Rule 85 of the Draft Income-tax Rules, 2026 mandates that every person entering into an international transaction or specified domestic transaction during a tax year must furnish a report from an accountant under section 172 in Form No. 48. The report must be verified in the prescribed manner and submitted at least one month prior to the due date for filing the return of income under section 263(1)(c).
Rule 86 provides detailed definitions applicable to safe harbour rules under Rules 87 to 93. It defines “accountant” with eligibility conditions including minimum professional experience, prescribed annual receipts, and recognition in foreign jurisdictions where applicable. The rule elaborates on various categories such as contract research and development services relating to software, core and non-core auto components, corporate guarantee, intra-group loan, data center and data center services, generic pharmaceutical drugs, information technology enabled services, knowledge process outsourcing services, and low value-adding intra-group services. It also defines operating expense, operating revenue, and operating profit margin, specifying inclusions and exclusions for computation purposes. Further, it clarifies the meaning of software development services, relevant tax year, and no tax or low tax country or territory. Collectively, these rules standardize reporting obligations and provide comprehensive definitions to ensure clarity, consistency, and structured application of safe harbour provisions in transfer pricing matters.
Extract of Rule No. 85 and 86 of Draft Income-tax Rules, 2026
Rule 85
Report from an accountant to be furnished under section 172.
(1) The report from an accountant required to be furnished under section 172 by every person who has entered into an international transaction or a specified domestic transaction during a tax year shall be in Form No. 48 and be verified in the manner indicated therein.
(2) The report shall be furnished at least one month prior to the due date of furnishing return of income as per section 263(1)(c).
Rule 86
Definitions for safe harbour rules for international transactions.
For the purposes of this rule and rule 87 to 93, —
(a) “accountant” __
(A)means an accountant referred to in section 515(3)(b) of the Act, who fulfils the following conditions, namely: —
(i) if he is pursuing the profession of accountancy individually or is a valuer then-
(a) he has professional experience of not less than ten years; and
(b) his annual receipt in the year preceding the year in which cost certification is undertaken, from the exercise of profession, exceeds ₹ 50 lakhs;
(ii) if he is a member or partner in any entity engaged in rendering accountancy or valuation services then, the annual receipt of the entity in the year preceding the year in which cost certification is undertaken exceeds ₹ 3 crores;
(B) includes any person recognised for undertaking cost certification by the Government of the country where the associated enterprise is registered or incorporated or any of its agencies, who fulfils the following conditions, namely: —
(i) the condition referred to in (a)(A)(i) and (ii);
(ii) if he is a member or partner in any entity engaged in rendering accountancy or valuation services then, the entity or its affiliates have presence in more than two countries;
(b) “contract research and development services wholly or partly relating to software development” means the following, namely: —
(i) research and development producing new theorems and algorithms in the field of theoretical computer science;
(ii) development of information technology at the level of operating systems, programming languages, data management, communications software and software development tools;
(iii) development of Internet technology;
(iv) research into methods of designing, developing, deploying or maintaining software;
(v) software development that produces advances in generic approaches for capturing, transmitting, storing, retrieving, manipulating or displaying information;
(vi) experimental development aimed at filling technology knowledge gaps as necessary to develop a software programme or system;
(vii) research and development on software tools or technologies in specialised areas of computing (image processing, geographic data presentation, character recognition, artificial intelligence and such other areas); or
(viii) upgradation of existing products where source code has been made available by the principal, except where the source code has been made available to carry out routine functions like debugging of the software;
(c) “core auto components” means,—
(i) engine and engine parts, including piston and piston rings, engine valves and parts cooling systems and parts and power train components; (ii) transmission and steering parts, including gears, wheels, steering systems, axles and clutches;
(iii) suspension and braking parts, including brake and brake assemblies, brake linings, shock absorbers and leaf springs; or
(iv) lithium-ion batteries for use in electric or hybrid electric vehicles;
(d) “corporate guarantee”
(i) means explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short-term or long-term borrowing; and
(ii) does not include letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of similar nature;
(e) “data center” means a dedicated secure space within a building or centralised location where computing and networking equipment is concentrated for the purpose of collecting, storing, processing, distributing or allowing access to large amounts of data;
(f) “data center services” means services provided by a data center through the use of physical infrastructure, including land, buildings, leaseholds, power, servers, computers, networking and other equipment, cable landing stations, cables, connectivity, security, human resource and other resources in India and shall not include ‘data hosting services’;
(g) “generic pharmaceutical drug” means a drug that is comparable to a drug already approved by the regulatory authority in dosage form, strength, route of administration, quality and performance characteristics, and intended use;
(h) “information technology enabled services” means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely: —
(i) back office operations;
(ii) call centres or contact center services;
(iii) data processing and data mining;
(iv) insurance claim processing;
(v) legal databases;
(vi) creation and maintenance of medical transcription excluding medical advice;
(vii) translation services;
(viii) payroll;
(ix) remote maintenance or recovery;
(x) revenue accounting;
(xi) support centres;
(xii) website services;
(xiii) data search integration and analysis;
(xiv) remote education excluding education content development; or
(xv) clinical database management services excluding clinical trials; but does not include any research and development services whether or not in the nature of contract research and development services.
