CBDT invites suggestions from stakeholders on safe harbour rules
August, 19th 2013
PRESS INFORMATION BUREAU
GOVERNMENT OF INDIA
CBDT INVITES SUGGESTIONS FROM STAKEHOLDERS ON SAFE HARBOUR
New Delhi: August 14, 2013
Shravana 23, 1935
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. Vide this
amendment, the Government of India had empowered the CBDT to make Safe Harbour rules. "Safe
harbour" was defined to mean circumstances in which the income-tax authorities shall accept the
transfer price declared by the assessee.
Thereafter, the issuance of the Safe Harbour Rules was examined and discussed at various points of
time, but no finality could be reached. Since a number of representations were received from different
stakeholders to prescribe the safe harbor rules, the Prime Minister on July, 30, 2012 approved the
constitution of a Committee to Review Taxation of Development Centres and the IT sector consisting of
Shri N. Rangachary, Chairman of the Committee and three others (hereinafter called the Rangachary
Committee) with broad terms of reference as under:
1. Engage in consultations with stakeholders and related government departments to finalize the
approach to Taxation of Development Centres and suggest any circulars that need to be issued.
2. Engage in sector-wise consultations and finalize the safe harbour provisions announced in Budget
2010, sector-by-sector. The Committee will also suggest any necessary circulars that may need to be
3. Examine issues relating to taxation of IT sector and suggest any clarifications that may be required
Subsequently, the Government of India vide OM dated 12th September, 2012 approved the considered
suggestion of the Rangachary Committee that it may finalize the Safe Harbour Rules in the following
(i) IT Sector
(ii) ITES Sector
(iii) Contract R&D in the IT and Pharmaceutical Sector
(iv) Financial transactions-Outbound loans
(v) Financial Transactions-Corporate Guarantees
(vi) Auto Ancillaries-Original Equipment Manufacturers
The Rangachary Committee consulted various stakeholders including sector related government
departments, NASSCOM, CII, FICCI, ASSOCHAM, ICAI, etc. and submitted six reports on Taxation of
Development Centres and IT Sector and other sectors as referred to in the OM dated 12th September,
On the basis of the recommendations of the Rangachary Committee in the first report on Taxation of
Development Centres and IT Sector (which was posted on the website of the income tax department
www.incometaxindia.gov.in on 30th June, 2013),
CBDT has issued the following circulars:
· Circular No. 1/2013 dtd. 17th January, 2013 on issues relating to Export of Computer Software under
sections 10A, 10AA and 10B of the Act.
· Circular No. 6/2013 dtd. 29th June, 2013 on Conditions Relevant to Identify Development Centres
engaged in Contract R&D Services with Insignificant Risk.
The Government of India has considered the other five reports of the Rangachary Committee. The major
recommendations of the Rangachary Committee have been accepted, with some modifications, and the
following decisions have been taken by Government:
(1) Safe harbour for the sectors recommended by the Rangachary Committee shall be applicable for two
assessment years beginning from 2013-14.
(2) Safe harbour for various sectors, subject to certain ceilings, shall be as under
SNo International Transaction Circumstances
(1) (2) (3)
1. Provision of software development services The operating profit margin declared in
other than contract R&D where the total relation to operating expense incurred is 20
value of international transaction does not per cent or more.
exceed Rs 100 crore
2. Provision of information technology enabled The operating profit margin declared in
services other than contract R&D where the relation to operating expense is 20 percent
total value of international transaction does or more.
not exceed Rs 100 crore
3. Provision of information technology enabled The operating profit margin declared in
services being knowledge processes relation to operating expense is 30 percent
outsourcing services other than contract or more.
R&D where the total value of international
transaction does not exceed Rs 100 crore
4. Advancing of intra-group loan to wholly The Interest rate declared in relation to the
owned subsidiary where the amount of loan international transaction, is equal to or
does not exceed Rs 50 crore . greater than the base rate of State Bank of
India (SBI) as on 30th June of the relevant
previous year plus 150 basis points.
5. Advancing of intra-group loans to wholly The Interest rate declared in relation to the
owned subsidiary where the amount of loan international transaction is equal to or
exceeds Rs. 50 crore. greater than the base rate of SBI as on 30th
June of the relevant previous year plus 300
6. Providing explicit corporate guarantee to The commission or fee declared in relation
wholly owned subsidiary where the amount to the international transaction is at the
guaranteed does not exceed Rs. 100 crore. rate of 2 per cent or more per annum on
the amount guaranteed.
7. Provision of specified contract research and The operating profit margin declared in
development services wholly or partly relation to operating expense incurred is 30
relating to software development. per cent. or more.
8. Provision of contract research and The operating profit margin declared in
development services wholly or partly relation to operating expense incurred is 29
relating to generic pharmaceutical drugs. per cent. or more.
9. Manufacture and export of core The operating profit margin declared in
auto components relation to operating expense is 12 percent
10. Manufacture and export of noncore auto The operating profit margin declared in
components. relation to operating expense is 8.5 percent
(3) Safe harbour rules shall not be applicable in respect of an international transaction entered into with
an associated enterprise located in any country or territory notified under section 94A of the Income-tax
Act, 1961, or in a no tax or low tax country or territory.
(4) Safe harbour rules shall be applicable only where a taxpayer exercises his option to be governed by
such rules in a specified form to be furnished before the due date of filing of return.
(5) Where the Transfer Pricing Officer is of the opinion that the option exercised by the assessee is valid,
he shall intimate acceptance of transfer price declared by the assessee to the assessing officer and the
assessee within a period of six months from the end of the month in which reference under section
92CA is received from the assessing officer. Where he is of the opinion that the option exercised is not
valid, he shall proceed to determine the arm's length price in respect of the international transactions
entered into by the assessee in accordance with sections 92C and 92CA without having regard to the
safe harbour margin or price as specified in the rules.
(6) A taxpayer opting for safe harbour rules shall not be allowed to invoke Mutual Agreement Procedure
(MAP) provided under the relevant DTAAs.
(7) Where the safe harbour rules are not applicable in the case of an assessee, engaged in providing
contract research and development services with insignificant risks, the Transactional Net Margin
Method (TNMM) shall be considered as the most appropriate method for the determination of arm's
length price unless it is shown by the assessee that it is not feasible to apply this method in the facts and
circumstances of the case.
The draft rules along with the Second to the Sixth report of the Rangachary Committee have been
posted on the website of the Income-tax Department. All stakeholders are requested to provide their
comments, if any, by 26th August, 2013 to the Director (FT&TR) at her email id firstname.lastname@example.org