1
Statement by CBDT on Safe Harbour Rules Under Section 92CB of the Act
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 arms 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 harbour
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 issued.
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 sector/ activities: 2
(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, 2013.
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 3
SNo
(1)
International Transaction
(2)
Circumstances
(3)
1. Provision of software
development services other than
contract R&D where the total
value of international transaction
does not exceed Rs 100 crore
The operating profit margin declared in
relation to operating expense incurred is 20
per cent or more.
2. Provision of information
technology enabled services
other than contract R&D where
the total value of international
transaction does not exceed Rs
100 crore
The operating profit margin declared in
relation to operating expense is 20 per
cent. or more.
3. Provision of information
technology enabled services
being knowledge processes
outsourcing services other than
contract R&D where the total
value of international transaction
does not exceed Rs 100 crore
The operating profit margin declared in
relation to operating expense is 30 per
cent. or more.
4. Advancing of intra-group loan to
wholly owned subsidiary where
the amount of loan does not
exceed Rs 50 crore .

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 on 30th June of the relevant
previous year plus 150 basis points.
5. Advancing of intra-group loans to
wholly owned subsidiary where
the amount of loan exceeds Rs.
50 crore.

The Interest rate declared in relation to the
international transaction is equal to or
greater than the base rate of SBI as on 30th
June of the relevant previous year plus 300
basis points. 4

6. Providing explicit corporate
guarantee to wholly owned
subsidiary where the amount
guaranteed does not exceed Rs.
100 crore.

The commission or fee declared in relation
to the international transaction is at the
rate of 2 per cent or more per annum on
the amount guaranteed.
7. Provision of specified contract
research and development
services wholly or partly relating
to software development.
The operating profit margin declared in
relation to operating expense incurred is 30
per cent. or more.
8. Provision of contract research
and development services
wholly or partly relating to
generic pharmaceutical drugs.
The operating profit margin declared in
relation to operating expense incurred is 29
per cent. or more.

9 Manufacture and export of core
auto components
The operating profit margin declared in
relation to operating expense is 12 per
cent. or more.

10. Manufacture and export of noncore auto components.
The operating profit margin declared in
relation to operating expense is 8.5 per
cent. or more.

(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