The final norms lay down a set procedure for calculating an ‘arm’s length price’

In a move to reduce disputes related to transfer pricing, the Finance Ministry, on Wednesday, notified safe harbour rules, relaxing norms, which will make it easier for companies to benefit from these regulations for a longer period and in a time-bound manner.

Safe harbour rules, or the circumstances under which the tax department shall accept the transfer price provided by the assessee, will now be applicable for five assessment years rather than two as was proposed in the draft rules. This will be applicable to six sectors, including IT and ITES, auto ancillary and pharma. Companies can take refuge under the norms for five years to avoid long-drawn out legal tangle with the government.

“Based on representation received, rules should be applicable for five years for greater certainty,” said Sumit Bose, Revenue Secretary.

As per the recommendations of the Rangachary Committee, the safe harbour rules were applicable only for two years.

The final norms, as notified on Wednesday, lay down a set procedure for calculating ‘arm’s length price’. The concept of an arm’s length transaction is to ensure that both parties are not acting in their own self-interest.

In the draft regulations, only transactions below Rs.100 crore were eligible for getting the safe harbour benefits. The final rules have done away with this ceiling. Transactions up to Rs.500 crore will be eligible for safe harbour, provided the operating profit margin that is declared in relation to operating expense is 20 per cent. For transactions above Rs.500 crore, this margin should be 22 per cent.

The government has also removed the ceiling of Rs.100 crore for transactions such as corporate guarantees between group companies. Transactions of this nature will escape the tax department’s scrutiny if the wholly-owned subsidiary is given the highest rating by a rating agency.

Knowledge process outsourcing

The definition of knowledge process outsourcing (KPO) has also been rationalised to provide reasonable distinction from regular business process outsourcing activity. The safe harbour operating margin for this sector has been reduced to 25 per cent from 30 per cent, as per the recommendations of the Rangachary panel. With respect to KPO business, the transaction threshold has been removed. Mr. Bose added that the income-tax department had set clear timelines in which action would be taken under these rules.

Reuters reports:

Multi-national companies have drawn increased scrutiny by governments around the world over transfer pricing, particularly following revelations that coffee chain Starbucks Corp used the practice to avoid paying taxes in Britain.

Transfer pricing, or the value at which companies trade products, services, shares or assets between units across borders, is a regular part of doing business for a multi-national. Experts say transfer prices are also a way for a company to minimise its tax bill.

In April, India said 27 companies, including the local units of HSBC, Standard Chartered and Vodafone, underpaid taxes in the last fiscal year after they sold shares to their overseas arms too cheaply.

India has targeted several multi-national companies for tax audits on transfer pricing in recent years, but has widened the scope of its investigations since last year, tax officials have said.

PTI reports from New Delhi:

Nasscom welcomes

Welcoming the government’s move to notify safe harbour norms, the National Association of Software and Services Companies (Nasscom), on Wednesday, said it would help in reducing litigation, besides attracting investment and expansion of delivery centres.

It would also reduce the burden of the tax department and the judiciary, where cases have been accumulating, it added.

“We believe that combination of Safe Harbour provisions and Advance Pricing Agreement (APA) will help resolve the tax and Transfer Pricing related concerns of global companies who have set up development centres in India.

“These centres contribute almost one third of the export revenue of the IT ITes sector,” Nasscom said.

“One of the key areas however is now to ensure that the provisions and the mechanism of the Safe Harbour are acceptable to corresponding tax authorities in the countries which receive these services,” the industry body said.

“We hope through a slew of announcements such as on SEZs, non-applicability of Profit Split, APA and now Safe Harbour provisions will send a strong message particularly to MNCs which were concerned about the uncertainty on taxation, large demand and ensuing litigation,” it said.