No Change in Safe Harbour Rules in Income Tax for Fixed Transfer Price for AY 2020-21

The Central Board of Direct Taxes (CBDT) Notified Changes in Safe Harbour Rules (SHR)

The notification said rates applicable from AY (Assessment Year) 2017-18 to 2019-20 will continue to apply for AY 2020-21.CBDT is the apex policy making body for direct taxes such as Personal Income Tax and Corporate Tax.

Introduced by the CBDT in 2009, safe harbour refers to the circumstances under which income-tax authorities will accept the transfer price declared by the assessee without any question or scrutiny. It aims to provide a certain degree of certainty to taxpayers. A safe harbour regime will, in particular, benefit taxpayers in the services sector by adopting a transfer pricing mark-up in the range prescribed to avoid protracted litigation.

Post 2009, first round of SHR provisions were introduced in August 2013 for a period of 3 years, followed by revision in 2017 in the SHR which were applicable till Financial Year (FY) 2019.

With the new notification, dated May 20, CBDT notified changes to Rule 10TD and 10TE of the Income Tax Rules, 1962, relating to SHR that provide that rates applicable from assessment year (AY) 2017-18 to 2019-20 will continue to apply for AY 2020-21 as well.

Different rates have been prescribed for different category of international transactions. For example, in case of international transaction related with software development services, operating profit margin will not be less than 17 per cent, in case size of transaction is ₹ 100 crore. If size of transaction is more than ₹ 100 crore but less than ₹ 200 crore, then operating margin will not be less than 18 per cent.

These rules are applicable for FY 2019-20 only. In the past these were applicable for more than one year, but this time the government has decided to announce only for one year considering FY 2020-21 would be impacted by the Covid-19 disruptions on businesses.

Tarini Nijhara, Director (Transfer Pricing) at Nangia Andersen Consulting said that the SHR were awaited for a long time and are used by many taxpayers as a dispute resolution mechanism for TP (Transfer Pricing) issues. The taxpayers intending to opt for SHR may apply before the statutory due date for undertaking TP compliance for AY 2020-21 on or by October 31, 2020.

“Given that businesses are amidst an unprecedented economic situation due to COVID-19, any lowering of the rates in line with the current economic circumstances would have gone a long way to make this scheme more attractive to the taxpayers at large and give desired fiscal stimulus and certainty to business on the crucial aspect of transfer pricing,” she said while adding that having said this, the Government has wisely announced it for only one year and it seems reduced rates would be announced for future years to match the sentiments of the industry.