In this article, Ashwini Gehlot of Institute of Law, Nirma University Ahmedabad discusses Safe Harbour Regulations (2017) In India.
Background
To control the expanding numbers of transfer pricing audits and prolonged disputes, the CBDT (Central Board of Direct Taxes) published the Safe Harbour Rules (SHRs) in September 2013. But the safe harbour rules didn’t get many responses from the taxpayer because of the high margin and vagueness in the classification of services. And now CBDT has recently issued a notification on 7 June 2017, revising the already established safe harbouring rules in India.
Safe Harbour – The concept
Section 92CB of The Finance (No. 2) Act 2009 defines the term Safe Harbour as “circumstances under which the income-tax authorities shall accept the transfer pricing declared by the assessee.”[1]
Safe harbours provide for conditions in which a specific category of taxpayers can follow a straightforward arrangement of rules under which transfer prices are mechanical, accepted by the revenue authorities. Safe harbour provisions offer necessary advantages to taxpayers and tax administrators with benefits of administrative simplicity, compliance relief, and certainty.
Benefits for taxpayers and the revenue authorities by the adoption of safe harbour rules, like[2]
- Advance information or information about the range of profits or prices to meet all the requirements for the safe. This brings certainty in transactions.
- Removal of the likelihood of litigation between the revenue authorities and the taxpayers.
- Self-assessment procedures and Automatic approvals.
- Ease of compliance.
- The decrease in compliance cost harbour.
The above-mentioned advantages enable the taxpayers and its partners for better planning of intra-group transactions.
Alongside the advantages, certain difficulties will be confronted by the taxpayers as well the income tax authorities like[3]
- Characterising the qualification for safe harbour.
- Computation of operating benefits and its adequacy to Income Tax Authorities.
- Approval process and subjectivity in approvals.
- Administrative implementation of the provisions.
Benefits for taxpayers and the revenue authorities by the adoption of safe harbour rules, like[4]
The earlier SHRs were applicable from AY(assessment year) 2013-14 till 4 consecutive years following this AY i.e. till 2017-18 and the new SHRs are applicable from AY 2017-18 up to 2 consecutive years i.e 2019-20. And for the AY 2017-18, taxpayer have the choice to choose the rules from old or new rules, whichever is more profitable or beneficial for them.
Key Highlights[5]
Rationalisation Of Safe Harbour Rates
The safe harbour rates are now decreased for all the contract services, like-
- For IT (Information Technology) and ITeS ( IT-enabled services) previously it was 20-22% and now it is decreased to 17-18%.
- For KPO services (Knowledge Processing Outsourcing) it is brought down from 25% to 18%, 21% and 24% depending on the percentage of employee cost to operating cost.
- For R&D (Research and Development) service provider (for genetic pharmaceutical drugs and IT) is decreased from 29-30% to 24%.
Introduced Upper Turnover Threshold Of Rs. 200 Crore
This is introduced for all types of contract service providers as mentioned above like IT, ITeS and so on. For AY 2017-18 rules, the taxpayer has the discretion to choose between old and new rule. So, now even a taxpayer with pertinent international transaction surpassing Rs. 200 crore can according to old rules, opt for safe harbour.
Safe Harbour Introduced For Receipt Of Low Value Adding Intra-group Services
In the revised rule, the provision of the safe harbour is extended and now Indian entities can receive low value adding intra-group services. And in this matter the SHRs are mostly in line with the guidelines issued by OECD under BEPS (Base Erosion and Profit Shifting) action plan 8-10, in respect of low value adding intra-group services, there are some gaps. To be covered by SHRs, like such services should-
- Not be duplicate service or shareholder services or a part of multinational enterprise (MNE) group.
- Be services which do not have the reliable external comparable services used to determine their ALP (Arm’s Length Price) and should be in the nature of support services.
- Not required to use or create, unique and valuable intangibles.
- Not include the assumption or control or creation of significant risk by/for the service provider.
There is a list of 10 types of services which are excluded from the low value adding intra-group services, like BPO, KPO, IT etc.
The new rules of SHRs have set down the definition of an accountant and also set a requirement for the applicant to get the following aspects certified by the accountant.
- Procedure of cost pooling,
- The reasonableness of allocation keys used for allocation cost and
- Removal of duplicate costs and shareholder costs from cost pool.
Safe Harbour Rate For KPO Service
For the request of the unsteady safe harbour rate for the KPO services, which is dependent on the application of employee cost to operating cost ratio, the employee cost has been defined to add different items of employee benefit and compensation like gratitude, bonus, salary, prerequisite, commission, wages, expenses incurred on the contractual employment of a person who is performing similar skills like that of regular employee, payment received on termination of service, relocation, recruitment and training expenditure etc.
It also included outsourcing expenses, to the level of employee cost, whenever determinable it is set in the total outsourcing expenses and if not determinable then 80% of the total outsourcing expenses are considered as employee cost.
Safe Harbour Rates On Loan Advanced In Foreign Countries
This rate which is given by the revised SHRs is based on the LIBOR (London Inter-Bank Offer Rate) for loans provided to AEs denominated in foreign currency. This new rule has also given the staggered rates depending on the credit rating of the overseas borrower, and such credit rating should be approved by Credit Rating Information Services Of India Limited (CRISIL a global analytical company giving research, risk, policy advisory services and rating)
Definition Of Operating Cost And Operating Revenue
The revised SHRs amended the definition of operating expenses to include-
- Cost related to ESOP (Employee Stock Option Plan) given by associated enterprises (AE)
- Compensation to AE for expenses incurred by the AE on behalf of the taxpayer.
