The Central Board of Direct Taxes (CBDT) vide
Notification1 dated 25 March 2025, has sought to amend
the Safe Harbour rules, specifically Rule 10TA and 10TD of the
Income-tax Rules, 1962 (the Rules). These rules may be called the
Income-tax (6th Amendment) Rules, 2025, and shall be
deemed to have come into force from the date of publication.
1. Increase in threshold of value of international
transactions from INR 200 crores to INR 300 crores
| Rule 10TD | Transaction | Safe Harbour |
|---|---|---|
| 2A(1) | Provision of Software Development Services | 18% OP/OC 2 |
| 2A(2) | Provision of Information Technology Enabled Services | 18% OP/OC |
| 2A(3) | Provision of Knowledge Process Outsourcing Services | 18% - 21% and 24% OP/OC depending on the Employee Cost to OC ratio |
| 2A(7) | Provision of Contract Research and Development Services (wholly or partially relating to software development) | 24% OP/OC |
| 2A(8) | Provision of Contract Research and Development Services (wholly or partially relating to generic pharmaceutical drugs) | 24% OP/OC |
Rule 10TD Sub-Rule 3(B) expands the applicability of these Safe
Harbour Rules for Assessment Years 2020-21, 2021-22, 2022-23,
2023-24, 2024-25, 2025-26, and 2026-27 (newly
introduced).
Our Comment
The increase in the threshold of international transactions from
INR 200 crores to INR 300 crores under Rule 10TD indicates the
government's intent to broaden the scope of Safe Harbour Rules
(SHR) and provide greater certainty to taxpayers engaged in
specific transactions. This broadens the coverage to more
multinational entities, allowing them to opt for Safe Harbour
provisions without undergoing detailed transfer pricing scrutiny.
The extension until AY 2026-27 ensures continuity and
predictability, which was otherwise curtailed to one year at a
time, and taxpayers had to await the notification for the
applicability of the prescribed safe harbour for each year.
2. Validity of the Safe Harbour for one Assessment Year at
a time
Rule 10TD (3) provided that the Safe Harbour prescribed shall
apply for AY 13-14 following four assessment years (i.e., AY 14-15
to AY 17-18). Subsequently, Rule 10TD (3A) was inserted w.e.f 1
April 2017 that provided that the Safe Harbour prescribed shall
apply for AY 2017-18 and the following two assessment years (i.e.
AY 2018-19 and AY 2019-20). Thereon, Rule 10TD (3B) was inserted
w.e.f 1 April 2020, which provided that the Safe Harbour prescribed
shall apply for AY 2020-21 and 2021-22, which was expanded
periodically by adding one year. This highlights the evolving
approach of the validity of the Safe Harbour Rules under Rule 10TD
and the procedural clarification under Rule 10TE. Initially, Safe
Harbour was granted for up to five years, then reduced to three
years, and now is largely available year by year.
In light of this, the current notification clarifies this under
Rule 10TE Sub-Rule (2) which stipulates that the option for safe
harbour validly exercised shall continue to remain in force for the
period specified in Form No. 3CEFA; provided that nothing contained
in this sub-rule shall apply to the option for safe harbour validly
exercised under Sub-Rule 3B of Rule 10TD for one assessment
year (newly introduced).
Our Comment
As such, any eligible assessee that contemplates opting for the
Safe Harbour Rules would file the requisite Form 3CEFA for one
assessment year at a time.
3. Expanded Applicability and extended definition of Core
Auto components to lithium-ion batteries for use in electric or
hybrid electric vehicles
Rule 10TA(b) contains the definition of 'core auto
components,' which now also includes 'lithium-ion batteries
for use in electric or hybrid electric vehicles.'
The Safe Harbour for manufacture and export of core and non-core
auto components3 is 12% and 8.5%, respectively.
Our Comment
By including lithium-ion batteries under Safe Harbour, it sought to align with India's broader policy objectives to promote electric mobility and self-reliance in battery manufacturing (possibly for contract manufacturing model for inbound investment setting up manufacturing in India). The Indian government is fostering a business-friendly, stable tax environment while accelerating the Make in India initiative for the EV sector. While this move seems to be aimed to benefit battery manufacturers, automakers, and global investors, strengthening India's position as an emerging EV hub, given the lower margins in other EV manufacturing hubs this may seem to be uncompetitive. The 12% safe harbour seems high for contract manufacturing and may not be lucrative for relevant taxpayers especially in capital-intensive industries that typically operate on thinner margins.
Overall Comments
Safe Harbour provisions in India, since its introduction in
2013, had hardly received any positive response - due to
uncompetitive markups, rigid conditions, and concerns about being
automatically flagged for scrutiny if opting out in subsequent
years. Even as the safe harbour margins were deemed to be high the
authorities have made frequent attempts to induce taxpayers to
consider opting in such as - rationalised the safe harbour rates in
2017, notification for applicability of the rates each year,
alignment of intra-group loans with global developments in 2023,
mandated electronical filing of Form No. 3 CEFA (application for
opting Safe Harbour) in 2024, etc.
This notification is a welcome move for multinationals and aligns
with inflation, business growth, and the need to provide certainty
to companies engaged in high-value cross-border transactions. Even
though TP scrutiny has increased, whether an extension of coverage
will push taxpayers toward Safe Harbour remains uncertain. The
uptake will depend on whether taxpayers view Safe Harbour as a
commercially viable alternative rather than just a compliance
safeguard.
While the safe harbour margins for various services remain
unchanged but continue to be available under the extended Safe
Harbour framework. Overall, the safe harbours have been curtailed
to specific activities, and in case the authorities want more
traction for opting in by taxpayers, they may contemplate
exploring:
- Fixed margins for different manufacturing, trading, or service operations industries.
- Align with global best practices for safe harbors such as OECD and other jurisdictions.
- Capping of royalty rates - use of brand or technology, etc.
- Defined profit range for generic activities such as contract manufacturing, distribution, procurement, marketing, etc.
We have covered the previous extension of the applicability of
Safe Harbour Rules in an earlier tax alert, which can be found as
follows:
- 2 Dec 2024 | Extension of Applicability of Safe Harbour Rules to AY 2024-25 and extension of timeline for filing Return of Income, Master File, and Safe Harbour
- 20 Dec 2023 | CBDT amends Safe Harbour Rule 10TA and Rule 10TD effective 1 April 2024
- 10 Aug 2023 | Extension of Applicability of Safe Harbour Rules to AY 2023-24
- 22 May 2020 | Safe Harbour Rules notified by the CBDT, for FY 2019-20 the previous rates to apply
- 9 Jun 2017 | Safe Harbour is more or less safe to sail now
Footnotes
1 Notification No. 21/2024 dated 25th March 2025 F. No. 370142/6/2025-TPL - Click Here & Press Release Click Here
2 OP/OC - Operating Profit Margin on Operating Costs - As per Rule 10TA (j), (k) & (l)
3 As per Rule 10TD(2A) (9) & (10)
4 Notification No. 01/2024 dated 26 February 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
