In an effort to reduce litigation with foreign companies, the Finance Ministry has issued draft rules for safe harbours.

The new rules, once notified, will define circumstances in which the Income Tax Authorities will accept the transfer price declared by assessee. These rules will be applicable in case of transaction or loan value is between Rs 50 crore and Rs 100 crore. The operating profit margin should be between 8.5 per cent and 20 per cent. These rules, ones, notified, will be applicable to four sectors including Information Technology; Information Technology enabled Services, Pharmaceutical and Auto Ancillaries-Original Equipment Manufacturers.

Apart from these sectors, activities of Financial Transactions-Outbound Loan and Financial Transaction-Corporate Guarantees will also be covered under the rules.

These rules will not be applicable to an international transaction entered into with an associated enterprise located in low tax jurisdiction having double taxation avoidance agreement with India. The new rules are based on recommendations of the N. Rangachary Committee.

MIXED BAG

Meanwhile, experts have mixed views on the new draft rules. Mukesh Bhutani, Chairman, of BMR Advisors, said, “On an overall basis, as regards implications to software, IT and ITeS, the scope is restrictive as it covers only companies that earn an operating margin up to Rs 100 crore, meaning that it will not benefit most captives who have been engaged in disputes on adjustments.

Even for those who are entitled, it will benefit those tax payers where the tax administration have applied rates in excess if 20 per cent and that too if the safe harbour provisions are also, want to resolve past disputes.”

Similarly, Vijay Iyer, Partner & National Leader (Transfer Pricing) with E&Y, felt that the exclusion of companies with turnover in excess of Rs 100 crore, would limit the number of takers for the safe harbour. “Further, the high safe harbour for auto components and corporate guarantees may dampen the acceptability of the safe harbour,” he added.

However, Iyer accepted that these rules will reduce litigation.

Echoing the same sentiment, Sunil Jain of J Sagar Associates said that the threshold amount is small and operating margin is on the higher side.