Revised Safe Harbour Rules 2017 – How safe is the new harbour?

June 19,2017
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Amit Dhadphale (Director, Deloitte Haskins and Sells LLP)

Dhanraj Dangi (Manager, Deloitte Haskins and Sells LLP)

The Central Board of Direct Taxes (CBDT), vide notification 46/2017 dated 7 June 2017, has come up with the revised Safe Harbour Rules (“new SHR”), which will be applicable from Financial Year (“FY”) 2016-17 to FY 2018-19.

This article aims to bring out an objective analysis of the new SHR and evaluation points for the taxpayers. To read a comparative analysis of old and new SHR, you may refer to the Annexure.

A. Objective analysis of the new SHR:

Taxpayers given a choice to select the old or new SHR for FY 2016-17:

While the FY 2016-17 is an overlapping year, the new rules clarify that for this year, the tax payer can choose the best from the old and new rules, which is logical.

Lowering the prescribed mark-ups / rates:

The SHR were introduced about five years ago (“old SHR”), it did not receive much of response when it was introduced, mainly due to the prescription of higher mark-ups. These rules were applicable from FY 2012-13 to FY 2016-17. The taxpayers did expect lowering of the mark-ups / rates under the new SHR, which is addressed by aligning most of the mark-ups / rates with the concluded Advance Pricing Agreements (“APAs”) and Mutual Agreement Procedures (“MAPs”). This makes the SHR an attractive mechanism for the taxpayers.

Prescription of staggered mark-ups for Knowledge Process Outsourcing (“KPO”):

This is a welcome change, since the definition of KPO may include rudimentary services, which, may not really be the real KPO. Quite likely that such quantitative filter may be used by the taxpayers and Transfer Pricing Officers (“TPOs”) in future.

Clarification on contract R&D service for software development:

The erstwhile SHR included the cases of upgradation of software products where the source code has been made available by the principal, which created concerns amongst the taxpayers undertaking simplistic routine software development activities, since their otherwise simpler activities were getting categorized as high-end software R&D activities. The new SHR bring out a logical exception where the source code is made available to carry out routine functions like debugging of the software.

Introduction of different interest rates on intragroup loans denominated in foreign currency:

The erstwhile SHR did not differentiate between the loans denominated in Indian Currency vis- -vis those denominated in the foreign currency and prescribed the interest rates based on the prevailing domestic interest rates, which created a hardship by way of higher rates for the loans advanced in the foreign currencies. The new SHR have ironed out this lacuna, by prescribing the staggered interest rates, based on the lower rates, i.e.


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