(i) “intra-group loan” means loan advanced to an associated enterprise being a nonresident, where the loan —
(i) is not advanced by an enterprise, being a financial company including a bank or a financial institution or an enterprise engaged in lending or borrowing in the normal course of business; and
(ii) does not include credit line or any other loan facility which has no fixed term for repayment;
(j) “knowledge process outsourcing services” means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely: —
(i) geographic information system;
(ii) human resources services;
(iii) engineering and design services;
(iv) animation or content development and management;
(v) business analytics;
(vi) financial analytics; or
(vii) market research; but does not include any research and development services whether or not in the nature of contract research and development services.
(k) “low value-adding intra-group services” means services that are performed by one or more members of a multinational enterprise group on behalf of one or more other members of the same multinational enterprise group and which, —
(i) are in the nature of support services;
(ii) are not part of the core business of the multinational enterprise group, i.e., such services neither constitute the profit-earning activities nor contribute to the economically significant activities of the multinational enterprise group;
(iii) are not in the nature of shareholder services or duplicate services;
(iv) neither require the use of unique and valuable intangibles nor lead to the creation of unique and valuable intangibles;
(v) neither involve the assumption or control of significant risk by the service provider nor give rise to the creation of significant risk for the service provider; and
(vi) do not have reliable external comparable services that can be used for determining their arm’s length price, but does not include the following services, namely: —
(A) research and development services;
(B) manufacturing and production services;
(C) information technology (software development) services;
(D) knowledge process outsourcing services;
(E) business process outsourcing services;
(F) purchasing activities of raw materials or other materials that are used in the manufacturing or production process;
(G) sales, marketing and distribution activities;
(H) financial transactions;
(I) extraction, exploration, or processing of natural resources; and
(J) insurance and reinsurance;
(l) “non-core auto components” means auto components other than core auto components;
(m) “no tax or low tax country or territory” means a country or territory in which the maximum rate of income-tax is less than fifteen per cent;
(n) “operating expense” means, —
(i) the costs incurred in the tax year by the assessee in relation to the international transaction during the course of its normal operations including costs relating to Employee Stock Option Plan or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee;
(ii) reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee at cost;
(iii) amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of those associated enterprises and which relate to normal operations of the assessee at cost; and
(iv) depreciation and amortisation expenses relating to the assets used by the assessee, so however, that it does not include, —
(A) interest expense;
(B) provision for unascertained liabilities;
(C) pre-operating expenses;
(D) loss arising on account of foreign currency fluctuations;
(E) extraordinary expenses;
(F) loss on transfer of assets or investments other than assets, on which depreciation is included in the operating expense;
(G) expense on account of income-tax; and
(H) other expenses not relating to normal operations of the assessee;
(o) “operating revenue” means the revenue earned by the assessee in the tax year in relation to the international transaction during the course of its normal operations including costs relating to Employee Stock Option Plan or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee; so however, that it does not include: —
(i) interest income;
(ii) income arising on account of foreign currency fluctuations;
(iii) income on transfer of assets or investments other than assets, on which depreciation is included in the operating expense;
(iv) refunds relating to income-tax;
(v) provisions written back;
(vi) extraordinary incomes; and
(vii) other incomes not relating to normal operations of the assessee;
(p) “operating profit margin” in relation to operating expense means the ratio of operating profit, being the operating revenue in excess of operating expense, to the operating expense expressed in terms of percentage;
(q) “relevant tax year” means the tax year for which the option for safe harbour is validly exercised;
(r) “software development services” means, —
(i) business application software and information system development using known methods and existing software tools; (ii) ancillary or support services for existing systems;
(iii) converting or translating computer languages;
(iv) adding user functionality to application programmes;
(v) debugging of systems;
(vi) adaptation of existing software; or
(vii) preparation of user documentation; but does not include any research and development services whether or not in the nature of contract research and development services.
