Transfer pricing has always been an ambiguous and disputed topic in international taxation. Now, as we know, transfer pricing refers to the arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied. In order to reduce the uncertainties and disputes in relation to transfer pricing, the Government of India has come up with transfer pricing safe harbour rules.

Q: What exactly is ‘safe harbour rule’?

A: Safe harbour rule simply means that the transfer price which is declared by the assessee shall be accepted by the income-tax authorities.

Q: Are safe harbour rules notified?

A: Safe harbour rules were part of the Finance Act of 2009, but the rules were never notified. On July 30, 2012, Prime Minister Manmohan Singh set up a committee called the Rangachary Committee named after N. Rangachary, former chairman of the CBDT and IRDA. The income-tax department released draft safe harbour rules on 14^th August, 2013 based on this committee’s recommendations. The comments received from various stake holders have been considered and necessary modifications have been made to the draft rules. The finalized safe harbour rules are being notified separately.

Q: Safe harbour rules are finalized for which sectors?

A: Government of India on 12th September, 2013 approved the considered suggestion of the Rangachary Committee that it may finalize the Safe Harbour Rules in the following sector/ activities:

(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

Q: From when are safe harbour rules applicable?

A: The safe harbour rules shall be applicable for 5 assessment years beginning from assessment year 2013-14.

Q: Which transactions are eligible for safe harbour benefits?

A: In the draft regulations, transactions below Rs.100 crore were eligible for getting the safe harbour benefits. However, the limit was relaxed in the final rules and now transactions up to Rs.500 crore will be eligible for safe harbour. However, the operating profit margin that is declared in relation to operating expense should be 20% for transactions upto 500 crore and for transactions above Rs.500 crore, this margin should be 22%.

Q: What are the ceiling limits and operating margin requirements for a KPO?

A: The operating margin requirement for a KPO was initially 30%, but the same has been reduced to 25%. The transaction ceiling limit has also been done away with.

Q: Can safe harbour option be exercised by taxpayers with guarantees exceeding 100 crores?

A: In the draft rules, the safe harbour option was available only for guarantees upto 100 crores. However, this limit was removed in the final rules provided that the credit rating of the borrowing group entity, done by an agency registered with the Securities and Exchange Board of India (SEBI), is ‘adequate to highest safety’. The safe harbour commission rate for such guarantees has been prescribed at a minimum of 1.75%.

Q: How can you exercise a safe harbour option?

A: To exercise the safe harbour option, you would need to furnish Form 3CEFA on or before the due date for furnishing return of income for the relevant year. In case option is exercised for more than one year, you would need to furnish the said form on or before the due date for furnishing the return of income for the first year. Additionally, the taxpayers opting for multiple year coverage by safe harbour rules are required to file a statement annually with the tax officer before filing the tax return.

Q: Can you opt out of the safe harbour option?

A: You can easily opt out of the safe harbour regime by filing a declaration to that effect.

Q: How long will it take to be sure whether you are eligible for the safe harbour option?

A: Within a period of 6-7 months from the date of filing Form 3CEFA the person will know whether he is eligible to opt for the safe harbour option or not. [2 months for the tax officer to refer the matter to transfer pricing officer (TPO), 2 months for the TPO to pass his order; 15 days for taxpayer to file objections with the Commissioner in case eligibility is not accepted by TPO; and 2 months for the Commissioner to pass his order]. One can also object before the Commissioner in case the TPO does not accept eligibility.

Please find the transfer pricing harbour prescribed rates as below in the table.

Eligible taxpayer/transaction	Specified circumstances as per final rules
Taxpayer engaged in providing software development services or ITES, with insignificant risk, to a non resident associated enterprise Where the aggregate value of such international transactions does not exceed  INR 500 crores   Where the aggregate value of such international transactions exceeds  INR 500 crores	Operating profit/Operating expenses is not less than 20%   Operating profit/Operating expenses is not less than 22%
Taxpayer engaged in providing KPO services, with insignificant risk, to a non resident associated enterprise.There is no threshold for this category of taxpayers	Operating profit/Operating expenses is not less than 25%
Taxpayer engaged in provision of contract R&D services (wholly or partly)  relating to software development , with insignificant risk, to a non resident associated enterprise.There is no threshold for this category of taxpayers	Operating profit/Operating expenses is not less than 30%
Taxpayer engaged in provision of contract R&D services (wholly or partly)  relating to generic pharmaceutical drugs , with insignificant risk, to a non resident associated enterprise.There is no threshold for this category of taxpayers	Operating profit/Operating expenses is not less than 29%
Taxpayer engaged in manufacture and export of core auto components / non-core auto component [where 90 per cent or more of total turnover are in nature of Original Equipment Manufacturer sales] Manufacture and export of core auto components Manufacture and export of non-core auto components   There is no threshold for this category of taxpayers	Operating profit/Operating expenses is not less than 12%   Operating profit/Operating expenses is not less than 8.5%
Taxpayer advancing intra-group loan to wholly owned non-resident subsidiary where the loan is sourced in Indian Rupees (excluding loans by enterprises engaged in lending or borrowing in the normal course of business)	Interest rate equal is not less than base rate of State Bank of India (SBI) as on 30th June of the relevant previous year plus(i) 150 basis points [where amount of loan does not exceed INR 50 crores (approx. USD 8 million)];(ii) 300 basis points [where amount of loan exceeds INR 50 crores]
Taxpayer providing explicit corporate guarantee to wholly owned non-resident subsidiary Where amount of guarantee does not exceed INR 100 crores (approx. USD 16 million)   Where amount of guarantee exceeds INR 100 crores and the credit rating of the borrowing AE done by an agency registered with SEBI is of adequate to highest safety	Commission or fee at the rate of not less than 2% per annum on the amount guaranteed      Commission or fee at the rate of not less than 1.75%per annum on the amount guaranteed