Transfer Pricing Alert - CBDT extends Safe Harbour Rules to fiscal year 2022-23

Safe Harbour Rules were introduced in 2013 with the intent to bring certainty to transfer pricing matters. In 2017, these Rules were revised. Please click here to read our analysis of the revised Safe Harbour Rules. These Rules provide that the transfer price declared by an eligible taxpayer in respect of a 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 requirements is eligible to opt for protection provided under these Rules. The applicability of these Rules has been extended from time to time.

Recently, the Central Board of Direct Taxes (CBDT) issued a notification¹ further extending the validity of Safe Harbour Rules to Fiscal Year 2022-23. The Rules have been extended with retrospective effect from 1 April 2023. While the applicability has been extended by one more year, no changes have been made to the prescribed parameters.

Safe Harbours for Fiscal Year 2022-23:

Sr. No.

Eligible International Transaction

Safe Harbour Rates

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 per cent; or
where the aggregate value of such transactions exceeds INR 1bn but does not exceed INR 2bn – not less than 18 per cent

Provision of Knowledge Process Outsourcing services

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

Not less than 24 per cent, if the employee cost to operating expense is at least 60 per cent;
Not less than 21 per cent, if the employee cost to operating expense is greater than 40 per cent or more but less than 60 per cent; or
Not less than 18 per cent, if the employee cost to operating expense does not exceed 40 per cent.

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

If the Interest rate is not less than the 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 the 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 – 425 Basis points

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

Provision of Corporate guarantee

The commission or fee is at a rate not less than one per cent per annum on the amount guaranteed.

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 is not less than 24 per cent, where the value of the international transaction does not exceed INR 2bn.

Manufacture and export of:

core auto components
non-core auto components

Operating profit margin to operating expense:

not less than 12 per cent for core auto components
not less than 8.5 per cent of non-core auto components

Receipt of low-value-adding intra-group services

The entire value of such transactions, including a markup not exceeding 5 per cent, 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 in India 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 the fiscal year 2016-17 apply to the fiscal year 2022-23. While taxpayers may opt for Safe Harbours in respect of international transactions entered into; the taxpayers may consider entering into a unilateral or bilateral APA (Advance Pricing Agreement) in order to gain transfer pricing certainty.

¹ Notification No. 58/2023 dated 9 August 2023