The income tax department today rationalised ‘safe harbour’ rates as it wants more foreign companies to make use of the mechanism and reduce transfer pricing disputes. Generally, ‘safe harbour’ refers to circumstances in which the income-tax authorities accept the transfer price declared by the assessee. Transfer pricing implies the prices at which various overseas divisions of a company transact with each other. The new rates would be effective from April 1, 2017 and shall continue to remain in force for two years — up to assessment year 2019-2020. As per the revised ‘safe harbour rules’, for transactions involving provision of software development and IT-enabled services, safe harbour margins have been reduced to peak rate of 18 per cent from 22 per cent in the previous regime. The new regime would be available for transactions up to Rs 200 crore in relation to IT services, knowledge process outsourcing services, contract research and development services wholly or partly relating to software development or generic pharmaceutical drugs. The “safe harbour rules” were introduced by Finance Act 2009 to reduce the transfer pricing disputes and also to provide compliance relief, administrative simplicity and certainty to the taxpayers. The tax department then came out with final “safe harbour rules” in September 2013. So far, the rules have evoked tepid response due to high margins running up to 30 per cent.
In order to align with the margins decided by various tribunals and in Advance Pricing Agreements, the CBDT today revised the rules. “The amendment in the safe harbour rules is indeed positive and demonstrate continued efforts of the government to reduce transfer pricing litigation. “While it is a welcome relief, its scope is still quite restrictive, specifically with respect to large software/ITES companies having turnover in excess of Rs 200 crore,” Nangia and Co Partner Amit Agarwal said.
The revised rules are steps towards making safe harbour a viable alternate dispute resolution mechanism, Price Waterhouse LLP Leader Transfer Pricing Kunj Vaidya said. Grant Thornton Advisory Director Arun Chhabra said that the lukewarm response to the earlier safe harbour scheme was on account of the high rates. “Thus, taxpayers opted for unilateral APA process instead. The revised scheme has been designed to attract small to medium business, especially in IT/ITeS segment, so as to give them a viable alternative to APA regime, which is both time consuming and expensive,” Chhabra said. BMR and Associates Transfer Pricing Leader Karishma R Phatarphekar said safe harbour of 5 per cent on low value adding intra-group services is a welcome move and aligned to the Base Erosion and Profit Shifting (BEPS) recommendations of the OECD. Also, the revised rates for IT and ITeS to 17-18 per cent for smaller taxpayers will ease the pressure on litigation and APA programme, he said.