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Indian Transfer Pricing Update: CBDT Amends Safe Harbour Rules

Indian Transfer Pricing Update: CBDT Amends Safe Harbour Rules

Home > Indian Transfer Pricing Update: CBDT Amends Safe Harbour Rules

SBC TP Update on CBDT Amendments to Indian Safe Harbour Rules-3 1 (1).pdf (1024 x 576 px)

Key Changes in Safe Harbour Rules as per the CBDT Notification

Executive Summary

 

SBC TP Update on the CBDT Amendments to Safe Harbour Rules vide Notification No. 21/2025 dated March 25, 2025.

  1. The definition of core auto components under Rule 10TA has been expanded to encompass lithium-ion batteries for use in electric and hybrid electric vehicles.
  2. The threshold limits under Rule 10TD for software development services, IT-enabled services (ITeS), Knowledge Process Outsourcing (KPO), Contract R&D in software development, and Contract R&D in generic pharmaceutical drugs have been increased from ₹200 crores to ₹300 crores.

The aforementioned amendments shall be applicable for the assessment years 2025-26 and 2026-27.

Summary of changes pre and post amendment

Before Amendment After Amendment
1. Definition of core auto components

As per Rule 10TA, Clause (b) of the Income-tax Rules, 1962

(i) engine and engine parts, including piston and piston rings, engine valves and parts cooling systems and parts and power train components;

(ii) transmission and steering parts, including gears, wheels, steering systems, axles and clutches;

(iii) suspension and braking parts, including brake and brake assemblies, brake linings, shock absorbers and leaf springs;
1. Definition of core auto components

As per Rule 10TA, Clause (b) of the Income-tax Rules, 1962

(i) engine and engine parts, including piston and piston rings, engine valves and parts cooling systems and parts and power train components;

(ii) transmission and steering parts, including gears, wheels, steering systems, axles and clutches;

(iii) suspension and braking parts, including brake and brake assemblies, brake linings, shock absorbers and leaf springs;

(iv) lithium-ion batteries for electric/hybrid vehicles.

Changes in Threshold Limits

Changes in Threshold Limits

India’s Transfer Pricing Safe Harbour Regime: An Overview

Overview of the Indian Safe Harbour Regime

• The Indian Safe Harbour Regime was established in response to escalating instances of transfer pricing audits and disputes. Introduced under the Finance (No.2) Act of 2009, effective from April 1, 2009, this regime was introduced vide Section 92CB of the Income Tax Act, 1961.

• Under section 92CB, the determination of an arm’s length price, as defined by section 92C or Section 92CA, is required to adhere to safe harbour rules. These rules provide predefined acceptable ranges of profits or prices, enhancing certainty for transactions.

• To provide greater advantages to taxpayers, the Central Board of Direct Taxes (CBDT) broadened the scope of Safe Harbour Rules through Rule 10TD of the Income-tax Rules. This expansion aims to streamline compliance procedures, encourage timely approvals, and reduce complexities associated with transfer pricing.

• On March 25, 2025, CBDT issued a notification, extending the applicability of Safe Harbour Rules to the Assessment Year 2025-26 & 2026-27, which pertains to the Financial Year 2024-25 & FY 2025-26.

• The Indian Safe Harbour Regime offers a structured and predictable framework that promotes compliance, minimizes disputes, and fosters a more harmonious business environment, ultimately contributing to a more efficient and effective transfer pricing ecosystem. 

Eligible Assessee

A person who has validly opted for safe harbour rules under Rule 10TE of the Income Tax Rules, 1962.

Eligible Transactions

These eligible transactions qualify for safe harbour treatment under Rule 10TB, providing a simplified and predictable transfer pricing framework.

