CA Reetika Agarwal

CA Reetika Agarwal

In India, new transfer pricing rules were introduced in 2002. Since then, the number of cases identified for audit and the transfer pricing adjustments locked up in disputes have increased tremendously. In order to reduce the increasing number of transfer pricing audits and prolonged disputes, the Finance (No.2) Act, 2009 w. r. e. f. 1.4.2009 inserted a new section 92CB to provide that determination of arm’s length price under section 92C or Section 92CA shall be subject to safe harbour rules. By this amendment, the Government of India had empowered the CBDT to make Safe Harbour rules. “Safe harbour” is defined to mean circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee.

On 18 September 2013, the CBDT issued the final safe harbour rules, but the response was not as encouraging as was thought. It is believed that the Government has received just 25 to 30 applications for FY 2013-14 under the then safe harbour rules.

For India, 07th June, 2017, indeed, can be considered as historic day.  Apart from the signing of Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) at Paris, the second positive move is the revision of Safe Harbour Rules which were originally issued by Central Board of Direct Taxes (CBDT) vides its notification dated 18 September 2013.

In order to reduce transfer pricing disputes, to provide certainty to taxpayers, to align safe harbour margins with industry standards and to enlarge the scope of safe harbour transactions, CBDT vide notification 46/2017 dated 07th June 2017, has amended the safe harbour rules by extending the applicability to an additional category of international transaction as well as revising the applicable price/margins that would be accepted as arm’s length.

Following Para summarizes the key provisions of amended safe harbour rules vis a vis old version of safe harbor rules:

 

Eligible International Transactions

Up to FY 2016-17 From FY 2016-17 to 2018-19
Threshold limit prescribed  

Safe  Harbour Margin

Threshold limit prescribed  

Safe  Harbour Margin

Provision of software development services [Rule 10TC (i)] Up to INR 500 Cr. 20  % or more on total operating costs Up to INR 100 Cr. 17 % or more on total operating costs
Above INR 500 Cr. 22  % or more on total operating costs Above INR 100 Cr. but up to INR 200 Cr. 18 % or more on total operating costs
Provision of information technology enabled services (ITES) [Rule 10TC (ii)] Up to INR 500 Cr. 20  % or more on total operating costs Up to INR 100 Cr. 17 % or more on total operating costs
Above INR 500 Cr. 22  % or more on total operating costs Above INR 100 Cr. but up to INR 200 Cr. 18 % or more on total operating costs
Provision of knowledge process outsourcing (KPO) services [Rule 10TC (iii)] No

Threshold

25  % or more on total operating costs Up to INR 200 Cr. i) 24 % or more on total operating costs; and employee cost in relation to the Operating cost  is at least 60 %;

ii) 21% or more on total operating costs; and employee cost in relation to Operating cost is 40  % or more but less than 60 %; or

iii) 18 % or more on total operating costs; and employee cost in relation to Operating cost  does not exceed 40 %

Advancing of intra-group loan [Rule 10TC (iv)] Up to INR 50 Cr. The Interest rate declared in relation to the  international transaction, is equal  to or greater than the base rate of State Bank of India (SBI) as of 30 June of the relevant previous year plus 150 basis points. NA
Above INR 50 Cr. The Interest rate declared in relation to the international transaction is equal to or greater than the base rate of SBI as of 30 June of the relevant previous year plus 300 basis points. NA
Advancing of intra-group loan where the  amount of loan is denominated in Indian Rupees (INR) NA The Interest rate declared in relation to international transaction is not less than one-year marginal cost of funds  lending  rate of SBI as on 01 April of relevant previous year plus

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i) 175 basis  points, where associated enterprise (AE) has CRISIL credit rating between AAA to A or its equivalent;

ii) 325 basis  points, where AE has CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent;

iii) 475 basis  points, where AE has CRISIL credit rating between BB to B or its equivalent;

iv) 625 basis points, where AE has CRISIL credit rating between C to D or its equivalent; or

v) 425 basis points, where credit rating of AE is not available and amount of loan advanced to AE including loans to all AEs in INR does not exceed INR 100 Cr. in aggregate as on 31 March of relevant previous year.

