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In an effort to reduce transfer pric-ing (TP) litigation, Section 92CAwas introduced by the Finance

Act (No. 2), 2009, authorising theCentral Board of Direct Taxes (CBDT)

to formulate safe harbour rules. Byway of the above amendment, CBDTwas empowered to frame safe har-bour rules.

Safe harbour rules are basically aset of directives or guidance on activ-ities or margins whereby the revenueauthorities should accept the pric-ing of a controlled transactiondeclared by the taxpayer withoutdemur.

The purpose of introduction ofsafe harbour concept was to giveassurance to the taxpayers that prop-er leverage will be allowed to them ingiven situations and circumstances.

After a long wait and on recom-

mendations of the RangacharyCommittee, draft of Safe HarbourRules have now been notified invit-ing comments from all stakeholdersby August 26.

The draft rules provide for anoption either to adopt the rules or gofor the normal TP provisions. Broadly,the rules notify for categories of thesectors/transactions, subject to cer-tain ceilings, where these rules couldbe applied:1) Information technology (IT)/ IT-enabled services sector2) Contract R&D in IT and pharma

sectors3) Automobile original equipmentmanufacturer (OEM)4) Outbound loans and corporateguarantees

According to the draft rules, thetransfer price of an eligible transac-tion declared by an eligible assesseeshall be acceptable to income-taxauthorities in case of a transactionpertaining to the first three cate-

gories, a specified margin of operat-ing profit (OP) over operatingexpense (OE) is declared, and in caseof the last category, i.e., outboundloans/corporate guarantees if theassessee earns a specified rate of

interest /commission.The draft rules specify, for thepurposes of the first two categories,an eligible assessee to mean a per-son who undertakes eligible interna-tional transactions and is an asseseehaving no risk of its own, i.e, the risksare undertaken, functions are per-formed, capital is provided, intangi-bles are held by the foreign principal.However, for the remaining cate-gories, an assessee shall be an eligibleassessee if it is an auto OEM oradvanced an intra-group loan or pro-vided a corporate guarantee.

Under the draft rules, the eligibleinternational transactions alongwithacceptable profit margins are givenin the chart. These margins are appli-cable for 2012-13 and 2013-14.

FY 2012-13 is already over. How canthe draft rules on which comments arebeing sought in August 2013 be madeapplicable for the year which hasalready expired on March 31, 2013 ? Itshall, however, be noted that in order to

qualify as eligible international tranaction, the aggregate of a service in thnature of software development, ITenabled services or knowledge procesoutsourcing should, in aggregate foeach nature, be less than ~100 cror

during the financial year. It is, thuobvious that large assessees will not bcovered under the safe harbour rule

Assuming such huge profit magins from an insignificant risk or nrisk bearing assessee and that too ithe period of recession in the economy is like expecting a fisherman tcatch a fish during high tide and thtoo without a net.

The expectation of such hugprofit margins would be unrealistfor the industry which is facingloomy economic environment.

The safe harbour rules in its cu

rent form cannot be called industrfriendly particularly for the categorof software development, IT-enableservices and knowledge process ousourcing.

(Part I of a two -part serie

(This article has been co-authored b

Alok Gupt

e-mail: hp.agrawal@sskmin.co

a.gupta@sskmin.co

Draft safe harbour rules disa

FOREIGN ENTERPRISE

HP AGRAWAL