The Central Board of Direct Taxes (CBDT) vide Notification1 dated 19 December 2023 has sought to amend the Safe Harbour rules, especially Rule 10TA and 10TD of the Income-tax Rules, 1962 (the Rules). These rules may be called the Income-tax (29th Amendment) Rules, 2023, and they are effective from the date of 1st April 2024. For further understanding the changes brought in, we must delve into the basic nuances of the “Safe Harbour Rules" and the rules governing the same leading upto the amendments introduced.
Safe Harbour Rules
Ammendments
Conclusion
With expanding international trade, the introduction of rules for Transfer Pricing Regulations and audits were felt of great need. However, the rules for transfer pricing regulation audits, the number of audits and prolonged disputes also saw a high rise. To reduce these increasing number of transfer pricing audits and resolve disputes, the Finance (No.2) Act, 2009 w.r.e.f 1.4.2009 inserted a new section 92CB to provide that determination of arm’s length price under section 92C or Section 92CA shall be subject to safe harbour rules. Section 92CB empowered CBDT OR “the Board" to make “Safe Harbour Rules". It was roughly explained as the conditions and circumstances under which income tax authorities shall accept the transfer prices as declared by any given Assessee to be at Arm’s length. And after great deal of consultations and discussions, the first safe harbour rules were notified by the board in the year 2013. It served as a legal provision designed to side-step legal or regulatory liability. This re-innovated the transfer pricing landscape, as it simplified the compliance process thus promoting more ease of business and trade.
OLD RULE |
NEW RULE AFTER AMENDMENT |
Rule 10TA(j) stated the following definition of “operating expenses” used for the computation of ALP as follows: “Loss on transfer of assets or investment which were operating in nature” |
Rule 10TA(j) now states the following as the new meaning of “operating expenses” for the computation of ALP as follows: “Loss on transfer of assets or investments in which depreciation is included in the operating expense are treated as operating expenses” |
Rule 10TA(k) stated the following definition of “operating income” used for the computation of ALP as follows: “Income on transfer of assets or investment which were operating in nature” |
Rule 10TA(j) now states the following as the new meaning of “operating expenses” for the computation of ALP as follows: “Income on transfer of assets or investments in which depreciation is included in the operating expense will be treated as operating income” |
OLD RULE |
NEW RULE |
Loans from India when advanced to their wholly owned subsidiaries outside India shall be in INR denomination. |
Loans from India to their Associated Enterprise (not just their wholly owned subsidiaries) outside India can be advanced irrespective of the type of currency denomination. |
OLD RULE |
NEW RULE |
Rule 10TD(2A) intra group loans from outside Indian counterparts to counterparts in India need “CRISIL” credit rating. |
Rule 10TD(2A) intra group loans from outside Indian counterparts to counterparts in India need credit rating assigned to AE by SEBI or RBI |
OLD RULE |
NEW RULE Currency |
Reference Rate |
LIBOR |
USD (USA) |
Secured Overnight Financing rate (SOFR) |
|
EURO (European Union) |
Inter Bank Offered Rate (EURIBOR) |
|
GBP (UK) |
Sterling Overnight Index Average (SONIA) |
|
YEN (Japan) |
Tokyo Term Risk Free Rate (TORF) |
|
AUD (Australia) |
Bank Bill Swap Rates (BBSW) |
|
SGD (Singapore) |
Compounded Singapore Overnight Rate Average (SORA) |
OLD RULE |
NEW RULE |
USA - LIBOR |
USA- Secured Overnight Financing rate (SOFR)+ 45 basis points |
UK- LIBOR |
UK- Sterling Overnight Index Average (SONIA)+ 30 basis points |
OLD RULE
Credit rating of the AE |
NEW RULE
Credit rating of the AE
|
OLD RULE |
NEW RULE Loan if less than INR 2.5 billion |
NEW RULE Loan if more than INR 2.5 billion |
AAA to A |
AAA, AA+, AA, AA-, A+, A, A- or equivalent |
No threshold limits of 2.5 billion INR of loans |
150 basis points |
150 basis points |
BBB to B |
BBB+, BBB, BBB- or equivalent |
|
300 basis points |
300 basis points |
|
BB+, BB, BB-, B+, B, B- or equivalent |
|
400 basis points |
450 basis points |
|
C+, C , C-, D or equivalent or not available |
|
400 basis points |
600 basis points |
The taxation procedure and the litigation procedure that follows in the compliances have raised concerns in many growing and expanding businesses in the recent times. The disputes and differences in opinions regarding the determination of ALP have also been difficult in this journey of Transfer pricing. To curb these issues, the safe harbour rules had come into effect. With its own set of challenges, Safe Harbour rules are a much-needed provision for global traders, investors and multi-national companies (MNC). With growing trends in markets for India in recent times and with international interest only multiplying fourfold, seeking professional advice is a must. Contact us further at Water and Shark India for more information.
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