Safe Harbour Rules (SHR) – Sale Of Raw Diamonds By Foreign Company

The CBDT on 29 Nov 2024 issued a notification to extend the existing SHR for AY 2024-25. The notification also introduced new SHR for sale of raw diamonds by Foreign company chargeable under Profits & gains of business or profession(‘PGBP’).

Due date u/s 139(1) for AY 2024-25 has been extended to 15 Dec 2024. Eligible Taxpayers may consider opting under safe harbor for their eligible international transactions for FY 23-24, as the due date for filing the application for Safe Habor is now extended to 15 Dec 2024.

The New SHR is introduced for the first time for Section 9(1)(i) – within the power u/s 92CB, unlike earlier Safe harbor which was for determination of ALP u/s 92C / 92CA. Introduction of the new SHR was mentioned in the budget speech by the Finance Minister for FY 2024-25, which was a long pending demand from the industry. The industry expressed that foreign mining companies were deterred from sale of raw diamonds in India due to issues surrounding Permanent establishment ( PE ). The new SHR is akin to presumptive basis of taxation in PGBP. Key points of the new SHR is provided below:

Eligible Assessee – Foreign company in the business of diamond mining

Eligible Business – Sale of raw diamonds in any notified specified zone as per Section 9(1)(i) Expl.1 (e)

Safe Harbor – 4% of the gross receipts to be charged as profits & gains under head of PGBP. Deductions u/s 30 to 38 shall be deemed to be provided. No set-off of unabsorbed depreciation or business loss shall be allowed.

Other Aspects – To opt under new SHR, application to be filed by taxpayer in Form No. 3CEFC. Rule 10TIB provides detailed process / procedures for Assessing officer to determine whether taxpayer has correctly opted under the new SHR. Taxpayer cannot invoke Mutual Agreement Procedure (MAP) where new SHR is opted. Sections 92D and 92E would be applicable if the eligible assessee enters into international transaction.

With regard to above, one has to consider the following:

1. New SHR is for income chargeable to tax under head of PGBP and there is no reference to deemed acceptance from an arm’s length price perspective in case of international transactions
2. Power to make Safe harbor by CBDT u/s 92CB is for determination of ALP u/s 92C / 92CA or section 9 (1) (i). The new SHR is with regard to the latter, and hence the general transfer pricing regulations would continue to apply.
3. As it relates to computation under PGBP, AO undertakes the verification of the Form and there is no reference to transfer pricing officer (TPO) unlike the existing SHR for the international transactions.

Therefore, one will have to evaluate the interplay between the new SHR for Diamond mining – foreign companies and transfer pricing regulations