Safe Harbour Rules

Safe Harbour rules are a critical component of India’s transfer pricing framework, introduced under Section 92CB of the Income-tax Act, 1961. These provisions aim to simplify compliance and reduce litigation by allowing eligible taxpayers to adopt predefined margins or prices for specified international transactions. In this article, we explore safe harbour rules, benefits and the related updates. 

Latest Update: CBDT Expands Safe Harbour Rules

The Central Board of Direct Taxes (CBDT), through Notification No. 21/2025 dated March 25, 2025, has announced significant amendments to the Income-tax Rules, 1962, aimed at expanding the scope of safe harbour rules under Section 92CB of the Income-tax Act, 1961.

Key Amendments Announced

• Increased Threshold Limit: The threshold for availing safe harbour has been increased from ₹200 crores to ₹300 crores, providing relief and certainty to larger multinational companies and taxpayers involved in high-value international transactions.
• Inclusion of Lithium-Ion Batteries: The definition of core auto components under safe harbour provisions has been broadened to include lithium-ion batteries used in electric and hybrid electric vehicles, aligning with India’s focus on promoting clean and sustainable mobility.
• Applicability for Two Assessment Years: To provide tax certainty, these amendments will apply for two assessment years - AY 2025-26 and AY 2026-27, offering a longer and predictable compliance window for eligible taxpayers.

Below, we have attached a PDF regarding the CBDT official announcement on the expansion of Safe Harbour Rules, 

Safe Harbour Rules - Brief Overview

The term "Safe Harbour" refers to conditions under which tax authorities will accept transfer pricing declared by a taxpayer without detailed scrutiny. The Safe Harbour Rules provide a structured process for businesses to simplify transfer pricing in international transactions. These rules help companies avoid disputes with tax authorities by allowing them to declare transfer prices within predefined acceptable limits. It is governed by Section 92CB of the Income Tax Act, 1961, aiming to reduce complexity in transfer pricing regulations.

How it Works?

Safe Harbour rules work in real-time in the following manner. Businesses engaged in international transactions declare their transfer prices within a predefined acceptable range, prescribed by safe harbour rules. The Income Tax Department automatically accepts these prices, eliminating the need for a detailed tax audit.

Transfer pricing (TP)

Transfer Pricing (TP) refers to the pricing of transactions between related parties, such as parent companies and subsidiaries or entities under common control. The key objective of TP regulations is to ensure that such transactions are conducted at arm’s length, meaning the prices should be comparable to those that unrelated parties would agree upon in similar conditions.  

Eligible Assessee under Safe Harbor rules

The eligible assessee under the Safe Harbor Rules in India has been defined in Rule 10TB. The eligible assessee is as under:

• An assessee who is engaged in providing software development services or information technology-enabled services or knowledge process outsourcing services, with insignificant risk, to a non-resident associated enterprises
• An assessee who  has made any intra-group loan
• A person who has provided a corporate guarantee
• A person who is engaged in providing contract research and development services wholly or partly relating to software development, with insignificant risk, to a foreign principal
• The assessee who is engaged in providing contract research and development services wholly or partly relating to generic pharmaceuticals drugs, with insignificant risk, to a foreign principal
• An assessee engaged in manufacture and export of core or non-core auto components and where ninety percent or more of total turnover during the relevant previous year is in nature of original equipment manufacturer sales
• A person who receives low-value-adding intra-group services from one or more members of its group

Eligible International Transaction

Income Tax Rule 10TD prescribes a list of eligible international transactions where the transfer price declared by the assessee shall be required to be accepted by the Income-tax Authorities. “Eligible International Transaction’’ means an international transaction between the qualified assessee and its related venture, and/or both of whom are non-resident, and which includes the following:

• Provisions of software development services.
• Provisions of information technology-enabled services.
• Provisions of knowledge process outsourcing services.
• The advance of intra-group loans.
• Provisions of corporate guarantee, where the amount guaranteed does not exceed one hundred crore rupees; or it exceeds one hundred crore rupees, and the credit rating of the associated enterprise, done by an agency registered with the Securities and Exchange Board of India, is of adequate to highest safety.
• Provisions of contract research and development services wholly or partly in connection with software development.
• Provisions of contract research and development services wholly or partly in connection with generic pharmaceutical drugs.
• The manufacture and export of non-core auto components.

Procedure to opt for Safe Harbour Rules

• Taxpayers who have entered into an eligible international transaction and wish to opt for Safe Harbour Rules are required to file a return of income on or before furnishing Form 3CEFA to the Assessing Officer.
• Taxpayers opting for safe harbor are required to maintain prescribed TP documentation and file the Accountant’s report in Form 3CEB by the due date.
• Where the transfer price declared by the eligible taxpayer is accepted by the tax authorities, the taxpayer shall not be eligible to invoke the Mutual Agreement Procedure (MAP) under the relevant tax treaty. Further, taxpayers electing the safe harbor will not be able to claim any further adjustment to the price, either on account of comparability differences or the benefit of the range as prescribed under the Income Tax Law.
•  If the Assessing Officer, Transfer Pricing Officer, or the commissioner, as the case may be, does not make a reference or pass an order within the specified time, then the option for safe harbor exercised by the assessee shall be treated as valid.

Non-applicability of Safe Harbor Rules 

Safe Harbor Rules rule does not apply to eligible international transactions entered into with an associated enterprise situated in any country or domain notified under Section 94A or in a non-taxable or least-taxable country or territory.  

Benefits of Safe Harbor Rules in India

The benefits of the Safe Harbor Rules in India to the taxpayers and revenue authorities are as follows:

• Advance information or knowledge about the range of profits or prices to qualify for SHR. This brings certainty to transactions.
• Elimination of the possibility of litigation between the taxpayers and the revenue authorities
• Automatic approvals and self-assessment procedures.
• Ease in compliance
• Reduction in compliance cost

Key Takeaways

• Safe Harbour Rules simplify transfer pricing compliance by allowing eligible taxpayers to adopt predefined margins for specified international transactions.
• Recent CBDT amendments have increased the threshold limit for availing safe harbour from ₹200 crores to ₹300 crores.
• The definition of core auto components now includes lithium-ion batteries used in electric and hybrid vehicles.
• These amendments will apply for two consecutive assessment years, AY 2025-26 and AY 2026-27.
• Eligible taxpayers must file Form 3CEFA and maintain prescribed documentation to avail safe harbour.
• Safe Harbour provisions do not apply to transactions with entities in notified non-cooperative jurisdictions under Section 94A

About the Author

RENU SURESH
Renu Suresh is a proficient writer with a knack for turning intricate legal concepts into clear, actionable advice. Her articles empower entrepreneurs by providing the knowledge they need to navigate the complexities of business laws, ensuring they can start and manage their businesses effectively.

Updated on: March 27th, 2025