In
order to reduce the increasing number of transfer pricing audits and prolonged
disputes, the Finance (No.2) Act, 2009 w.r.e.f
1.4.2009 inserted a new section 92CB to provide that determination of arm’s
length price under section 92C or Section 92CA shall be subject to safe harbour rules. Vide this amendment,
the Government of India had empowered the CBDT to make Safe Harbour
rules. “Safe harbour” was defined to mean
circumstances in which the income-tax authorities shall accept the transfer
price declared by the assessee.
Thereafter,
the issuance of the Safe Harbour Rules was examined
and discussed at various points of time, but no finality could be reached.
Since a number of representations were received from different stakeholders to
prescribe the safe harbor rules, the Prime Minister on July, 30, 2012 approved
the constitution of a Committee to Review Taxation of Development Centres and the IT sector consisting of Shri
N. Rangachary, Chairman of the Committee and three
others (hereinafter called the Rangachary Committee)
with broad terms of reference as under:
1.
Engage in consultations with stakeholders and related government departments to
finalize the approach to Taxation of Development Centres
and suggest any circulars that need to be issued.
2.
Engage in sector-wise consultations and finalize the safe harbour
provisions announced in Budget 2010, sector-by-sector. The Committee will also
suggest any necessary circulars that may need to be issued.
3.
Examine issues relating to taxation of IT sector and suggest any clarifications
that may be required
Subsequently,
the Government of India vide OM dated 12th September, 2012 approved the
considered suggestion of the Rangachary Committee
that it may finalize the Safe Harbour Rules in the
following sector/ activities:
(i) IT Sector
(ii)
ITES Sector
(iii)
Contract R&D in the IT and Pharmaceutical Sector
(iv) Financial transactions-Outbound loans
(v)
Financial Transactions-Corporate Guarantees
(vi) Auto Ancillaries-Original Equipment Manufacturers
The Rangachary Committee consulted various stakeholders
including sector related government departments, NASSCOM, CII, FICCI, ASSOCHAM,
ICAI, etc. and submitted six reports on Taxation of Development Centres and IT Sector and other sectors as referred to in
the OM dated 12th September, 2013.
On
the basis of the recommendations of the Rangachary
Committee in the first report on Taxation of Development Centres
and IT Sector (which was posted on the website of the income tax department
www.incometaxindia.gov.in on 30th June, 2013),
CBDT
has issued the following circulars:
•
Circular No. 1/2013 dtd. 17th January, 2013 on issues
relating to Export of Computer Software under sections 10A, 10AA and 10B of the
Act.
•
Circular No. 6/2013 dtd. 29th June, 2013 on
Conditions Relevant to Identify Development Centres
engaged in Contract R&D Services with Insignificant Risk.
The
Government of India has considered the other five reports of the Rangachary Committee. The major recommendations of the Rangachary Committee have been accepted, with some
modifications, and the following decisions have been taken by Government:
(1)
Safe harbour for the sectors recommended by the Rangachary Committee shall be applicable for two assessment
years beginning from 2013-14.
(2)
Safe harbour for various sectors, subject to certain
ceilings, shall be as under –
SNo
(1)
|
International Transaction
(2)
|
Circumstances
(3)
|
1.
|
Provision of
software development services other than contract R&D where the total
value of international transaction does not exceed Rs 100 crore
|
The operating profit
margin declared in
relation
to operating expense incurred is 20 per cent or more.
|
2.
|
Provision of
information technology enabled services other than contract R&D where the
total value of international transaction does not exceed Rs 100 crore
|
The operating profit
margin declared in
relation
to operating expense is 20 percent or more.
|
3.
|
Provision of
information technology enabled services being knowledge processes outsourcing
services other than contract R&D where the total value of international
transaction does not exceed Rs 100 crore
|
The operating profit
margin declared in
relation
to operating expense is 30 percent or more.
|
4.
|
Advancing of
intra-group loan to wholly owned subsidiary where the amount of loan does not
exceed Rs 50 crore .
|
The Interest rate
declared in relation to the international transaction, is equal to or
greater than the
base rate of State Bank of
India (SBI) as on
30th June of the relevant
previous
year plus 150 basis points.
|
5.
|
Advancing of
intra-group loans to wholly owned subsidiary where the amount of loan exceeds
Rs. 50 crore.
|
The Interest rate
declared in relation to the
international
transaction is equal to or
greater than the
base rate of SBI as on 30th
June of the relevant
previous year plus 300
basis
points.
|
6.
|
Providing explicit
corporate guarantee to wholly owned subsidiary where the amount
guaranteed
does not exceed Rs. 100 crore.
|
The commission or
fee declared in relation
to the international
transaction is at the
rate of 2 per cent
or more per annum on
the
amount guaranteed.
|
7.
|
Provision of
specified contract research and development services wholly or partly
relating to software development.
|
The operating profit
margin declared in
relation to
operating expense incurred is 30
per
cent. or more.
|
8.
|
Provision of
contract research and development services wholly or partly relating to generic
pharmaceutical drugs.
|
The operating profit
margin declared in
relation to
operating expense incurred is 29
per
cent. or more.
|
9.
|
Manufacture and
export of core
auto components
|
The operating profit
margin declared in
relation
to operating expense is 12 percent or more.
|
10.
|
Manufacture and
export of noncore auto components.
|
The operating profit
margin declared in
relation
to operating expense is 8.5 percent or more.
|
(3)
Safe harbour rules shall not be applicable in respect
of an international transaction entered into with an associated enterprise
located in any country or territory notified under section 94A of the
Income-tax Act, 1961, or in a no tax or low tax country or territory.
(4)
Safe harbour rules shall be applicable only where a
taxpayer exercises his option to be governed by such rules in a specified form
to be furnished before the due date of filing of return.
(5)
Where the Transfer Pricing Officer is of the opinion that the option exercised
by the assessee is valid, he shall intimate
acceptance of transfer price declared by the assessee
to the assessing officer and the assessee within a
period of six months from the end of the month in which reference under section
92CA is received from the assessing officer. Where he is of the opinion that
the option exercised is not valid, he shall proceed to determine the arm’s
length price in respect of the international transactions entered into by the assessee in accordance with sections 92C and 92CA without
having regard to the safe harbour margin or price as
specified in the rules.
(6)
A taxpayer opting for safe harbour rules shall not be
allowed to invoke Mutual Agreement Procedure (MAP) provided under the relevant
DTAAs.
(7)
Where the safe harbour rules are not applicable in
the case of an assessee, engaged in providing
contract research and development services with insignificant risks, the
Transactional Net Margin Method (TNMM) shall be considered as the most
appropriate method for the determination of arm’s length price unless it is
shown by the assessee that it is not feasible to
apply this method in the facts and circumstances of the case.
The
draft rules along with the Second to the Sixth report of the Rangachary Committee have been posted on the website of the
Income-tax Department. All stakeholders are requested to provide their
comments, if any, by 26th August, 2013 to the Director (FT&TR) at her email
id batsala.yadav@nic.in
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