On June 7th, 2017 the government of India notified the amended Safe harbor rules vide Notification No. 46/2017-Income Tax dated: 07/06/2017. The amendments in the safe harbor rules are summarized below:
1. New terms defined:
| Clause | Term | Definition |
| (a) | accountant | “accountant” means an accountant referred to in the Explanation below sub-section (2) of section 288 of the Act and includes any person recognized for undertaking cost certification by the Government of the country where the associated enterprise is registered or incorporated or any of its agencies, who fulfills the following conditions, namely:—
I. if he is a member or partner in any entity engaged in rendering accountancy or valuation services then,— (i) the entity or its affiliates have presence in more than two countries; and (ii) the annual receipt of the entity in the year preceding the year in which cost certification is undertaken exceeds ten crore rupees; II. if he is pursuing the profession of accountancy individually or is a valuer then,— (i) his annual receipt in the year preceding the year in which cost certification is undertaken, from the exercise of profession, exceeds one crore rupees; and (ii) he has professional experience of not less than ten years.” |
| (ca) | Employee cost | “employee cost” includes:
(i) salaries and wages; (ii) gratuities; (iii) contribution to Provident Fund and other funds; (iv) the value of perquisites as specified in clause (2) of section 17 of the Act; (v) employment related allowances, like medical allowance, dearness allowance, travel allowance and any other allowance; (vi) bonus or commission by whatever name called; (vii) lump sum payments received at the time of termination of service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments; (viii) expenses incurred on contractual employment of persons performing tasks similar to those performed by the regular employees; (ix) outsourcing expenses, to the extent of employee cost, wherever ascertainable, embedded in the total outsourcing expenses: Provided that where the extent of employee cost embedded in the total outsourcing expenses is not ascertainable, eighty per cent. of the total outsourcing expenses shall be deemed to be the employee cost embedded in the total outsourcing expenses; (x) recruitment expenses; (xi) relocation expenses; (xii) training expenses; (xiii) staff welfare expenses; and (xiv) any other expenses related to employees or the employment. |
| (ga) | Low value adding intra group services | “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: (i) research and development services; (ii) manufacturing and production services; (iii) information technology (software development) services; (iv) knowledge process outsourcing services; (v) business process outsourcing services; (vi) purchasing activities of raw materials or other materials that are used in the manufacturing or production process; (vii) sales, marketing and distribution activities; (viii) financial transactions; (ix) extraction, exploration, or processing of natural resources; and (x) insurance and reinsurance;” |
| (la) | Relevant previous year | “relevant previous year” means the previous year relevant to the assessment year in which the option for safe harbor is validly exercised;” |
2. The previous clause (a) which defined the term “contract research and development services wholly or partly relating to software development” shall now be read as clause (aa). Another amendment in the same clause is after the word “principal” the words “, except where the source code has been made available to carry out routine functions like debugging of the software” shall be inserted;
3. In clause (j) the definition of ‘operating expenses’ has been amended to include 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, reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee, 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.
Two provisos have also been inserted after item (viii) of clause (j) namely:
“Provided that reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee shall be at cost:”
“Provided further that amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of the associated enterprises and which relate to normal operations of the assessee shall be at cost”
4. In clause (k) the definition of the term ‘operating revenue’ has been amended to include 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.
5. In Rule 10TB, new clause (vii) added after clause (vi) which states that “(vii) is in receipt of low value-adding intra- group services from one or more members of its group.”