India's Transfer Pricing Safe Harbour Regime

The Rational Choice: Selecting the Safe Harbour Option

Advantages of Choosing the Safe Harbour Approach

 

Advantages of Choosing the Safe Harbour Approach
Enhanced Certainty
By providing advance insight into the acceptable range of profits or prices that meet Safe Harbour criteria, transactions gain a heightened level of certainty, offering stakeholders a clearer financial landscape.
Conflict Mitigation
Safe Harbour serves as an effective dispute avoidance mechanism, significantly curbing the potential for conflicts between taxpayers and revenue authorities. This fosters a more harmonious business environment, particularly significant given the high incidence of Indian Transfer Pricing litigation.
Streamlined Approvals & Assessment
Safe Harbour Rules offer a structured mechanism for application and approvals procedures, facilitating a smoother and time-bound process. This stands in stark contrast to the prolonged timelines associated with Domestic Litigation or Advance Pricing Agreements (APAs).
Comparative Compliance
In contrast to the complexities involved in Advance Pricing Agreements (APAs) and the Domestic Transfer Pricing Litigation Route, Safe Harbour Rules present a more favorable choice in terms of TP/ALP rates/margins, timelines, and associated costs. This streamlined approach can alleviate compliance burdens.
Resource Efficiency
The adoption of Safe Harbour Rules translates into substantial savings in terms of time, costs, and efforts, especially in potential litigation scenarios. This strategic choice can lead to optimized resource allocation and more efficient business operations.
Stakeholder Confidence
Safe Harbour instills confidence in taxpayers through its predictable framework, enhancing investor confidence and fostering robust business growth.
Safeguarding Reputational Capital
Choosing the Safe Harbour route mitigates the risk of reputational damage that could arise from contentious transfer pricing disputes. A clean record in compliance can enhance a company’s standing within its Group and among stakeholders.
Incentive for Voluntary Compliance
The transparent and predictable nature of Safe Harbour can incentivize voluntary compliance, enabling companies to proactively meet their transfer pricing obligations and contribute positively to the overall tax ecosystem.

Core Features of the Safe Harbour Rules in India

Safe Harbour Rules in India: Key Points for Taxpayers

For those seeking to opt for safe harbour rules for AY 2025-26 & 2026-27 and who have undertaken in eligible international transactions, adherence to specific guidelines is imperative. Here’s a concise breakdown of the crucial aspects:

Key Points for Taxpayers
Filing Requirement
Taxpayers opting for safe harbour need to file an income return and safe harbour application (Form No 3CEFA) to the Assessing Officer, both before the stipulated deadline i.e., 30 November 2025 for AY 2025-26 and 30 November 2026 for AY 2026-27.
Compliance Commitment
Even if opting for safe harbour, taxpayers must fulfill the prescribed transfer pricing documentation and maintain/Form 3CEB filing compliances (Rule 10TD(5) of the Rules).
Geographical Limitations
Safe harbour doesn’t apply to transactions with Associated Enterprises/Related Parties location in low or no tax countries.
Mutual Agreement Procedure (MAP)
If approved, the transfer price by the tax authorities for an eligible international transaction bars the assessee from invoking the Mutual Agreement Procedure in a double taxation avoidance agreement with a foreign entity.
Adjustment Constraints
When opting for safe harbour, comparability adjustments and prescribed variation/range benefits (tolerance band) aren’t accessible (Rule 10TD(4) of the Rules).
Duration of Choice
The option exercised remains in effect for a period of one year.
Transaction Scope
Safe harbour applies solely to specified transactions, while TP scrutiny exposure remains open to other transactions not eligible under safe harbour.
Deemed Acceptance
If the Assessing Officer, Transfer Pricing Officer, or the Commissioner, as the case may be, does not make a reference or pass an order within the specified time, then the option for safe harbor exercised by the assessee shall be treated as valid.
Scope of definitions
The scope of Operating Revenue and Operating Expense to be used in the computation of the Operating Margin has been clearly defined in the Safe Harbour Rules.

Safe Harbour Rates

Safe Harbour Rates

Safe Harbour Procedure

Safe Harbour Procedure

How can SBC assist you?

Navigating the Safe Harbour Application process doesn’t have to be overwhelming. We’re here to provide discreet and effective assistance every step of the way.

SBC support:

• We provide assistance in filing Form No. 3CEFA (Safe Harbour Application), ensuring a smooth process.

• Our experts evaluate your eligibility for Safe Harbour Rules (SHR) by undertaking functional analysis and review of inter-company transactions and underlying agreements to guide your decision-making.

