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Indian tax: Safe harbour rules

Contributed by Kreston
December 9, 2020

Ganesh Ramaswamy, Partner, K. Rangamani and Associates LLP, India, Kreston International member firm

On 20 May 2020, the Indian tax department issued a notification specifying the safe harbour rates applicable for the 12-month financial year ending in March 2020 (FY 2019/20), for determining arm's length rates for certain international transactions affecting the transfer pricing regulations.

The notification states that the same rates as were applicable during the last three financial years (FY 2016/17 to 2018/19) would also apply for FY 2019/20. Unlike earlier (2013 and 2017) safe harbour notifications by the tax department, which gave safe harbour rates for 5 years and 3 years, respectively, the current notification provides safe harbour rates for only 1 year (2019/20).

Safe harbour rates provide the arm's length price issued by the tax department for specified international transactions. If a taxpayer undertakes certain specific international transactions at the specified safe harbour rates, it will be acceptable to the tax authorities and no further transfer pricing audit, or consequent adjustment, will be required. The table summarises the safe harbour rates notified for various transactions for FY 2019/20.

Sl no.International transactionsMonetary thresholdSafe harbour rates
1Software and information technology enabled servicesUp to INR 1 billion17%
INR 1 to 2 billion18%
2KPO servicesUp to INR 2 billion and employee cost to total cost ratio is:

Up to 40%
40 to 60%

3R&D services related to software developmentUp to INR 2 billion24%
4R&D services in generic pharmaceutical sectorUp to INR 2 billion24%
5Intragroup loans in Indian currencyDepending on credit rating of AE from AAA to DLending rate of State Bank of India as on 1 Apr 2019 + 175–425 bps
6Intragroup loans in foreign currencyDepending on credit rating of AE from AAA to D6 months LIBOR as on 30 Sep 2019 + 155–400 bps
7Corporate guaranteeNo threshold1%
8Manufacture and export of core auto componentsNo thresholdOperating cost + 12%
9Manufacture and export of non-core auto componentsNo thresholdOperating cost + 8.5%
10Receipt of low value-added intragroup servicesValue below INR 1 millionMargin not more than 5%

Taxpayers opting for the safe harbour rules for FY 2019/20 must file Form 3CEFA with the Assessing Officer on or before 30 November 2020.

There has also been a significant amendment in the Indian tax laws in 2020: the safe harbour provisions now also cover profit attribution for permanent establishments.


Tags: Tax | law | regulation | audit | mining | transfer pricing | currency | services | India | tax



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