6. In Rule 10TC, new clause (x) added after clause (ix) which states that “(x) receipt of low value-adding intra-group services from one or more members of its group,”
7. In Rule 10TD, a new sub-rule (2A) has been inserted which defines the circumstances in respect of eligible international transactions in addition to the circumstances specified in sub-rule (2). The circumstances are provided in the table below:
| S.No. | Eligible transaction | Circumstances |
| 1. | Provision of software development services referred to in item (i) of rule 10TC. | The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is –
(i) not less than 17 per cent., where the value of international transaction does not exceed a sum of one hundred crore rupees; or (ii) not less than 18 per cent., where the value of international transaction exceeds a sum of one hundred crore rupees but does not exceed a sum of two hundred crore rupees. |
| 2. | Provision of information technology enabled services referred to in item (ii) of rule 10TC. | |
| 3. | Provision of knowledge process outsourcing services referred to in item (iii) of rule 10TC | The value of international transaction does not exceed a sum of two hundred crore rupees and the operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is –
(i) not less than 24 per cent. and the Employee Cost in relation to the Operating Expense is at least sixty per cent.; (ii) not less than 21 per cent. and the Employee Cost in relation to the Operating Expense is forty per cent. or more but less than sixty per cent.; or (iii) not less than 18 per cent. and the Employee Cost in relation to the Operating Expense does not exceed forty per cent. |
| 4. | Advancing of intra- group loans referred to in item (iv) of rule 10TC where the amount of loan is denominated in Indian Rupees (INR) |
The interest rate declared in relation to the eligible international transaction is not less than the one-year marginal cost of funds lending rate of State Bank of India as on 1st April of the relevant previous year plus, – (i) 175 basis points, where the associated enterprise has CRISIL credit rating between AAA to A or its equivalent; (ii) 325 basis points, where the associated enterprise has CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent; (iii) 475 basis points, where the associated enterprise has CRISIL credit rating between BB to B or its equivalent; (iv) 625 basis points, where the associated enterprise has CRISIL credit rating between C to D or its equivalent; or (v) 425 basis points, where credit rating of the associated enterprise is not available and the amount of loan advanced to the associated enterprise including loans to all associated enterprises in Indian Rupees does not exceed a sum of one hundred crore rupees in the aggregate as on 31st March of the relevant previous year. |
| 5. | Advancing of intra- group loans referred to in item (iv) of rule 10TC where the amount of loan is denominated in foreign currency. | The interest rate declared in relation to the eligible international transaction is not less than the six-month London Inter-Bank Offer Rate of the relevant foreign currency as on 30th September of the relevant previous year plus, –
(i) 150 basis points, where the associated enterprise has CRISIL credit rating between AAA to A or its equivalent; (ii) 300 basis points, where the associated enterprise has CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent; (iii) 450 basis points, where the associated enterprise has CRISIL credit rating between BB to B or its equivalent; (iv) 600 basis points, where the associated enterprise has CRISIL credit rating between C to D or its equivalent; or (v) 400 basis points, where credit rating of the associated enterprise is not available and the amount of loan advanced to the associated enterprise including loans to all associated enterprises does not exceed a sum equivalent to one hundred crore Indian rupees in the aggregate as on 31st March of the relevant previous year. |
| 6. | Providing corporate guarantee referred to in sub-item (a) or sub-item (b) of item (v) of rule 10TC. | The commission or fee declared in relation to the eligible international transaction is at the rate not less than one per cent per annum on the amount guaranteed. |
| 7. | Provision of contract research and development services wholly or partly relating to software development referred to in item (vi) of rule 10TC. | The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24 per cent., where the value of the international transaction does not exceed a sum of two hundred crore rupees. |
| 8. | Provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs referred to in item (vii) of rule 10TC. | The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24 per cent., where the value of the international transaction does not exceed a sum of two hundred crore rupees. |
| 9. | Manufacture and export of core auto components referred to in item (viii) of rule 10TC. | The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 12 per cent. |
| 10. | Manufacture and export of non-core auto components referred to in item (ix) of rule 10TC. | The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 8.5 per cent. |
| 11. | Receipt of low value-adding intra- group services in item (x) of rule 10TC. | The entire value of the international transaction, including a mark-up not exceeding 5 per cent., does not exceed a sum of ten crore rupees: Provided that the method of cost pooling, the exclusion of shareholder costs and duplicate costs from the cost pool and the reasonableness of the allocation keys used for allocation of costs to the assessee by the overseas associated enterprise, is certified by an accountant.”; |
8. New sub-rule (3A) is now inserted to allow the above mentioned rates for AY 2017-18 and two assessment years immediately following AY 2017-18. Also, where an eligible assessee is eligible to exercise option under sub-rule (2) or, as the case may be, sub-rule (2A) above, the assessee shall have the right to choose the option which is most beneficial to him.
9. In Rule 10TE in sub-rule (2) a new proviso is inserted namely, ‘Provided also that in case of the option for safe harbor validly exercised under sub-rule (2A) of rule 10TD, the word “three” shall be substituted for “five”.’
LQ Comments:
The amended safe harbor rules intend to put an end to litigative matters and provide a degree of certainty and ease of doing business to the assessee. The amended rules have now brought relatively smaller MNCs under its ambit. These MNCs can now plan their activities in a much better manner without the fear of tax sword hanging over them.
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For following safe harbour rules, do we need to file some form etc?
An assesse who had exercised option in AY 2013-14 under Rule 10TD(1) & (2) for 5 assessment years i.e.upto AY 2017-18.Now for opting option under subrule (2A) whether the assesse has to file form 3CEFA again or the earlier form will do and he can opt for 17% instead of 20%