Most Awaited Notification on safe harbour rules for FY 2019-20
The Central Board of Direct Taxes (CBDT) has notified Safe Harbour Rules (SHR) in the month of May 2020 for Assessment Year 2020-21 and rates applicable from AY (Assessment Year) 2017-18 to 2019-20 will continue to apply for AY 2020-21.
First time SHR provisions were introduced in 2013 for a period of 3 years, followed by revision in 2017 in the SHR which were applicable till Financial Year (FY) 2019.
Safe harbour refers to the circumstances under which income-tax authorities will accept the Arm’s length price declared by the assesses without any question or scrutiny as per Transfer Pricing Rules. It aims to provide a certain degree of assurance to taxpayers. A safe harbour regime will, in particular, benefit taxpayers in the services sector by adopting a transfer pricing mark-up in the range prescribed to avoid litigation.
Different rates have been prescribed for different category of international transactions. Safe harbour rates applicable for FY 2019-20:
| Sl. No. | International transactions | Monetary Threshold | Safe harbour rates |
|
1. |
Software development services and information technology enabled services |
Up to Rs. 100 crores |
17% |
| Rs. 100 crores to Rs. 200 crores |
18% |
||
|
2. |
Knowledge process outsourcing services |
Up to Rs. 200 crores and employee cost to total cost ratio is: | |
| Up to 40% | 18% | ||
| 40% to 60% | 21% | ||
| Greater than 60% | 24% | ||
|
3. |
Contract Research and Development services relating to software development |
Up to Rs. 200 crores |
24% |
|
4. |
Contract Research and Development services relating to generic pharmaceutical drugs |
Up to Rs. 200 crores |
24% |
| 5 | CRISIL rating of AE: | One-year marginal cost of funds lending rate of |
|
Intra group loans denominated in Indian currency |
SBI as on 1st April, 2019 plus | ||
| AAA to A or its equivalent | 175 bps | ||
| BBB-, BBB, BBB+ or Equivalent | 325 bps | ||
| BB to B or its equivalent | 475 bps | ||
| C to D or its equivalent | 625 bps | ||
| Credit rating of AE not available and the aggregate sum of loan advanced to AEs as on March 31, 2020 does not exceed Rs. 100 crores |
425 bps |
||
|
6 |
Intra group loans denominated in foreign currency |
CRISIL Rating of AE: |
Six month’s LIBOR of the relevant currency as on 30 September, 2019 plus |
| AAA to A or its equivalent | 150 bps | ||
| BBB-, BBB, BBB+ or Equivalent | 300 bps | ||
| BB to B or its equivalent | 450 bps | ||
| C to D or its equivalent | 600 bps | ||
| Credit rating of AE not available and the aggregate sum of loan advanced to AEs as on March 31, 2020 does not exceed Rs. 100 crores. |
400 bps |
||
| 7 | Provision of corporate guarantee | No threshold | 1% of the amount guaranteed |
| 8. | Manufacture and export of core auto components | No threshold | Operating cost-plus 12% |
| 9. | Manufacture and export of non- core auto components | No threshold | Operating cost plus 8.5% |
|
10. |
Receipt of low value adding intra group services (IGS) |
Total value of IGS does not exceed Rs 10 crores. |
The value of transactions cannot include margin of more than 5% |
Taxpayers opting for the Safe Harbour Rules for FY 2019-20 will need to file Form 3CEFA with the Assessing Officer, on or before the due date of furnishing return of income for FY 2019-20, i.e., by 30 November, 2020. The taxpayer must file the return of income either before or along with Form 3CEFA.
Government has extended safe harbour rules for one year only and there is no reduction in the tax rates. Multi National business community is expecting reduced tax rates as per SHR for future years as economic condition is not so good and most of the business are highly affected due to COVID 19.
The notification of the safe harbour rules is one of the welcome steps towards minimising transfer pricing disputes thereby improving the overall investment atmosphere in India from a direct tax perspective. However following points which emerge from the discussion and needs to be addressed for better implementation and clarity,
- Global business scenario changes every passing year, the negative / positive impact of the changes should be factored while deciding the ratios or it may not reflect world industry bench mark or Current economic environment. Currently there are no such provision / clarification by CBDT.
- Requirement of maintaining requisite documents pertaining to international transactions has not been done away with. Though one can understand the logic behind it but this kind of partial relief to the assessee.
- There are risks of double taxation since reporting higher than arms-length level of income in one jurisdiction (where SHR adopted) than that of another jurisdiction where SHR are not adopted. Also, the impact of a secondary adjustment will also need to be duly considered by the taxpayers.
- Even though SHR is adopted, lot of subjectivity cannot be avoided since coverage of IT & ITES and R&D are most complex one which requires complete technical analysis.
“The taxpayers intending to opt for SHR may apply before the statutory due date for undertaking TP compliance for AY 2020-21 on or by October 31, 2020. With good judgement the government has wisely notified the rate for only one year and it gives the impression of being reduced rates would be announced for future years to cover loss of the Multinational Enterprises due to COVID 19,”