ARTICLE

Draft Safe Harbour Rules

for Transfer Pricing in International Transactions in India

(SHRs)

On By

CA. SATISH AGARWAL

Mobile Phone Office
Hotel)

: +919811081957

: +911125769111 9/14, Ist Floor East Patel Nagar, (Near Jaypee Sidharthe

E-Mail

New Delhi- 110008 : satishagarwal307@yahoo.com

Draft Safe Harbour Rules (SHRs) for Transfer Pricing in International Transactions in India (A) Introduction of SHRs
1 Meaning of SHRs Concept of SHRs to provide the circumstances where income tax authorities be required to accept the transfer price as declared by assessee 2 (III) CBDT vide Circular No. 05, dated June 03, 2010 has explained the objects for
introducing Section 92CB i.e to reduce the number of transfer pricing audits & prolonged disputes

Section 92CB of Income Tax Act, 1961

(I) Section 92CB was inserted by finance (No.2) Act, 2009 as applicable from April 01, 2009 (II) This section empowered the CBDT to notify the SHRs for transfer pricing against EITs

(IV)(a) SHRs can be notified under Section 92CB for eligible International transactions (EITs) only not (b) For Specified Domestic Transactions (SDTs) (V) CBDT has published rules 10TA to 10TG in public domain to foreign associate enterprise
(AE)

(B) Special Features of SHRs

1

Applicability of SHRs
(I) SHRs be applicable for assessment year 2013-14 & 2014-15 once draft SHRs are approved (II) SHRs be applicable for EITs not SDTs

(III) SHRs be applicable against manufacturing & export of core or non core auto components where minimum 90% turnover be in nature of Original Equipment Manufacturer (OEM) sales 5

Nature & Type of SHRs

(I) SHRs be in nature of safe harbour percentage (%) for operating margins or interest rates or corporate guarantee fees as specified in rule 10TD against EITs (II) SHRs be of 2 types (a) Sector specific SHRs (b) Non sector specific SHRs

Non Applicability of SHRs

SHRs not applicable against EITs entered with AE located in country or territory where income tax not applicable

Acceptance of Transfer Pricing by Income Tax Deptt.

(I) Income tax deptt be required to accept the transfer pricing where percentage (%) of operating margins or interest rate or corporate guarantee fees not less than safe harbour % as specified in rule 10TD (II) Henceforth no transfer pricing audit be required where SHRs are similar to section 44AD of Income Tax Act, 1961

Intra Group Loans & Corporate Guarantees Fees

SHRs against EITs relating to intra group loans & corporate guarantees fees be applicable to all assesses beside their nature of business activities i.e sector specific or non sector specific

SHRs for EITs

(I) SHRs be applicable against EITs (a) Provision of Software Development Service (b) Knowledge Process Outsourcing Services (c) Contract R & D Services for software development or generic pharma drugs & manufacturing (II) Services be rendered with insignificant risk

Section 44AD or SHRs

(I) Section 44AD (a) Assessee be permitted not to maintain the books of accounts & not to get accounts audited where opted presumptive taxation under section 44AD (b) Assessee not required to apply to Assessing officer (AO) for opting section 44AD

OCTOBER - 2013

(II) SHRs (a) Assessee be required to maintain the documentations as specified under section 92D & Audit from CA as specified under section 92E of Income Tax Act, 1961 (b) Application to AO be submitted in form No. 3CEG

Assessee not Opting the SHRs

(I) Assessee be required to compute the arms length price against EITs as specified under Section 92C to 92CA where not opting the SHRs (II) Henceforth assessee not required to accept the SHRs as specified under Rule 10TD

(c) AO be required to determine the transfer 9 pricing in accordance to SHRs (d) AO be permitted for not allowing option for selection of SHRs where not satisfied relating to operating margins or interest rates or corporate guarantee fees as specified in Rule 10TD 1

Invocation of Mutual Agreement Procedure (MAP)

Assessee not permitted to invoke the MAP for avoidance of double taxation where income tax deptt. has permitted the use of SHRs as specified under Section 92CB (III) Inter corporate guarantee where amount not exceeding INR 100 Crores

(C) Non Sector Specific SHRs

Commission or fee be minimum 2% on amount guaranteed

Applicability of SHRs against EITs

EITs (I) Intra Group Loans where amount not exceeding INR 50 Crores (II) Where amount exceeding INR 50 Crores SHRs Interest rate be base rate of SBI on 30th June + 1.5 % (150 basis points) 3%
(300 basis points)

Not Applicability of SHRs

(I) SHRs not applicable for financial companies & Banks & financial Institutions & other entities as engaged in lending or borrowing in normal course of business

(D) Sector Specific SHRs

1

Concept of Operating Margin

(I) SHRs be applicable against minimum operating margin to be declared by assessee where AO will not disturb transfer pricing

Statement of Minimum Operating Margin for R & D Services with Insignificant Risk to Non Resident Associate Enterprise (AE)
For provision of Contract R & D Services (I) Services relating to software development

Statement of Minimum Operating Margin for Software & IT & KPO Services
(I) For provision of software development services (II) For Provision of Information Technology (IT) Enabled Services (III) For Provision of knowledge Process Outsourcing (KPO) Services 20% 4 20% 30%

30% 29%

(II) Services relating to generic pharmaceuticals drugs

Statement of Minimum Operating Margin for Manufacturing & Export of Core or Non Core Auto Components
(I) Manufacturing & Export of Core auto Components (II) Manufacturing & Export of non Core auto Components 12%

