TRANSFER PRICING SAFE HARBOUR RULES – CREATING BARBED WIRES SINCE 2009

It is human nature to jump at and exploit to the fullest extent, everything that is new to our world. It happened with petroleum; it happened with Sachin Tendulkar; it also started happening with the Transfer Pricing provisions. After the introduction of the Transfer Pricing Regulations vide the Finance Act, 2001, the number of audits started increasing, along with the number of the pending cases. To curb the same, section 92CB was introduced vide Finance Act, 2009, which provided that the determination of arm’s length price under section 92A/92C shall be subject to certain “Safe Harbour Rules”. The intent was clear – do NOT scrutinize every single assessee who enters into a transaction with its international associate. “Safe Harbour” was defined to mean those transactions for which the Revenue would accept the transfer price declared by the assessee.

Vide the aforesaid amendment in 2009, the Government also empowered the CBDT to make the said “Safe Harbour Rules”. However, after many discussions, consultations and debates, no conclusion could be reached as to the issuance of these Rules. So, on 30th July, 2012, The Rangachary Committee was formed to review taxation of Development Centres and IT Sector, which submitted its reports from time to time.

On 13th October, 2012, the said committee submitted its report on the following term of reference:

“Engage in sector-wise consultations and finalize the safe harbour provisions announced in Budget 2010, sector-by-sector. The Committee will also suggest any necessary circulars that may need to be issued.”

The sectors, in respect of which the Rules were finalized by the Committee, are as follows:

1. IT Sector
2. ITES Sector
3. Contract R&D in the IT and Pharmaceutical Sector
4. Financial transactions-Outbound loans
5. Financial Transactions-Corporate Guarantees
6. Auto Ancillaries-Original Equipment Manufacturers

Taking into consideration, the above report of the Committee, the CBDT issued a press release on 14th August, 2013 inviting suggestions from the stakeholders on the draft Safe Harbour Rules, proposed to be inserted vide Rules 10TA to 10TG in the Income Tax Rules, 1962.

The Rules are discussed hereunder, in brief:

Rule 10TA – Definitions:
This rule provides the definitions of the services, sectors and other terms, for the purpose of the Safe Harbour Rules.

Rule 10TB – Eligible Assessee:
Eligible assessee has been defined to mean a person who has opted for the application of Safe Harbour Rules, and enters into specific transactions listed in sub-rule (1) of the said Rule. Certain transactions mandate the eligible assessee to have ‘insignificant risk’, which has been defined in sub-rules (2) and (3).

Rule 10TC – Eligible International Transaction:
‘Eligible International Transaction’ has been defined to mean an international transaction between the ‘eligible assessee’ and its ‘associated enterprise’, at least one of whom is a non-resident. The broad composition of such international transactions, eligible for the Safe Harbour Rules, has also been enlisted.

Rule 10TD – Safe Harbour:
Various circumstances in respect of the ‘eligible international transactions’, for which the transfer price declared by the assessee shall be accepted, have been specified. It is also clarified that the said circumstances would be applicable for the assessment years 2013-14 and 2014-15 only.

Further, it has been clarified that section 92C(2) will not be applicable on such transactions, i.e. the arm’s length price will not be computed as per the methods laid down by the Act. However, sections 92D and 92E would continue to apply on the eligible assessee as well. Hence, the eligible assessee would be required to keep and maintain such information and documents, as prescribed; the eligible assessee would also be required to furnish the report from Chartered Accountant as per section 92E.

Rule 10TE – Procedure:
This rule lays down the procedure for exercising the option for Safe Harbour. According to the said Rule, the eligible assessee must furnish Form 3CEG to the Assessing Officer by the due date specified in section 139(1), i.e. 30th November of the assessment year. The format of the said Form has also been provided, proposed to be inserted in Appendix II, Rule 10T.

On receipt of the said Form, the Assessing Officer shall verify whether the assessee is an ‘eligible assessee’, and whether the transactions are ‘eligible international transactions’.

On confirmation of the above, the Assessing Officer shall verify whether the transfer price declared by the assessee is acceptable or not, as per the circumstances laid down in Rule 10TD. For the above purposes, the Assessing Officer may call upon the assessee to submit such documents and information, as required. The Assessing Officer may also refer the same to the Transfer Pricing Officer for verification, as per section 92CA.

If any of the above conditions are not satisfied, the Assessing Officer shall declare the transfer price declared by the assessee to be invalid, and the arm’s length price would be computed by him as per section 92C, after giving a reasonable opportunity of being heard to the assessee.

It has been clarified that if the eligible assessee does not exercise his option for Safe Harbour by submitting the Form 3CEG and following the procedure laid down, then the arm’s length price would be computed as per section 92C and 92C. Hence, the Safe Harbour Rules do not apply automatically on the eligible assessee.

Rule 10TF – Safe Harbour Rules not to apply in certain cases:
The Safe Harbour Rules will not apply if the associate enterprise is located in:
Country or territory notified under section 94A (i.e. Notified Jurisdictional Areas); or
No tax or low tax country or territory (as defined in Rule 10TA – minimum marginal rate of income tax is zero or less than 15%, in respect of the associated enterprise).

Rule 10TG – Not eligible for MAP:
If the transfer price declared is accepted by the Revenue, the assessee will not be allowed to invoke Mutual Agreement Procedure under DTAA, as referred in sections 90 or 90A.

Under MAP, the Revenue Authorities of two countries come together to settle a dispute in respect of double taxation. The eligible assessee, exercising the option of Safe Harbour, thus, cannot opt for the option of MAP.

The above is a broad overview of the Rules proposed to be inserted by the CBDT. They have been released for suggestions from the stakeholders.