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Safe Harbour Rules for International Transactions.

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June 4, 2021 |

8 mins read

Safe Harbour Rules for International Transactions

Transfer Pricing involves lot of dispute amongst taxpayers and tax authorities, on how much should be the margins of various transactions/ what should be the ALP of given transactions between AE’s. Given the ever changing technologies and mode of operating business, the margins, ALP determined once may not be true for subsequent years.

In order to reduce litigation , countries introduce “Safe harbour” mechanism. “Safe harbour” , refers to circumstances under which, the tax authorities shall accept the Transfer Price declared by the taxpayer, in other words the margin earned by taxpayer/ ALP are accepted by tax authorities.

Safe harbour rules, provides minimum operating margins,  in relation to an operating expense, which a taxpayer is expected to earn from certain international transactions. If  it earns these margins, the Transfer price will be acceptable to the tax authorities.

Generally, “Safe harbour Rules” (SHR) would contain the following : –

  • Sector in which the assessee operates, which would be covered under SHR. The Rules do not cover all the Sectors, but are applicable only to certain Sectors;
  • Turnoveror the value of transactions, for which SHR would be applicable. The minimum operating marginmay be different for different levels of turnover;
  • Margin that should be earned on such transactions, to be eligible for Safe Harbour Rules

The transfer price declared by assesse,  shall be accepted by tax authorities if it is in accordance with the followings circumstances. Three things, that one should consider for each of these limits are the Sector covered, the operating margins on a transaction and the value of the transaction, for which the said rules would be applicable : –

Software Development Services

S. No. Eligible International Transaction Circumstances
Rule 10TC Rule 10TD
(i) Provision of software development services with insignificant risk (other than R&D Services) Operating profit margin* Value of international transaction
17% or more Rs. 100 cr. or less
18% or more Greater than Rs. 100 cr. but upto Rs. 200 cr.

*Operating Profit Margin =  (Operating Profit/Operating expenses)  x 100

International Taxation Services

“SOFTWARE DEVELOPMENT SERVICES” MEANS: –
a)     business application software and information system development using known methods and existing software tools;
b)     support for existing systems;
c)     Converting or translating computer languages;
d)     adding user functionality to application programmes
e)     adaptation of existing software; or
f)      preparation of user documentation
Note : It does not include any R&D Services (including contract R&D Services).

If however, the transaction relates to software development services, where significant risk is borne by the assesse, these provisions would not be applicable.

Information Technology Enabled Services

S. No. Eligible International Transaction Circumstances
Rule 10TC Rule 10TD
(ii) Provision of information technology enabled Services with insignificant risk (other than R&D services) Operating profit margin* Value of international transaction
17% or more Rs. 100 cr. or less
18% or more Greater than Rs. 100 cr. but upto Rs. 200 cr.

“Information Technology Enabled Services” means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely : –

  1. back office operations
  2. call centres or contact centre services
  3. data processing and data mining
  4. insurance claim processing
  5. legal databases
  6. creation and maintenance of medical transcription excluding medical advice
  7. translation services
  8. Payroll
  9. remote maintenance
  10. revenue accounting
  11. support centres
  12. website services
  13. data search integration and analysis
  14. remote education excluding education content development
  15. clinical database management services excluding clinical trials

If however, the transaction relates to information technology enabled services, where significant risk is borne by the assesse, these provisions would not be applicable.

NOTE : It does not include any R&D services whether or not in the nature of contract R&D services.

For any queries, please write them in the Comment Section or Talk to our tax expert

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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