Safe Harbour Concept

The year 1991 was a watershed moment for India. With the opening up of economy came in challenges in the international tax arena. This resulted in beginning of the Indian transfer pricing regime.

Since 2002, there has been a steep escalation in transfer pricing disputes in the country. Under the Indian transfer pricing regime, many transactions are being subjected to adjustment giving rise to considerable disputes. It has been experienced that the outsourced/captive units set-up in India by foreign multinationals have faced significant transfer pricing adjustments to their margins whilst the Indian parent companies have suffered huge adjustments on their intra-group capital financing arrangements during the course of audits over the last few years. This has proven to be a stumbling block for Indian companies acquiring a global reach and attracting foreign direct investment into India as it defeats the very purpose of the offshoring i.e. cost arbitrage and importantly availability of trained man power.

As in the last few years, India has seen a plethora of disputes on the transfer pricing front resulting in astronomical additions to the income of MNEs having business operations in India. Thus, with a view to alleviate the uncertainty faced by such taxpayers and at the same time ensure an acceptable level of taxable profit in India, introduction of safe harbour provisions is a step in the right direction. The CBDT was empowered to make safe harbour rules in India vide Finance Act, 2009.

Safe Harbour – the concept

“Safe harbour refers to a legal provision to reduce or eliminate liability in certain situations as long as certain conditions are met.”

Businesses thrive on certainty and safe-harbour offers just that. A safe harbour is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule. To put in differently, from the perspective of Transfer Pricing (‘TP’) provisions the SHR provides a window for the taxpayers wherein in case of defined circumstances the income-tax authorities shall accept the TP declared by the taxpayer.
Safe harbours provide for circumstances in which a certain category of taxpayers can follow a simple set of rules under which transfer prices are automatically accepted by the revenue authorities. Safe harbour provisions offer essentially benefits to taxpayers and tax administrators with benefits of compliance relief, administrative simplicity and certainty.

The adoption of safe harbour rules provides many perceived benefits both for taxpayers and the revenue authorities like:

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

The above mentioned perceived benefit helps the taxpayers and its counterparts for better planning of intra-group transactions.

An overview of Safe Harbour Rules in Indian Transfer Pricing Regime

Safe Harbour – the Indian version

Section 92CB of the Income Tax Act (‘ITA’) defines the term Safe Harbour as circumstances under which the income tax authorities shall accept the transfer pricing declared by the assessee.

Government of India vide the Finance (No 2) Act 2009 made significant proposals with respect to the Indian transfer pricing provisions, one of which was powers to enact Safe Harbour Rules (‘SHR’) to Central Board of Direct Taxes (‘CBDT’). The first set of rules were notified on 18 September 2013 – Rules 10TA to 10TG and Form 3CEFA (for international transactions) and Rules 10TH to 10THD and Form 3CEFB (for domestic transactions).

However, the safe harbour programme received a tepid response from taxpayers in India, due to perceived high margins and ambiguity in the classification of services. Hence, the CBDT has vide a notification dated 7 June 2017, revised the existing SHR. The important aspects pertaining to these rules are discussed in this article.

Who are the eligible assessees?


The eligible assessee has been defined in Rule 10TB. The eligible assessee are as under,

1. is engaged in providing software development services or information technology enabled services or knowledge process outsourcing services, with in significant risk, to a non-resident associated enterprises; or

2. has made any intra-group loan; or

3. has provided a corporate guarantee; or

4. is engaged in providing contract research and development services wholly or partly relating to software development, with in significant risk, to a foreign principal ; or

5. is engaged in providing contract research and development services wholly or partly relating to generic pharmaceuticals drugs, with in significant risk, to a foreign principal; or

6. in engaged in manufacture and export of core or non-core auto components and where ninety per cent or more of total turnover during relevant previous year is in nature of original equipment manufacturer sales; or

7. is in receipt of low value-adding intra-group services from one or more members of its group.

It is very important to note that only eligible assessee will be entitled to apply for safe harbour provisions, therefore each and every word of definition plays vital role. The important terminologies / words are defined in the SHR.

Which are the eligible transactions?