Advancing of intra-group loan where the  amount of loan is denominated in foreign currency NA The interest rate declared in relation to eligible international transaction is not less than six- month London  Inter-Bank Offer Rate (LIBOR) of  relevant foreign currency as on 30  September of relevant previous year  plus,

i) 150 basis  points, where AE has CRISIL credit rating between AAA to A or its equivalent;

ii) 300 basis  points, where AE has CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent;

iii) 450 basis  points, where AE has CRISIL credit rating between BB to B or its equivalent;

iv) 600 basis points, where AE has CRISIL credit rating between C to D or its equivalent; or

v) 400 basis points, where credit rating of AE is not available and amount of loan advanced to the AE including loans to all AEs does not exceed INR 100 Cr. in aggregate as on 31 March of relevant previous year.

Providing corporate guarantee [Rule 10TC (v)] Up to INR 100 Cr. The commission or fee declared in relation to the international transaction is at the rate of 2% or more per annum on the amount guaranteed. No threshold The commission or fee declared in relation to international transaction is at the rate of 1% or more per annum on amount guaranteed
Above INR 100 Cr. provided AE has been rated

to be of adequate to highest safety by a rating agency registered with SEBI

The commission or fee declared in relation to the international transaction is at the rate of 1.75% or more per annum on the amount guaranteed.
Provision of specified contract R&D services wholly or partly relating to software development [Rule 10TC (vi)] No threshold 30  % or more on total operating costs Up to INR 200 Cr. 24 % or more on total operating costs
Provision of specified contract R&D services wholly or partly relating to generic pharmaceutical drugs [Rule 10TC (vii)] No threshold 29 % or more on total operating costs Up to INR 200 Cr. 24 % or more on total operating costs
Manufacture and export of core  auto components [Rule 10TC (viii)] No threshold 12% or more on total operating costs No threshold 12 % or more on total operating costs
Manufacture and export of non-core auto components where 90% or more of total turnover during  the relevant previous year  is in the  nature of original equipment manufacturer (OEM) sales [Rule 10TC (ix)] No threshold 8.5% or more on total operating costs No threshold 8.5 % or more on total operating costs
Receipt of low value-adding intra-group services [Rule 10TC (x)] NA Up to 10 Cr. 5 % or less of the  value of international transaction

Provided that allocation methodology is certified by an accountant.

The other salient features of amended rules are as follows –

♠ This amendment has come into effect from 1st of April, 2017, i.e. A.Y. 2017-18 and shall continue to remain in force for two immediately succeeding years thereafter, i.e. up to A.Y. 2019-2020.

♠ Assessees eligible under the present safe harbour regime up to AY 2017-18 shall also have the right to choose the safe harbour option most beneficial to them.

♠ Definitions of following has been provided:

  • Definition of employee costs has been provided.
  • Definition of “low value adding intra group services”; to claim eligibility under the safe harbour rules for receipt of low value adding services, the allocation methodology needs to be certified by an Accountant as defined the rules.
  • Definition of contract R&D services relating to software development has amended to exclude services which involve making available source code to carry out routine functions.
  • Definition of operating costs and operating income has been expanded to include costs relating to stock based compensation provided to employees and reimbursement of expenses.

♠  Most of the other provisions, including those relating to maintenance of documentation and compliance procedures continue to apply under the amended rules.

Recently, the government released its first comprehensive report on APA programme since it was started in 2012. Over the last 5 years, 815 applications have been filed by the taxpayers and majority of these are for unilateral APAs. Till April 28, 2017, 154 agreements have been entered into (143 unilateral and 11 bilateral). Almost 50 per cent (70 out of 141) of the total unilateral agreements are with the information technology and banking/finance industries. It is believed that most of these APAs could have been covered under the safe harbour programme if the government have set the rates wisely.

Though the Government has taken one step forward still more is required. In nutshell, it’s a welcome and positive step towards strengthening the safe harbour mechanism for small and medium size companies. The introduction of new thresholds will enable companies to review their transfer pricing mechanism and also helps to manage their transfer pricing disputes in India.

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