Expanding Safe Harbour Rules To Restrain Transfer Pricing Disputes
Expanding Safe Harbour Rules To Restrain Transfer Pricing Disputes
In the Indian tax landscape, Transfer Pricing has always been the most sought-after scrutinised area of the Indian Revenue Authorities. With no straitjacket formulae and related-party transactions under the microscope, such Transfer Pricing scrutiny audits generally conclude at very high-pitched inverse additions.
While the subjectivity surrounding the pricing of related-party transactions remains a constant battle to be fought between taxpayers and Indian Revenue Authorities, the Indian Transfer Pricing law has come a long way to make it more inclusive for the taxpayers. In addition to offering the traditional appellate forums to the taxpayers, the Indian Government has introduced various taxpayer-friendly measures over the years.
Establishing a Dispute Resolution Panel as an alternative way to the Commissioner Appeals route for lodging objections against negative Transfer Pricing audits was a welcome step taken by the Indian Government many years ago. The introduction of the Advance Pricing Agreements (APA) regime in India has been considered as the most successful step taken towards removing ambiguity around the pricing of related-party transactions and achieving tax certainty. Even the amendments to the Mutual Agreement Procedure (MAP) rules a few years ago have been helping taxpayers resolve their prior cross-border disputes in a faster and efficient manner.
Among such successful and taxpayer-friendly measures, the introduction of Safe Harbour rules has been no less than a blessing to taxpayers entering cross-border transactions with their multinational group entities. The Safe Harbour rules not only help in avoiding discrepancies in related-party transaction pricing but also provide much-needed tax certainty for a certain class of related-party transactions.
What are the Safe Harbour rules?
As the name suggests, opting for Safe Harbour rules lands the taxpayer in a safe harbour. Safe harbour was defined to mean circumstances in which the Indian Revenue Authorities shall accept the Transfer Price declared by a taxpayer. The rules prescribe specified related-party transactions/ covered transactions and the corresponding pre-defined rates/ Safe Harbour rate along with the thresholds for taxpayers, which makes a taxpayer eligible to opt out of such rules.
Safe Harbour experience of the Indian taxpayer
Introduced as a tax-friendly mechanism, the Safe Harbour rules took time to get acceptance and accolades from taxpayers in India since it covered only a handful of transactions under the regime that also came with stricter threshold applicability. Even the rates offered by the Safe Harbour rules issued originally were too high and far away from the commercial realities and industry standards.
Realising the same, the Indian Government has come up with amendments on Safe Harbour rules in the past to make it more attractive to the taxpayers. Considering the need to make it even more attractive and accessible to a wider base of taxpayers, the Indian Government proposed to expand the scope of Safe Harbour rules in the Union Budget 2025.
Amendments in Safe Harbour rules: Notification dated 25 March 2025 from the Central Board of Direct Taxes (CBDT)
During the budget speech on 1 February 2025, the Indian Finance Minister proposed to expand the scope of Safe Harbour rules in India. Delivering on the proposal made by the Finance Minister, and following the passing of Finance Bill 2025 in Lok Sabha, the CBDT (the central regulatory tax body of the country) issued a press release and notification on 25 March 2025 with respect to the expansion of Safe Harbour rules. The amended provisions shall be applicable for two Assessment Years i.e., AY 2025-26 and AY 2026-27.
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Expanding the coverage/ scope - |
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Climate change, being a global phenomenon, has made Electric Vehicles (EV) the inevitable future of a greener and healthier planet. In business terms, this translates to increased investments in the EV market segment and hence, with a view to boost the EV market segment in India, the scope of Safe Harbour rules has been expanded by including 'lithium-ion batteries' for use in electric or hybrid EVs in the definition of core auto components. |
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This move aims to encourage and provide tax certainty to taxpayers in the EV market segment. Taxpayers manufacturing and exporting the lithium-ion batteries (used in electric and hybrid cars) will now be considered part of the core auto industry for tax purposes and hence can opt for the Safe Harbour rate of 'Operating Profit Margin to Operating Expense of 12%'. |
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Increase in the applicability threshold - |
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Acknowledging the constant demand of the industry, the turnover applicability threshold has been increased from INR 200 crore to INR 300 crore'. |
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Large taxpayers engaged in the provision of software development services, information technology-enabled services, knowledge process outsourcing services, contract research and development relating to software development, or generic pharmaceutical drugs with value of international transaction of up to INR 300 crore can also opt for Safe Harbour rates. |
Views
There is no doubt that these amendments are no less than a blessing for taxpayers associated with lithium-ion battery manufacturing in India. This will provide them with the encouragement that the Indian Government acknowledges their contribution to the economy and possibly send a positive message to the global EV players to invest in India. Even for existing transactions covered under the Safe Harbour rules, the increase in revenue applicability threshold gives a way to a much larger base of taxpayers wanting to adopt Safe Harbour.
While the amendments are an encouraging and welcome move, the Indian Government could have provided relief by reducing the rates of the covered transactions, which it has not done in this amendment. It has been a long-standing request of the industry to alter the Safe Harbour rates of the covered transactions in order to make the same more economically feasible to the taxpayer, since the present rates are much higher and far-fetched from commercial realities.
Source:- Taxxmann