* Notes
(a) SHRs applicable where Aggregate amount of EITs not exceeding INR 100 Crores

8.5%

* SHRs be applicable where minimum 90% turnover be in nature of original Equipment (b) SHRs not applicable where aggregate Manufacturer (OEM) amount of EITs exceeding INR 100 Crores 2 OCTOBER - 2013

(E) Miscellaneous Provisions for SHRs

1

Concept of Intra Group Loans

Where loan is advance to wholly owned subsidiary outside India out of Indian rupee sources

(I) Operating Revenue Includes Revenue of assessee as earned during course of normal operations & connection with EITs (II) Operating Revenue not Includes (a) Interest income (b) Income arising out of translation of foreign currency items (c) Income on sale of assets or investments of assessee (d) Refund relating to income tax (e) Provisions no longer required now written back (f) Extraordinary items (g) Other items not relating to operating activities

Concept of Corporate Guarantee fees

Where guarantee is given against short term or long term borrowings taken by wholly owned subsidiary outside India

SHRs for Corporate Guarantee fees

SHRs be applicable for corporate guarantee fees beside nature of business activity of assessee 6

Concept of Operating Expenses

(I) Operating Expenses Includes Cost to assessee as incurred during course of normal operations & connections with EITs including depreciation & amortization expenses relating to assets used (II) Operating Expenses not Includes (a) Interest expenses (b) Provision for un ascertained liabilities (c) Pre operating expenses (d) Loss arising out of translation of foreign currency items (e) extra ordinary items (f) Loss on sale of assets or investments (g) Other items not relating to operating activities & (II) Minimum 22% where EITs exceeding 500 crores

Concept of Operating Profit Margin

(OPM) (I) Operating profit margin in relation to operating expenses to include a ratio between operating profit and operating expenses in term of percentage (II) Computation of Ratio Operating RevenueOperating Expenses Operating Expenses

x 100

5 1

Concept of Operating Revenue

(F) Suggestions from Rangachary Committees Report

Provisions of Software Development Services

(I) Minimum 20% operating margin where EITs not exceeding INR 500 crores 4 Intra Group Loans & Minimum interest rate be base rate of SBI + (II) Minimum 22% where EITs exceeding INR 1.5% ( 150 basis points ) where loans not 500 crores exceeding INR 50 crores

Provision of Information Technology 5 Corporate Guarantee Fees (IT) Enabled Services

(I) Minimum 20% operating margin where EITs not exceeding INR 500 crores & (II) Minimum 22% where EITs exceeding 500 crores

Provision of knowledge Process Outsourcing (KPO) Services

(I) Minimum 20% operating margin where EITs not exceeding INR 500 crores

(I) Minimum 2% where guarantee not exceeding INR 50 crores & (II) Minimum 1.75% where guarantee not exceeding INR 100 crores & (III) Minimum 1.5% where guarantee not exceeding INR 250 crores & (IV) Minimum 1.25% where guarantee exceeding INR 250 crores 3

OCTOBER - 2013

SATISH S AGARWAL & CO.

Chartered Accountants
9/14, East Patel Nagar
(Near Jaypee Siddhartha Hotel)

New Delhi-110008 Tel (off) +911125769111 (Multiple Lines) Mob : +919811081957 Email : satishagarwal307@yahoo.com (Regd No - 005593N)

*Expertises & Specialisations* (I) Auditing/Certification under the US GAAP (Regd. with USAS PCAOB) (II) International Taxation
(1) Development of long-term strategy (2) Preparation of documents for Transfer Pricing (3) Study of Transfer Pricing (4) Audit of Transfer Pricing (5) Assessment of Transfer Pricing (6) Strategy for tax structure by availing tax incentives , tax holidays and tax benefits (7) Strategy for optimisation of tax liability by networking of DTAT s (8) Taxation and tax planning for non-residents entities & expatriates (9) Guidance and Representation for Advance Rulings

(III) Opinions and Consultations (IV) Accounting Conversions

(1) (2) (3) (4) (1) (2) (3) (4) (5)

From From From From

INDIAN GAAP to US GAAP INDIAN GAAP to IFRS US GAAP to INDIAN GAAP IFRS to INDIAN GAAP

(V) Regulatory Approvals Registrations & other matters

ROC (Registrar of companies)

(6) SEZs (Special Economic Zones) RBI (Reserve Bank of India) (7) 100% EOUs (Export Oriented units) STPI (Software Technology park of India) (8) CBEC (Central Board of Excise and Customs) FIPB (Foreign Investment promotion board) (9) DOT (Department of Telecommunication) SIA (Secretariat of Industrial approvals) (10) CST (Central Sales Tax) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) Excise Audit

(VI) Audit Assignments

(1) SOX Audit (2) Statutory Audit (3) Internal Audit (4) Tax Audit (5) Compliance Audit (6) Management Audit (7) Verification Audit (8) Stock Audit (9) Capital structuring Audit (10) Fund flows Audit (11) TDS Audit

Cost reduction analysis Audit Working capital management Audit Budget analysis Audit Financial disbursement Audit Revenue and capital expenditures Audit System Audit Manpower planning Audit Raw material planning Audit Resource planning Audit Borrowing planning Audit

(VII) Incorporation & Maintenance of Companies outside India