India Tax Administration amends the transfer pricing safe harbor rules

A “safe harbour” is defined in the Indian Income Tax Law (ITL) as circumstances in which the tax authorities shall accept the transfer price declared by the taxpayer. India’s Central Board of Direct Taxes (CBDT), the apex Indian tax administration body, first issued transfer pricing (TP) safe harbor rules (SHR) on 18 September 2013, applicable for five years from financial year (FY) 2012-13 to FY 2016-17.

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CBDT has expanded safe harbour rules:

Introduction:
The Safe Harbour Rules provide a structured process for businesses to simplify transfer pricing in international transactions.

These rules help companies avoid disputes with tax authorities by allowing them to declare transfer prices within predefined acceptable limits.

It is governed by Section 92CB of the Income Tax Act, aiming to reduce complexity in transfer pricing regulations.

Key Amendments Introduced:
Extension of Safe Harbour Period:
The applicability of the Safe Harbour provisions has been extended to include Assessment Years (AY) 2025-26 and 2026-27, ensuring continued benefits for qualifying taxpayers.

Inclusion of Lithium-Ion Batteries as Core Auto Components:
The definition of ‘core auto components’ under Rule 10TA now encompasses lithium-ion batteries for use in electric or hybrid electric vehicles. This inclusion aligns with India’s push towards sustainable mobility and provides tax certainty for manufacturers in the electric vehicle sector.

Increase in Threshold Limits for Eligible Transactions:
The monetary threshold for certain international transactions to avail Safe Harbour provisions has been raised from INR 200 crore to INR 300 crore.


Transactions Covered Under Safe Harbour Rules
SHR applies to specified international transactions where taxpayers engage in controlled transactions with their Associated Enterprises (AEs).
The key categories include:
Software Development and ITeS (Information Technology Enabled Services)
If a taxpayer earns at least 17-18% operating profit margin on total cost, the transfer pricing will not be questioned.

Knowledge Process Outsourcing (KPO) Services
Requires a minimum operating profit margin of 18-24% depending on the complexity of services.

Contract Research and Development (R&D) Services
For generic pharmaceutical R&D and software development R&D, a margin of 24% or higher is accepted.

Manufacturing and Auto Components
Inclusion of Lithium-Ion Batteries (2025 Amendment): Recognized as a core auto component under SHR.

Loans Advanced to Foreign Subsidiaries
Interest rates for intra-group loans in foreign currency are based on LIBOR + a fixed spread.

Corporate Guarantees Provided to AEs
The SHR prescribes a minimum guarantee fee of 1-2%