Draft Rule 87 of the Income-tax Rules, 2026 defines the scope of an “eligible assessee” for availing safe harbour rules for international transactions, subject to exercising a valid option under rule 90. Eligible assessees include persons providing low-risk information technology services such as software development, IT-enabled services, knowledge process outsourcing, and contract R&D relating to software to a non-resident associated enterprise (foreign principal). It also covers entities undertaking intra-group loans, providing corporate guarantees, rendering low-risk contract R&D services relating to generic pharmaceutical drugs, manufacturing and exporting core or non-core auto components with at least 90% original equipment manufacturer sales, receiving low value-adding intra-group services, or providing data center services to a foreign company. The rule prescribes detailed criteria to determine “insignificant risk,” focusing on functional, asset, and risk allocation. The foreign principal must perform key economically significant functions, provide capital and intangibles, exercise strategic supervision and control, and bear significant risks, while the eligible assessee should merely execute assigned work without assuming substantial risks or owning intangibles. For R&D activities, similar conditions apply, ensuring that ownership of research outcomes vests with the foreign principal. Importantly, contractual terms alone are not determinative; actual conduct is decisive in assessing risk and control. Overall, Rule 87 establishes clear eligibility and risk-based conditions to streamline transfer pricing compliance under safe harbour provisions.
Extract of Rule No. 87 of Draft Income-tax Rules, 2026
Rule 87
Eligible assessee for safe harbour rules for international transactions.
(1) Subject to the provisions of sub-rules (2) and (3), the “eligible assessee” means a person who has exercised a valid option for application of safe harbour rules in accordance with rule 90, and—
(a) is engaged in providing information technology services consisting of any one or more of the following—
(i) software development services;
(ii) information technology enabled services;
(iii) knowledge process outsourcing services;
(iv) contract research and development services wholly or partly relating to software development; with insignificant risk, to a non-resident associated enterprise (hereinafter referred to as foreign principal);
(b) has made any intra-group loan;
(c) has provided a corporate guarantee;
(d) is engaged in providing contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal;
(e) is engaged in the manufacture and export of core or non-core auto components and where ninety per cent or more of total turnover during the relevant tax year is in the nature of original equipment manufacturer sales; or
(f) is in receipt of low value-adding intra-group services from one or more members of its group;
(g) has provided data center services to a foreign company.
(2) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in sub-rule (1)(a)(i) to (iii), the Director General of Income-tax (Systems) shall have regard to the following factors, namely:—
(a) the foreign principal performs most of the economically significant functions involved, including the critical functions such as: (i) conceptualization;
(ii) design of the product; and
(iii) providing the strategic direction and framework, either through its own employees or through its other associated enterprises, while the eligible assessee carries out the work assigned to it by the foreign principal;
(b) the capital and funds and other economically significant assets including the intangibles required, are provided by the foreign principal or its other associated enterprises, and the eligible assessee is only provided a remuneration for the work carried out by it;
(c) the eligible assessee works under the direct supervision of the foreign principal or its associated enterprise which not only has the capability to control or supervise but also actually controls or supervises the activities carried out through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis;
(d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant;
(e) the eligible assessee has no ownership right, legal or economic, on any intangible generated or on the outcome of any intangible generated or arising during the course of rendering of services, which vests with the foreign principal as evident from the contract and the conduct of the parties.
(3) For the purpose of identifying an eligible assessee, with insignificant risk, referred to in sub-rule (1)(a)(iv) and (d), the Director General of Income-tax (Systems) or the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the following factors, namely:—
(a) the foreign principal performs most of the economically significant functions involved in research or product development cycle, including the critical functions such as;
(i) conceptualization;
(ii) design of the product; and
(iii) providing the strategic direction and framework, either through its own employees or through its other associated enterprises while the eligible assessee carries out the work assigned to it by the foreign principal;
(b) the foreign principal or its other associated enterprises provides,—
(i) the funds or capital;
(ii) other economically significant assets including intangibles required for research or product development; and
(iii) a remuneration to the eligible assessee for the work carried out by it;
(c) the eligible assessee works under the direct supervision of the foreign principal or its other associated enterprise which has not only the capability to control or supervise but also actually controls or supervises research or product development, through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis;
(d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant;
(e) the eligible assessee has no ownership right, legal or economic, on the outcome of the research which vests with the foreign principal and is evident from the contract as well as the conduct of the parties.
