Ear to the ground

The softening stance of the Government towards transfer pricing is evident from several recent measures such as the Advance Pricing Agreement, tolerance band for transfer prices, and opening the three-year deadlock between the Competent Authorities of India and the US. The latest addition are the Safe Harbour rules.

A ‘safe harbour’ refers to the circumstances in which revenue authorities will accept the transfer pricing declared by the taxpayer.

The Central Board of Direct Taxes notified the draft rules last month and comments were invited from stakeholders. The CBDT has moved rather swiftly and notified the final rules after factoring in some of the key comments received.

The Government has notified the final rules, effective from FY 2012-13 for five years. It is a condensed APA mechanism. The industries covered include information technology, IT-enabled services, knowledge process outsourcing and auto-components manufacturers, besides intra-group outbound loans and corporate guarantees. Notwithstanding the similarities with the APA regime, the safe harbour rules are quite real-time and cost-effective, offering taxpayers a fast-track transfer pricing certainty.

The rules also provide for a near real-time audit by revenue officials on the eligibility of the safe harbour claim. Taxpayers also have a resolution mechanism if their claim is not accepted. This heralds a real-time course correction by taxpayers instead of the usual wait of 3-4 years from the end of the relevant financial year for a scrutiny audit.

The other key highlight of the final safe harbour rules is the removal of the turnover ceiling of Rs 100 crore for IT/ITES, thereby covering the entire industry. It prescribes a differential safe harbour profit margin declaration of 20 per cent for below Rs 500 crore and 22 per cent for above that. Another positive outcome for KPO services is that the initial profit margin of 30 per cent has been reduced to 25 per cent, and the definition has been rationalised to remove regular BPO activities.

Taxpayers are free to charge lower mark-ups, subject to documentation and the normal transfer pricing audit route, where the mark-ups are determined during audit more than two years after the yearend.

Any taxpayer opting for safe harbour should exercise the option to be governed by the rules for five years.

Keeping in mind the thin line of demarcation between some of the services, a robust transfer pricing analysis backed by a factual and functional study would help ensure the safe harbour claim is accepted by revenue authorities.

Overall, the final safe harbour rules are a welcome move and shows that the Government has its ear to the ground in its endeavour to smooth the disparity between the transfer pricing positions adopted by revenue officials and taxpayers.

(Vishwa R. SharanManagercontributed to the article)

(The author is Partner, Transfer Pricing Services, Grant Thornton India LLP)

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