Safe Harbour – key consideration

OECD in its transferpricing (TP) guidelines (TPG) has stated Safe Harbour (SHR) as an administrative procedure to aid minimising TP disputes. SHR was introduced in India in 2013. Covered transactions included software development services, ITeS services, KPO services, interest income, corporate guarantee, contract R&D services.

However, few taxpayers opted under SHR due to high arm’s length price (ALP) prescribed therein. Later, in 2017 the CBDT amended the SHR to reduce the ALP for service transactions and brought lowvalue adding intragroup services in its ambit. From then on, every year, the same ALP gets extended for subsequent years as well. Recently, the CBDT Notification extended the same to FY 2022-23 as well.

Key aspects one has to bear in mind:

1. Intragroup services (IGS)- SHR covers typical management charges payments by Indian subsidiaries. Like in previous years, recently completed audit season witnessed TPOs challenging IGS payments by way of complete/partial disallowance. As most of them obtain very minimal or no relief at the first levels of audit, opting under SHR can provide definite respite from providing evidences for the need/benefit test. Ofcourse the documentation required under SHR – CA certificate on basis, threshold limits, nature of services, mark-up needs to be adhered to.Not many MNEs opt under SHR only for IGS as they are sceptical that it might result in the taxpayer being selected under regular TP scrutiny for other transactions. However, in our experience we understand opting under SHR is usually independent from being selected for transfer pricing audit for other transactions.
2. Intragroup Loans – SHR provides ALP based on LIBOR + Rates when LIBOR is being phased out, it is expected that the CBDT will notify changes in the basis of pricing for the financial transaction. As USD LIBOR rates were available for FY 2022-23, notifications can be expected for FY 2023-24 onwards may be within the year itself.
3. IT/ITES transactions – Captive service providers engaged in covered transactions and within the SHR threshold limits can consider opting for SHR as it is time bound and cost efficient while evaluating dispute resolution programmes. Further, the effective differences in the overall outcomes between the APA and SHR for routine IT/ITES services has been blurring in the recent times, considering costs and time involved in concluding APA for companies with turnover less than 200 Crs

Taxpayers opting under SHR are subject to audit by transfer pricing officer to examine if taxpayer is rightly eligible under SHR. Also, the process laid down for this audit under SHR is largely objective and slightly easier to obtain consensus from the tax authorities on the arm’s length nature of the covered transactions. Therefore, SHR can be a pragmatic approach in dispute resolution for eligible taxpayers.