Transfer Pricing Alert

CBDT extends Safe Harbour Rules to fiscal year 2020-21

With a view to provide tax certainty and reduce litigation in the area of Transfer Pricing, Safe Harbour Rules were introduced in 2013. These Rules provided safe harbours for certain transactions that have historically been subject to intense litigation – viz. IT/ITES, intra-group financing, R&D, KPO services, corporate guarantee, etc.  The Safe Harbour Rules provides that the transfer price declared by an eligible taxpayer in respect of specified transaction shall be accepted by the Revenue Authorities, subject to fulfilment of specified conditions. A taxpayer entering into specified international transactions and meeting prescribed margin/pricing requirement is eligible to opt for protection provided under the Safe Harbours Rules.

Recently, the Central Board of Direct Taxes (CBDT) issued a notification1 extending the validity of Safe Harbour Rules to fiscal year 2020-21. The Rules have been extended with retrospective effect from 1 April 2021. While the applicability has been extended by one more year, no changes have been made in the prescribed parameters.

 

Safe Harbours for Fiscal Year 2020-21

Sr. No.

Eligible International Transaction

Safe Harbour Rates

1

Provision of Software development services and Information technology enabled services

Operating profit margin to operating expense

  • Where the aggregate value of such transactions does not exceed INR 1bn – not less than 17%; or

  • Where the aggregate value of such transactions exceeds INR 1 bn but does not exceed INR 2bn – not less than 18%

2

Provision of Knowledge Process Outsourcing services

The value of international transaction does not exceed INR 2bn and the operating profit margin to operating expense is –

  • Not less than 24%, if the employee cost to operating expense is at least 60%;

  • Not less than 21%, if the employee cost to operating expense is greater than 40% or more but less than 60%; or

  • Not less than 18%, if the employee cost to operating expense does not exceed 40%.

3

Provision of Intra-group loan to Associated Enterprise (AE) denominated in INR

If Interest rate is not less than one-year marginal cost of funds lending rate of State Bank of India as on 1 April of the relevant fiscal year plus

  • Where CRISIL credit rating of the AE is available

Basis Points

CRISIL Credit Rating

175 basis points

AAA to A or its equivalent

325 basis points

BBB-, BBB or BBB+ or its equivalent

475 basis points

BB to B or its equivalent

625 basis points

C to D or its equivalent

 

  • Where credit rating of the AE is not available and the amount of loan advanced to the AE including loans to all AE in INR does not exceed INR 1bn in aggregate as on 31st  March of the relevant fiscal year – 425 Basis points

4

Provision of Intra-group loan to AE denominated in foreign currency

Interest rate is not less than six-month LIBOR of the relevant foreign currency as on 30 September of the relevant fiscal year plus:

  • Where CRISIL credit rating of the AE is available

Basis Points

CRISIL Credit Rating

150 basis points

AAA to A or its equivalent

300 basis points

BBB-, BBB or BBB+ or its equivalent

450 basis points

BB to B or its equivalent

600 basis points

C to D or its equivalent

 

  • Where credit rating of the AE is not available and the amount of loan advanced to the AE including loans to all AE in INR does not exceed INR 1bn in aggregate as on 31 March of the relevant fiscal year – 400 Basis points

5

Provision of Corporate guarantee

The commission or fee is at the rate not less than 1% per annum on the amount guaranteed.

6

Provision of contract research and development services, wholly or partly relating to:

  • software development; or

  • generic pharmaceutical drugs

The operating profit margin to operating expense not less than 24%, where the value of the international transaction does not exceed INR 2bn.

7

Manufacture and export of:

  • core auto components

  • non-core auto components

Operating profit margin to operating expense:

  • not less than 12% for core auto components

  • not less than 8.5% non-core auto components

8

Receipt of low value-adding intra-group services

  • Entire value of such transactions, including a mark-up not exceeding 5%, does not exceed INR 1bn.

  • Method of cost pooling, exclusion of shareholder costs and duplicate costs from cost pool and the reasonableness of the allocation keys used for allocation of costs to be certified by an Accountant.

 

BDO Comments

While this is a welcome move, there are no changes either in the prescribed threshold or the rates. The rates and threshold notified for fiscal year 2016-17 apply for fiscal year 2020-21 (i.e., fifth year in a row). For taking the benefit of Safe Harbour Rules, the taxpayer needs to file an application on or before the deadline of filing the tax return (28 February 2022 for fiscal year 2020-21). While taxpayers may opt for Safe Harbours in respect of international transactions entered into fiscal year 2020-21; the taxpayers may consider entering into a unilateral or bilateral APA (Advance Pricing Agreement) in order to gain transfer pricing certainty, especially in light of the current crisis and prevailing economic uncertainty.

1Notification No. 117/2021/F. No. 370142/44/2021-TPL dated 24 September 2021