Transfer Pricing Alert

CBDT amends the Safe Harbour Rules

BACKGROUND

Section 92CB of the Income Tax Act, 1961 (IT Act), prescribes that the determination of income under section 9(1)(i)1  and the determination of arm’s length price under section 92C2 or 92CA3  of the IT Act shall be subject to safe harbour rules. ‘Safe harbour rules’ means circumstances in which the income tax authorities shall accept the transfer price declared by the taxpayer. In this regard, Rule 10TD of the Income Tax Rules, 1962 (IT Rules) provides a list of eligible international transactions and circumstances for which the transfer price declared by the taxpayer shall be accepted by the tax authorities. Rule 10TA of the IT Rules defines various terms used in the transfer pricing rules.

Recently, the CBDT has amended Rule 10TA and Rule 10TD of the IT Rules4  vide the Income Tax (Twenty-Ninth Amendment) Rules, 2023, which shall be effective from 1 April 2024. We, at BDO in India, have hereunder summarised the key provisions of the said amended rules:

Rule 10TA of the IT Rules:

Sr No

Earlier Rule 10TA

Amended Rule 10TA

1

Intra-group loan means a loan advanced to a wholly owned subsidiary being a non-resident

Intra-group loan means a loan advanced to an associated enterprise being a non-resident, excluding those by financial companies or enterprises engaged in normal lending or borrowing operations

2

The loan must be sourced in Indian Rupees (INR)

No such condition

3

The definition of operating incomes and operating expenses has been slightly modified. Earlier, any ‘income’ or ‘loss’ on transfer of assets or investments was considered as a non-operating item

The said definition has been modified to provide that income or loss on transfer of those assets or investments whose depreciation is included in the operating expenses, shall be considered as operating in nature. This would mean that where a capital asset on which depreciation is reckoned is disposed of, such gain or loss on disposal would also be includible in the operating income or operating cost base
Rule 10TD of the IT Rules:

Sr No

Earlier Rule 10TD

Amended Rule 10TD

1

For the calculation of interest on an intra-group loan, where the loan is denominated in INR, interest rates are determined considering the CRISIL credit rating of the associated enterprise

The word ‘CRISIL’ has been omitted. Credit rating means the credit rating assigned to the associated enterprise by a Securities and Exchange Board of India registered and Reserve Bank of India accredited credit rating agency5

2

For the advancing of intra-group loans, where the amount of loan is denominated  in a foreign currency, interest calculation consists of the following features-

For the advancing of intra-group loans, where the amount of loan is denominated in a foreign currency, interest calculation consists of the following features-

(i)

The interest rate declared in relation to the eligible international transaction is not less than the six-month London Inter-Bank Offer Rate



 

The interest rate declared in relation to the eligible international transaction is not less than the reference rate6
The new rule provides that the interest rate for such loans will now be based on the
reference rate of the relevant foreign currency as on September 30 of the financial year

(ii)

Interest rates calculated were based on CRISIL credit rating

Interest rates to be calculated based on credit rating as prescribed

(iii)

Interest rates prescribed were irrespective of the quantum of loans

Interest rates to vary depending on the quantum of loans

(iv)




































 

Interest Rates-
A) 150 basis points, where the associated enterprise has a CRISIL credit rating between AAA to A or its equivalent;
B) 300 basis points, where the associated enterprise has a CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent;
C) 450 basis points, where the associated enterprise has a CRISIL credit rating between BB to B or its equivalent;
D) 600 basis points, where the associated enterprise has a CRISIL credit rating between C to D or its equivalent; or
E) 400 basis points, where the 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 INR 100 Cr in the aggregate as on 31st March of the relevant previous year.
























 

Interest Rates-
A) Where loan advanced to the associated enterprise including loans to all associated enterprises does not exceed INR 250 Cr in the aggregate as on 31st March of the relevant previous year:
i) 150 basis points, where the associated enterprise has a credit rating of AAA, AA+, AA, AA-, A+, A, A- or equivalent;
ii) 300 basis points, where the associated enterprise has a credit rating of BBB+, BBB, BBB- or equivalent;
iii) 400 basis points, where the associated enterprise has a credit rating of BB+, BB, BB-, B+, B, B-, C+, C, C-, D or equivalent or where the credit rating of the associated enterprise is not available

B) Where loan advanced to the associated enterprise including loans to all associated enterprises exceeds INR 250 Cr in the aggregate as on 31st March of the relevant previous year:
i) 150 basis points, where the associated enterprise has a credit rating of AAA, AA+, AA, AA-, A+, A, A- or equivalent;
ii) 300 basis points, where the associated enterprise has a credit rating of BBB+, BBB, BBB- or equivalent;
iii) 450 basis points, where the associated enterprise has a credit rating of BB+, BB, BB-, B+, B, B- or equivalent;
iv) 600 basis points, where the associated enterprise has a credit rating of C+, C, C-, D or equivalent or where the credit rating of the associated enterprise is not available.”



 
BDO IN INDIA COMMENTS

The amended rules have been largely prompted by the global transition from LIBOR to Alternate Reference Rates, the prominent ones being SOFR (USD), EURIBOR (Euro), SONIA (GPB) TORF (Yen) BBSW (AUD) and SORA (SGD). Another key relaxation is extending the applicability of the regulations to loans provided by Indian companies to any non-resident associated enterprise. While the safe harbour rules provide certainty in tax, ease of compliance and elimination of the possibility of litigation to taxpayers in India, one must be mindful of its implications in the overseas jurisdiction before opting for the same.
 

1All income accruing or arising, whether directly or indirectly, through or from any business connection, property, asset or source of income in India, or through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.
2Methods for computation of arm’s length price. 
3Reference by the tax officer (with previous approval) of the computation of arm’s length price to the Transfer Pricing Officer.
4Notification No. 104/2023/ F. No. 370142/26/2023-TPL
5Explanation inserted by this amendment after sub rule 2A in Rule 10TD
6Explanation inserted by this amendment after sub rule 2A in Rule 10TD