Draft safe harbour rules along with Central Board of Direct Taxes (CBDT) release and the recommendation of N Rangachari committee are available on the revenue department website and all stakeholders are requested to provide comment on the same, Bose added.
Finance Minister P Chidambaram has been trying to introduce these safe harbour rules for transfer pricing since the Union Budget. The safe harbour concept was introduced into transfer pricing regulations in 2009 to provide a degree of certainty to taxpayers, but despite several years of industry consultations the safe harbours were not prescribed till date. India is considered to be among the top three nations which have highest number of transfer pricing related litigations.
Also read: Transfer pricing: MNCs receive I-T notices
Under the safe harbour mechanism, tax authorities would accept the quoted value of transactions between local firms and their related parties abroad without any scrutiny.
CBDT has identified six sectors for safe harbour rules which include IT Sector, ITES Sector, Contract R&D in the IT and Pharmaceutical Sector, Financial transactions-Outbound loans, Financial Transactions-Corporate Guarantees, Auto Ancillaries-Original Equipment Manufacturers. CBDT has prescribed different operating profit margins for different sectors. In case of IT and ITES it is 20 percent or more, while in case of core auto component and non core auto component it is 12 percent and 8.5 percent respectively.
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HP Ranina, Corporate Tax Lawyer explained that CBDT has gone with the recommendations of the Rangachary Committee. CBDT has fixed the rates of profit. "If an international transaction is at particular profit margin, which is within the rates provided by the safe harbour rules then there will be no litigation with the Income Tax Department, as it has to be accepted by them," Ranina said.
He further added that if the industry feels that the profit margin rate is very high for certain sectors then they will certainly object. "I do expect that certain industries may feel that the rates which are being prescribed are on the higher side and may ask the government to tone down the rates in order to bring them in conformity with market conditions as prevailing today," Ranina said.
Dinesh Kanabar, Deputy CEO and Chairman Tax, KPMG hoped that these rules are better worded and are not susceptible to multiple interpretations.
"If the rules are properly worded and the percentages are appropriate I see this as a very significant step providing certainty to multinationals operating with India," he added.
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