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CBDT releases draft safe harbour rules
With the objective of providing certainty to the tax payers and reducing litigation, the Government in the Finance (No 2) Act, 2009 had introduced safe harbour provisions in the Indian Income-tax Act, 1961 (‘the Act’). A safe harbour was defined to mean circumstances under which the Indian Revenue Authorities (‘IRA’) would accept the transfer price declared by the tax payer. In July 2012, the Rangachary Committee was tasked with reviewing these provisions and based on their recommendations, the CBDT has issued the draft safe harbour rules (‘Draft Rules’). Taxand India explore these new draft safe harbour rules and their potential impact on taxpayers globally.
As above, in July 2012, a Committee was constituted under the chairmanship of N Rangachary (‘the Rangachary Committee’) to review the taxation of development centres and IT sector. The Rangachary Committee was entrusted with the task of engaging in sector wise consultations with the stakeholders and finalising the sector wise safe harbour rules. Based on the recommendations received from the Rangachary Committee, the CBDT has issued the draft safe harbour rules (‘Draft Rules’). The Draft Rules have been put out for public comment – comments have been sought by August 26, 2013. Once the CBDT has considered comments received from the tax payers, the Rules will be notified in their final form and will form part of the Income-tax Rules, 1962 from Rule 10TB to 10TG.
Highlights of the draft rules include:
- A tax payer can opt to be covered by the safe harbour rules by furnishing the prescribed Form 3CEG with the Assessing Officer (‘AO’) on or before the due date of filing the return of income for the relevant previous year. The person authorised to sign the income-tax return of the tax payer will sign Form No 3CEG.
In cases where the value of software development or the ITeS or KPO services provided by the tax payer are for a value less than INR 1,000 million, the tax payer can elect for safe harbour shelter provided the tax payer assumes insignificant risk. The Draft Rules provide criteria for determining whether the risk borne by the eligible assessee is insignificant. These criteria are similar to those mentioned in Circular No 6 issued by the CBDT (related to identification of development centres engaged in contract R&D services with insignificant risk).
The Draft Rules have defined the terms – software development services, ITeS, KPO services, intra-group loan, corporate guarantee, contract R&D services, core auto components, non-core auto components, operating expense, operating revenue, etc.
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The Draft Rules are a welcome development and similar to Circular No 6, shows the intention of the Indian Government to reduce tax litigation around transfer pricing. However, the high margins proposed by the Draft Rules coupled with the inability of the tax payer to invoke MAP could lead to double taxation of income. For many tax payers the cost of this double taxation may be much more than the need to buy peace on their Indian tax litigation. It is possible that the potential for double taxation may be a serious deterrent for tax payers from electing to be governed by the safe harbour provisions.
It is hoped that some of the other recommendations as proposed by the safe harbour committee (and also by the committee formed to review the taxation of development centres and the IT sector) that do not find a mention in the rules and on which circulars have not yet been issued, find the attention of the concerned tax administrators in the future.