Safe Harbour Rules Notified for AY2020-21

CBDT has notified the applicability of safe harbour rules for the Assessment Year 2020-21 via a notification dated 20th May 2020. The notification explained that the rates contained in safe harbour rules applicable for the Assessment Years 2017-18 to 2019-20 shall continue to apply for the Assessment Year 2020-21 as well. The safe harbour rules were introduced by the government by way of a notification dated 18th September 2013. The Rules 10TA to Rule 10TG formed part of safe harbour rules and were made applicable for AY 2013-14 and four assessment years immediately following the said assessment year. Later on, certain amendments were made to the rules in the year 2017 via a notification and also certain low value-adding Intra-Group services were brought into the ambit of the rules. Now, CBDT on May 20, notified changes in two rules namely Rule 10TD and Rule 10TE as follows:

In Rule 10TD a new sub-rule (3B) has been inserted which states that the provisions contained in sub-rules (1) and (2A) shall be applicable for the Assessment Year 2020-21.

As a result of this change, now the eligible taxpayers can avail the beneficial rates under the prescribed conditions contained in safe harbour rules for AY 2020-21 as well. The earlier provisions stated that the rates contained in sub-rule (2A) can be availed for only three years starting from AY 2017-18 (i.e. up to AY 2019-20).

In Rule 10TE a proviso has been inserted after the 3rd proviso contained in sub-rule (2) which states that the said sub-rule (2) will not apply in a case when Rule 10TD(3B) has been opted by the assessee.

The result of this insertion is that the safe harbour option that an assessee opts for the AY 2020-21 will remain valid only for the said assessment year. As per the earlier provisions, the maximum time period for which the option could be availed was 3 years which has now been changed to one year for AY 2020-21. These amendments have been made applicable with effect from 1st April 2020. The term safe harbour refers to such circumstances under which the authorities shall accept the

transfer price that is declared by the assessee without any dispute. This helps the taxpayers to avoid unnecessary litigation. The rules cover some specified international transactions undertaken by certain eligible taxpayers meeting certain criteria. Rule 10TD specifies the international transactions and the circumstances for which the safe harbour rules can be opted. Here is an example of how safe harbour rules apply. Suppose an assessee is engaged in international transactions related to the provision of specified software development services. The operating profit margin declared by the assessee shall be accepted if it is 17% or more when the total transaction value doesn’t exceed Rs. 100 crores in the financial year. The amendments mentioned in the current notification have been made applicable with effect from 1st April 2020. CBDT has stated that the retrospective effect made to the rules doesn’t lead to any person being adversely affected. If you want to know how transfer prices are calculated as per the Income Tax Act, you may click here.

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Frequently Asked Questions

Common questions about Safe Harbour Rules for AY 2020.

The safe harbour rules provide a framework under which tax authorities will accept the transfer prices declared by an assessee for specified international transactions, without any further scrutiny or litigation, provided certain conditions are met. This helps taxpayers avoid unnecessary disputes and legal hassles.

Safe harbour rules offer the benefit of certainty and reduced compliance costs for taxpayers. By adhering to the prescribed conditions, taxpayers can avoid protracted transfer pricing disputes and the associated costs and efforts involved in defending their transfer pricing positions before the tax authorities.

The safe harbour rules cover specific categories of international transactions, such as the provision of software development services, information technology-enabled services, knowledge process outsourcing services, and certain low value-adding intra-group services.

The conditions for availing safe harbour rules vary depending on the nature of the international transaction. Generally, the taxpayer must meet certain criteria related to the operating profit margin, the total transaction value, and other specific conditions prescribed for the relevant transaction category.

The recent amendment has changed the validity period for the safe harbour option. For the assessment year 2020-21, the safe harbour option can be availed for only one year, whereas earlier it could be availed for a maximum period of three consecutive years.

The recent amendments notified by the CBDT have extended the applicability of the existing safe harbour rules to the assessment year 2020-21. This allows taxpayers to continue benefiting from the certainty and reduced compliance costs offered by the safe harbour regime for the said assessment year.

The safe harbour rules are particularly relevant for industries that engage in a significant volume of international transactions, such as the information technology and IT-enabled services sectors, where the provision of software development services and other related services is common.

Generally, once a taxpayer opts for the safe harbour regime, the option cannot be revoked for the assessment year in question. However, the taxpayer can choose not to avail the safe harbour option in subsequent assessment years.

The safe harbour rates, such as the prescribed operating profit margins, are determined by the tax authorities based on an analysis of industry practices, economic conditions, and other relevant factors. These rates are periodically reviewed and updated as necessary.

While safe harbour rules offer certainty and reduced compliance costs, they may not be suitable for all taxpayers or transactions. In some cases, taxpayers may be able to achieve a more favorable transfer pricing outcome through a detailed transfer pricing analysis and documentation, compared to the prescribed safe harbour rates.