The ‘safe harbour’ rules would ensure certainty in taxation of overseas transactions between related parties and reduce transfer pricing-related cases

In a move aims to curtail tax-related disputes with multinational corporations (MNCs) operating in India, the finance ministry has notified ‘safe harbour’ rules. These rules are easier than those announced in a draft and would ensure certainty in taxation of overseas transactions between related parties and reduce transfer pricing-related cases.

"This is a welcome move. It reflects the fact that the Indian Government has its ears to the ground and is listening to the taxpayers and softening the disparity between the transfer pricing positions adopted by the revenue officials and the taxpayers to the extent feasible," said Fatema Hunaid, partner for tax and regulatory services- transfer pricing at Grant Thornton India LLP.

This follows a slew of transfer pricing disputes with many MNCs in the past year, which had hurt the investment environment.

The new rules will be applicable for five years beginning from Assessment Year 2013-14.

Safe harbour rules lay down the framework within which the Income Tax authority shall accept the transfer price declared by the taxpayer. Here, taxpayers follow a simple set of rules/margins under which transfer prices are automatically accepted by the Income Tax authorities.

Transfer pricing, or the value at which companies trade products, services, shares or assets between units across borders, is a regular part of doing business for a multinational. According to experts, transfer pricing is used by companies to minimise their tax payouts.

Hunaid said, "The rules seem like a condensed Advanced Pricing Agreement (APA) kind of mechanism for the taxpayers (IT, ITES, KPO and auto-components manufacturers, intra-group outbound loans and corporate guarantees).  Notwithstanding the similarity of the safe harbour rules with the APA regime, these do not have the trappings of a regular APA program and is quite real-time and cost effective in providing a fast-track transfer pricing certainty to the taxpayers so to say."

The rules also provide for an almost real-time audit by the revenue officials regarding the eligibility of the safe harbour claim of the taxpayers. The taxpayers have now also been provided with a resolution mechanism in case their claim is objected to by the revenue officials. This heralds real-time course correction by the taxpayers as against waiting for the normal period of three to four years from the end of the relevant financial year for a normal scrutiny audit to take place.

The other key highlights of the final safe harbour rules are that the turnover ceiling of Rs100 crore for IT/ITES has been removed entirely, thereby making this route available to the industry as a whole. A differential safe harbour profit margin declaration of 20% for below Rs500 crore and 22% for above Rs500 crore has been prescribed.  Another positive outcome for Knowledge Process Outsourcing (KPO) services in the final rules is that the initial profit margin of 30% has now been reduced to 25% and the definition has also been rationalised to remove regular Business Process Outsourcing (BPO) activities.