CBDT notifies relaxed safe harbour regime for cross-border transactions

The Central Board of Direct Taxes (CBDT) has notified a new, relaxed, safe harbour regime in order to reduce transfer pricing disputes. The new safe harbour regime is available for transactions of up to Rs200 crore.

The move is aimed at providing certainty to taxpayers, aligning safe harbour margins with industry standards and hor enlarging the scope of safe harbour transactions, a CBDT release stated.

The new safe harbour regime, which is based on the report of a committee set up in this regard, has come into effect from 1 April 2017, ie, Assessment Year 2017-18 and shall continue to remain in force for two immediately succeeding years thereafter, ie, up to AY 2019-2020.

Assessees eligible under the present safe harbour regime up to AY 2017-18 shall also have the right to choose the safe harbour option most beneficial to them.

The new regime incorporates a new category of transactions, called ''Receipt of Low Value-Adding Intra-Group Services.''

The new safe harbour regime is available for transactions limited to Rs200 crore in provision of software development services, provision of information technology-enabled services, provision of knowledge process outsourcing services, provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs.

In respect of transactions involving provision of software development services and provision of information technology-enabled services, safe harbour margins have been reduced to peak rate of 18 per cent from 22 per cent in the previous regime.

In respect of transactions involving provision of knowledge process outsourcing services, a graded structure of 3 different rates of 24 per cent, 21 per cent and 18 pwe cent has been provided, based on employee cost to operating cost ratio, replacing the single rate of 25 per cent in the previous regime.

In respect of transactions involving provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs, safe harbour margins have been reduced to 24 pe5r cent from 30 per cent and 29 per cent, respectively, in the previous regime.

Risk spreads on intra-group loans denominated in foreign currency will be benchmarked to the 6-month London Inter-Bank Offer Rate (LIBOR) as on 30 September of the relevant year and on loans denominated in Indian rupees to the 1-year SBI MCLR as on 1 April of the relevant year.

The safe harbour regime is optional to taxpayers.