Safe Harbour Rules Notified for AY 2020-21

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:

  1. 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).

  1. 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.

Post by Niti Gupta

Niti Gupta is a Chartered Accountant who has experience working with different industries. She loves to write about anything and everything, but majorly research and write about finance and taxation.