- Amount recovered from the AE which is related to normal operations of the taxpayer.
Safe Harbour Rates[6]
A brief snapshot of the eligible transactions, circumstances for application of SHR 2017, threshold, and the safe harbor margins is provided below:
| S.No | Eligible International transaction | SHR 2013 | SHR 2017 | |||
| Threshold | Safe Harbour Margin | Threshold | Safe Harbour Margin | |||
| 1 | Software development services | Upto INR 500 crore | >= 20% on operating costs (“OC”) | Upto INR 100 crore | >= 17% on OC | |
| Above INR 500 crore | >= 22% on OC | Above INR 100 crore & upto 200 crore | >= 18% on OC | |||
| 2 | IT enabled services | Upto INR 500 crore | >= 20% on OC | Upto INR 100 crore | >= 17% on OC | |
| Above INR 500 crore | >= 22% on OC | Above INR 100 crore & upto 200 crore | >= 18% on OC | |||
| 3 | Knowledge process outsourcing (“KPO”) | None | >= 25% on OC | Upto INR 200 crore | Employee cost to OC | Margin |
| <40% | 18% | |||||
| >=40% & <60% | 21% | |||||
| >60% | 24% | |||||
| 4 | Advancing of intra-group loans to wholly owned subsidiary (“WOS”) | Upto INR 50 crore | >= SBI rate (30 June) + 150 basis pts | Refer point 5 & 6 | ||
| Above INR 50 crore | >= SBI rate (30 June) + 300 basis pts | |||||
| 5 | Advancing of intra-group loans to WOS & loan is in INR | Not applicable | Credit rating | Interest rate of one year marginal cost of funding rate of SBI plus | ||
| AAA to A | SBI rate + 175 basis pts | |||||
| BBB-, BBB, BBB+ | SBI rate + 325 basis pts | |||||
| BB to B | SBI rate + 475 basis pts | |||||
| C to D | SBI rate + 625 basis pts | |||||
| NA & Total loan to all AEs <= 100 crore | SBI rate + 425 basis pts | |||||
| 6 | Advancing of intra-group loans to WOS & loan is in foreign currency | Not applicable | Credit rating | Interest rate of six month LIBOR of relevant foreign currency (as on 30 September) plus | ||
| AAA to A | LIBOR + 150 basis pts | |||||
| BBB-, BBB, BBB+ | LIBOR + 300 basis pts | |||||
| BB to B | LIBOR + 450 basis pts | |||||
| C to D | LIBOR + 600 basis pts | |||||
| NA & Total loan to all AEs <= 100 crore | LIBOR + 400 basis pts | |||||
| 7 | Corporate guarantee to WOS | Upto INR 100 crore | >= 2% on amount guaranteed | Upto INR 100 crore | >= 1% on amount guaranteed | |
| Above INR 100 Crore + WOS has been rated at adequate to highest safety by SEBI registered rating agency | >= 1.75% | |||||
| 8. | Contract Research and Development (R&D) Services related to software development | None | >= 30% on OC | Upto INR 200 crore | >= 24% on OC | |
| 9. | Contract Research and Development (R&D) Services related to pharmaceutical drugs | None | >=29% on OC | Upto INR 200 crore | >= 24% on OC | |
| 10. | Manufacture and export of core auto components | None | >=12% on OC | None | >=12% on OC | |
| 11. | Manufacture and export of non-core auto components | None | >=8.5% on OC | None | >=8.5% on OC | |
| 12. | Low value adding intra-group services | Not applicable | Not applicable | Upto INR 100 crore | 1) Mark-up – 5%
2) Maximum value – INR 10 crore 3) Cost is certified by accountant (including CA)
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[1] THE FINANCE (No. 2) BILL, 2009, NO. 33-F, Act of Parliament, 2009 (India), 92CB.
[2] Malpani, M. (2017). An overview of Safe Harbour Rules in Indian Transfer Pricing Regime (April 2014) | Bizsolindia Services Pvt. Ltd.. [online] Bizsolindia.com. Available at: http://bizsolindia.com/an-overview-of-safe-harbour-rules-in-indian-transfer-pricing-regime-april-2014/ [Accessed 12 Jul. 2017].
[3] Malpani, M. (2017). An overview of Safe Harbour Rules in Indian Transfer Pricing Regime (April 2014) | Bizsolindia Services Pvt. Ltd.. [online] Bizsolindia.com. Available at: http://bizsolindia.com/an-overview-of-safe-harbour-rules-in-indian-transfer-pricing-regime-april-2014/ [Accessed 12 Jul. 2017].
[4] Anon, (2017). [online] Available at: http://www.in.kpmg.com/taxflashnews/KPMG-Flash-News-CBDT-notifies-revised-Safe-Harbour-Rules-2.pdf [Accessed 12 Jul. 2017].
[5] ibid.
[6] Anon, (2017). [online] Available at: http://www.in.kpmg.com/taxflashnews/KPMG-Flash-News-CBDT-notifies-revised-Safe-Harbour-Rules-2.pdf [Accessed 12 Jul. 2017].
