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September 29, 2021
India Tax Administration extends applicability of transfer pricing safe harbor rules to financial year 2020-21
A “safe harbor” is defined in the Indian Income Tax Law (ITL) as circumstances under which the tax authorities will accept the transfer price declared by the taxpayer. India’s Central Board of Direct Taxes (CBDT), the apex Indian tax administration body, first issued transfer pricing (TP) safe harbor rules (SHR) on 18 September 2013, applicable for five years from financial year (FY) 2012-13 to FY 2016-17. The CBDT through notification dated 7 June 2017 amended the SHR, which were applicable for three FYs from FY 2016-17 through FY 2018-19. For FY 2016-17, taxpayers had the option to elect the rule which was more beneficial. On 20 May 2020, the CBDT issued a notification amending the SHR to extend the applicability to FY 2019-20, without any modifications.
On 24 September 2021, the CBDT issued a new notification extending the applicability of SHR to FY 2020-21, without any further modifications. Taxpayers opting for SHR for FY 2020-21 would need to file the return of income for the year on or before the date of furnishing the prescribed Form 3CEFA for opting for the SHR. The due date for filing is 28 February 2022.1
Further, the CBDT has yet to prescribe SHR for attribution of profits to a business connection or permanent establishment (PE) of a nonresident, which was introduced under Finance Act 2020.
The Finance Act 2009 introduced provisions in the ITL that authorized the CBDT, to establish a TP SHR. On 18 September 2013, the CBDT issued the SHR, applicable for five years from FY 2012-13 to FY 2016-17. The SHR provided the procedure for adopting a safe harbor, the transfer price to be adopted, the compliance procedures upon adoption of a safe harbor and circumstances in which a safe harbor adopted may be held to be invalid.
On 7 June 2017, the CBDT issued notification 46/2017 amending the SHR by extending the applicability to an additional category of international transaction as well as revising the applicable price/margins that would be accepted as arm’s length. The amended rules were applicable for three FYs from FY 2016-17 through FY 2018-19. For FY 2016-17, as the amended rules overlapped with the prior rules, the taxpayers had the option to opt for the rule which was more beneficial. The CBDT then extended the applicability of the SHR to FY 2019-20, without any modifications.
The CBDT has now issued a notification on 24 September 2021 extending the applicability of SHR to FY 2020-21, without any further modification.
International transactions and applicable safe harbor transfer price
A summary of the safe harbor transfer price declared by an eligible taxpayer that shall be accepted by the tax authorities for FY 2020-21 is as follows:
Applying the arm’s-length principle can be a resource-intensive process. It may impose a heavy administrative burden on taxpayers and tax administrations that can be exacerbated by both complex rules and resulting compliance demands. These facts may lead to consideration of whether and when SHR would be appropriate in the TP area. Some of the difficulties that arise in applying the arm’s-length principle may be avoided by providing circumstances in which eligible taxpayers may elect to follow a simpler set of prescribed TP rules in connection with clearly and carefully defined transactions.
The modifications made to the SHR in 2017 had sought to make the option more attractive for taxpayers. It was expected that the SHR may be further rationalized, particularly for international transactions in the nature of provision of information technology and information technology enabled services by increasing the monetary threshold for eligible taxpayers. This may have enabled reducing the pressure on alternative dispute resolution mechanisms, such as MAP and advance pricing agreements. The extension of the SHR for FY 2020-21 is nevertheless a welcome move by the CBDT and taxpayers would need to evaluate feasibility of opting for the SHR for FY 2020-21, as an option for managing potential TP controversy.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Mumbai
Ernst & Young LLP (India), Bangalore
Ernst & Young LLP (India), New Delhi