The transfer price declared by an eligible taxpayer shall be accepted by the Tax Authorities for the below mentioned international transactions (eligible international transactions) subject to the ceilings/circumstances stated as under:

Eligible international transaction	As per the draft rules		As per the final rules
	Threshold limit prescribed	Safe harbor margin	Threshold limit prescribed	Safe harbor margin
Provision of software development services other than contract R&D with insignificant risks	Up to INR 1 billion	20 % or more on total operating costs	Up to INR 5 billion	20 % or more on total operating costs
			Above INR 5 billion	22 % or more on total operating costs
Provision of information technology enabled services other than contract R&D with insignificant risks	Up to INR 1 billion	20 % or more on total operating costs	Up to INR 5 billion	20 % or more on total operating costs
			Above INR 5 billion	22 % or more on total operating costs
Provision of information technology enabled services being knowledge processes outsourcing services other than contract R&D with insignificant risks	Up to INR 1 billion	30 % or more on total operating costs	Threshold limit removed	25 % or more on total operating costs
Advancing of intra-group loan to a nonresident wholly owned subsidiary	Up to INR 500 million	The Interest rate declared in relation to the international transaction, is equal to or greater than the base rate of State Bank of India (SBI) as of 30 June of the relevant previous year plus 150 basis points	No change
Advancing of intra-group loan to a nonresident wholly owned subsidiary	Above INR 500 million	The Interest rate declared in relation to the international transaction is equal to or greater than the base rate of SBI as of 30 June of the relevant previous year plus 300 basis points	No change
Providing explicit corporate guarantee to wholly owned subsidiary (WOS)	Up to INR 1 billion	The commission or fee declared in relation to the international transaction is at the rate of 2% or more per annum on the amount guaranteed	Up to INR 1 billion	The commission or fee declared in relation to the international transaction is at the rate of 2% or more per annum on the amount guaranteed
			Above INR 1 billion, provided the WOS has been rated to be of adequate to highest safety by a rating agency registered with SEBI	The commission or fee declared in relation to the international transaction is at the rate of 1.75% or more per annum on the amount guaranteed
Provision of specified contract R&D services wholly or partly relating to software development with insignificant risks	No limit	30% or more on total operating costs	No change
Provision of contract R&D services wholly or partly relating to generic pharmaceutical drugs with insignificant risks	No limit	29% or more on total operating costs	No change
Manufacture and export of core auto components	No limit	12% or more on total operating costs	No change
Manufacture and export of noncore auto components where 90% or more of total turnover during the relevant previous year is in the nature of original equipment manufacturer (OEM) sales

Ø  It should be noted that even where a taxpayer opts for the safe harbour scheme, it should continue to maintain contemporaneous transfer pricing documentation and furnish the transfer pricing certificate from a chartered accountant in Form 3CEB. Where a taxpayer opts for the safe harbour scheme, it is also precluded from seeking recourse to the Mutual Agreement Procedure.    

Ø  In which situations typically would we see tax authorities challenging the eligibility?

Tax authorities could challenge the eligibility:

§  Where the taxpayer is not an entity bearing insignificant risk in respect of IT / ITES / KPO / software R&D / pharma R&D.

§  Where the facts and circumstances on the basis of which the safe harbour option was exercised have changed and the AO has a reason to doubt the eligibility for a subsequent AY. The facts and circumstances could relate to the functional or risk profile of the taxpayer in respect of the transaction, contractual conditions in respect of the transaction, conduct of the taxpayer in respect of the transaction or the substantive nature of the transaction.