As per Rule 10TC following class of international transactions between the eligible assessee (as mentioned above) and its associated enterprise are defined as “eligible international transaction” for the purpose of SHR,

1. Provision of software development services;

2. Provision of information technology enabled services;

3. Provision of knowledge process outsourcing services;

4. Advance of intra group loan;

5. Provision of corporate guarantee;

6. provision of contract research and development services wholly or partly relating to software development;

7. provision of contract research and development services wholly or partly relating to generic pharmaceuticals drugs;

8. manufacture and export of core auto components;

9. manufacture and export of non-core components;

10. receipt of low value-adding intra-group services from one or more members of its group.

Minimum criteria for Safe Harbour and Applicable rates in case of eligible transactions

Minimum limit for Safe Harbour and applicable rates in case of various sectors are prescribed in the transfer pricing rules, as per Rule 10TD(2) applicable from AY 2013-14 to AY 2017-18 and Rule 10TD(2A) applicable from AY 2017-18 to AY 2019-20. For details Click here.

The key changes by way of amendments to the SHR are as follows:

Other important points

1. Reduction in Safe Harbour rates for most of the eligible transactions, along with other changes made to the specified circumstances.

2. Introduction of receipt of low value-adding intra-group services to the list of eligible transactions.

3. Modifications to the definitions of ‘operating expense’ and ‘operating revenue’.

4. Applicability of the SHR for three (instead of the erstwhile five) financial years, with the first financial year (FY) being FY 2016-17 upto FY 2018-19.

5. In case the assessee wants to continue under Safe Harbour provision then it can also file a declaration for subsequent periods separately, having the right to choose the safe harbour option most beneficial to them.

6. Even though the assessee opts for SHR, the provision of section 92 D i.e. maintenance of the prescribed documents pertaining to international transactions and sec 92E i.e certificate from Chartered Accountant will continue to apply.

7. Safe harbour rules shall not apply if an Associate Enterprise is located in any country or territory notified under Section 94A of the Act, or a country or territory which is subjected to low tax (less than 15 per cent tax rate).

Procedural requirement

In case an assessee wants to apply for SHR then it will have to follow below mentioned procedure,

• Application to Assessing Officer (AO) on or before the due date of furnishing the return in form 3CEFA.

• The form should clearly specify the period for which the assessee wish to apply for safe harbour rules.

• In case of subsequent assessment years, the assessee should provide details of eligible transactions, their quantum and the profit margins or rate of commission or rate of interest.

• The safe harbour option will not be valid of subsequent period in case the same is held has invalid by appropriate authority for preceding year (i.e. TPO or Commissioner as the case may be).

• The assessee can opt out for safe harbour rules for any subsequent period by filing declaration to that effect to the assessing officer.

• The assessing officer on receipt of the application is required to verify the eligibility. In case required the assessing officer may refer the matter to TPO for ascertaining the eligibility of the assessee.

• The assessing officer / TPO is required to give opportunity of being heard before rejecting the application.

• The assessee can appeal against the rejection order of Assessing Officer / TPO within 15 days of receipt of order.

The SHR provide for a time bound procedure for determination of the eligibility of the assessee and the international transactions. In case the action is not taken by any of the income tax authorities within the prescribed time lines as provided in the rules, the option exercised by the assessee shall be treated as valid.


The notification of the safe harbour rules is one of the welcome development thoughts and conciliatory step towards minimising transfer pricing disputes thereby improving the overall investment climate in India from a tax perspective. However following points which emerge from the discussion and needs to be addressed for better implementation and clarity,

• Global business scenario changes every passing year, the negative / positive impact of the changes should be factored while deciding the ratios or it may not reflect world industry bench mark or Current economic environment. Currently there are no such provision / clarification by CBDT.

• Requirement of maintaining requisite documents pertaining to international transactions has not been done away with. Though one can understand the logic behind it but this kind of partial relief to the assessee.

• There are risks of double taxation since reporting higher than arms-length level of income in one jurisdiction (where SHR adopted) than that of another jurisdiction where SHR are not adopted. Also, the impact of a secondary adjustment will also need to be duly considered by the taxpayers.

• Even though SHR is adopted, lot of subjectivity cannot be avoided since coverage of IT & ITES and R&D are most complex one which requires complete technical analysis.

We hope with better clarity and addressing above points, purpose of bringing SHR will be fulfilled to maximum extent and ultimately the purpose of SHR is achieved.


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