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India Finalizes Safe Harbor Rules

by Mary Swire,, Hong Kong

25 September 2013

The Indian Government has unveiled the final version of its new transfer pricing safe harbor rules.

The announcement comes just one month after the Finance Ministry launched a consultation on draft proposals. This rapid progress is in contrast to the more protracted process of reforming India's transfer pricing rules that has been underway since 2009. That year's Finance Act stipulated that the calculation of an arm's length price was to be subject to safe harbor rules. No agreement could be reached on what shape the new regime was to take, and eventually a committee was established in 2012 to draw up provisions.

The committee drafted safe harbors for the IT and ITES sectors, contract research and development (R&D) in the IT and pharmaceutical sectors, financial transactions involving corporate guarantees and outbound loans, and auto ancillary equipment manufacturers. The Government said last month that it had accepted the majority of the committee's recommendations.

Following the consultation, which closed on August 26, the Government has confirmed that the rules will be applicable for the five assessment years beginning in 2013-14. A taxpayer will be able to opt to use the regime for a period of their choice, providing that this does not exceed five assessment years.

The Assessing Officer (AO) in each case will pass their reference on to the Transfer Pricing Officer (TPO) within two months of the taxpayer's application. Within two months of this reference, the TPO must pass an order determining the validity of the taxpayer's decision to use the rules. If the authorities reject the application, a hearing will be held and a reasoned order passed, to which the taxpayer will have the right to file an objection. The Commissioner will have two months to respond.

If the option is declared valid, it will remain so for the requested period, unless the taxpayer voluntarily opts out. The taxpayer will need to submit a statement regarding the significance of the international transaction, its nature, and the operating margins or rate of interest/commission for the relevant assessment years covered under the safe harbor period. The option may be deemed invalid if there is a change in the facts and circumstances relating to the eligibility of the taxpayer or of the international transaction. The ruling will only be withdrawn once the Commissioner has consulted with the taxpayer.

TAGS: Finance | Transfer Pricing | tax | business | India | interest | revenue guidance | ministry of finance | tax authority | tax planning | transfer pricing | revenue statistics | tax reform | research and development | Tax

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