Safe Harbour Rules

Central Board of Direct Taxes (CBDT) vide a Notification No. 66/2022 dated 17.06.2022 has introduced the Income-tax (18th Amendment) Rules, 2022. With this amendment, CBDT has extended the validity of safe harbor provisions for transfer pricing (TP) issues of Rule 10TD till Assessment Year 2022-23. In this article we will look at the Safe Harbour Rules for AY2022-23 notified vide the Income-tax (18th Amendment) Rules, 2022 in detail. Know more about the procedure for calculating transfer pricing.

Safe Harbor Rules

The Safe Harbor Rules provided the procedure for adopting a safe harbor, the transfer price to be adopted, the compliance procedures upon adoption of a safe harbor, and circumstances in which a safe harbor adopted may be held to be invalid.

Transfer pricing (TP)

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.

Safe Harbors

Safe Harbors provide for circumstances in which a certain category of taxpayers can follow a simple set of rules under which the revenue authorities automatically accept transfer prices

Section 92CB of the Income Tax Act (‘ITA’)

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.

Rule 10TD of Income Tax Rules

Rule 10TD prescribes a list of eligible international transactions where the transfer price declared by the assessee shall be required to be accepted by the Income-tax Authorities.

Rule 10TD (1) and Rule 10TD (2A) of Income Tax Rules

Rule 10TD (1) and Rule 10TD (2A) prescribe a list of eligible international transactions where income-tax authorities shall accept the transfer price declared by the taxpayer at arm’s length. It provides that provisions shall apply for the Assessment Year 2017-18 and the following two Assessment Years. In other words, it shall apply for three AYs from 2017-18 to 2019-20. Later the CBDT has inserted a new sub-rule (3B) to the Rule 10TD to extend the applicability to AY 2020-21 and thereafter till Assessment Year 2021-22.

Safe Harbour Rules for AY2022-23

The CBDT has now amended Rule 10TD (3B) to further extend the applicability of Rule 10TD till Assessment Year 2022-23 with effect from 1st April 2022 vide the Income-tax (18th Amendment) Rules, 2022 The notification explained that the rates contained in safe harbor rules applicable for the Assessment Years 2017-18 to 2019-20 shall continue to apply for the Assessment Year 2022-23 as well.

Benefits of safe Harbor Rules in India

The benefits of safe Harbor Rules in India to the taxpayers and revenue authorities are as follows:

Advance information or knowledge about the range of profits or prices to qualify for SHR. This brings certainty to 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

Eligible Assessee 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
An assessee who has made any intra-group loan
A person who has provided a corporate guarantee
A person 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
A person who receives low-value-adding intra-group services from one or more members of its group

Eligible International Transaction

“Eligible International Transaction’’ means an international transaction between the qualified assessee and its related venture, and/or both of whom are non-resident, and which includes the following:

Provisions of software development services.
Provisions of information technology-enabled services.
Provisions of knowledge process outsourcing services.
The advance of intra-group loan.
Provisions of corporate guarantee, where the amount guaranteed, does not exceed one hundred crore rupees; or it exceeds one hundred crore rupees, and the credit rating of the associated enterprise, done by an agency registered with the Securities and Exchange Board of India, is of the adequate to highest safety.
Provisions of contract research and development services wholly or partly in connection with software development.
Provisions of contract research and development services wholly or partly in connection with generic pharmaceutical drugs.
The manufacture and export of non-core auto components.

Non-applicability of Safe Harbor Rules

Safe Harbor Rules rule does not apply to eligible international transactions entered into with an associated enterprise situated in any country or domain notified under Section 94A or in a non-taxable or least-taxable country or territory.

Procedure to opt for Safe Harbour Rules for AY2022-23

The procedure to opt for

Safe Harbour Rules for AY2022-23

Taxpayers who have entered into an eligible international transaction and wish to opt for Safe Harbour Rules for AY2022-23 are required to file a return of income on or before furnishing Form 3CEFA to the Assessing Officer,
Taxpayers opting for safe harbor for AY2022-23 are required to maintain prescribed TP documentation and file the Accountant’s report in Form 3CEB by the due date
Where the transfer price declared by the eligible taxpayer is accepted by the tax authorities, the taxpayer shall not be eligible to invoke the Mutual Agreement Procedure (MAP) under the relevant tax treaty. Further, taxpayers electing the safe harbor will not be able to claim any further adjustment to the price, either on account of comparability differences or the benefit of the range as prescribed under the Income Tax Law.
If the Assessing Officer, Transfer Pricing Officer, or the commissioner, as the case may be, does not make a reference or pass an order within the specified time, then the option for safe harbor exercised by the assessee shall be treated as valid.