• We conduct a comprehensive cost-benefit analysis to help you assess your options effectively.

• If needed, we calculate year-end transfer pricing adjustments to align with safe harbour rates.

• Our support extends to year-end compliance, including Form No. 3CEB and transfer pricing documentation.

• We offer representation support before tax authorities (AO & TPO) for safe harbour proceedings.

For TP assistance, reach us at +91 9553111131 /+91 9491933365.

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ISD – Imput Service Distributor Under GST

ISD - Imput Service Distributor Under GST

Home > ISD – Imput Service Distributor Under GST

ISD - Imput Service Distributor Under GST

Definition and purpose of Input Service Distributor

Definition

As per Section 2(61) of CGST Act, 2017, “Input Service Distributor (ISD)” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax u/s 9(3) or 9(4), for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20.

Purpose of ISD

When a business entity has large share of common expenditure on services and the billing is made to a single location, the ITC available should not be wholly claimed by that centralised location as services are utilised by one or more distinct persons. So, it may take a separate registration as ISD to distribute the ITC to its distinct persons proportionately.

Background of ISD

Earlier, Taxpayers have an option to distribute common input services from third parties either through ISD or cross charge mechanisms.

But, Section 20(1) has been amended with effective from 1st April 2025 vide Notification No. 16/2024-CT dated 06.08.2024 making it mandatory to have registration under ISD for the entities having centralized offices where services are procured for or on behalf of distinct persons referred to in section 25.

Meaning of ISD and Cross Charge

1.Cross charge is a charge of tax on deemed supplies made by HO/centralized office to its distinct entities.

2.ISD is meant for distribution of common ITC on invoices received by HO/ centralized office among its distinct entities referred to in Section 25.

What are External and Internally Generated Services?

1.Common input services/ External services – Procuring input services (common to one or more distinct persons) from external/third party suppliers. (eg– audit services, legal services, Accounting software, Consultation services, Advertisement services, Bank charges, insurance, tele – communication services, Membership fee etc.)

2.Internally generated services – Activities performed by Head office as a whole benefitting its branches having separate GSTIN. (eg- Accounting services, IT services, CEO/CFO/CS/HR services)

Before 01st April 2025

After 01st April 2025

Any entity which has a centralized location receiving input services on behalf of its distinct persons is now required to obtain ISD registration. The Finance Bill removes the option previously available to taxpayers to choose between cross charge and ISD.

Note: Cross charge for internally generated services is not mandatory vide Circular 199/11/2023 – GST dated 17th July 2023. It clarified that in situations where no invoice is raised for ‘internally generated services’ the value can be deemed as NIL where the recipient is eligible to claim ITC.

Functions of ISD

Note:

• ISD mechanism cannot be used for transfer of credit to holding company, subsidiary company, group entities, related parties as they have different PAN.

• ISD can neither be a supplier nor recipient of goods/services.

Compliances by ISD

A. Forms/ Returns

• Every taxable person registered as an ISD shall, for every calendar month or part thereof, furnish GSTR 6, as prescribed under Rule 65, a return, electronically, within thirteen days after the end of such month on the basis of details contained in FORM GSTR-6A.

• Just like GSTR 2A, GSTR 6A is an auto-populated form based on GSTR 1 filed by the suppliers.

• Eg: For the month of February 2025, the date of filing GSTR 6 shall be 13th March 2025

• Late filing of GSTR-6 attracts a late fee of ₹100 per day u/s 47 of the CGST Act (₹50 per CGST & SGST each per day)

B. Documentation

1. Documents issued to ISD

Invoices issued by the supplier of services u/s 31 of CGST Act Debit Notes issued by supplier of services u/s 34 of CGST Act

Invoice issued as per Rule 54(1A)(a) to transfer ITC from regular registration located in the same state as ISD

2. Documents issued by ISD

ISD shall distribute the amount of tax credit to recipients by issuing an ISD invoice as per Rule 54(1).

Distribution of ITC (Rule 39)

A. Conditions/Restrictions for Distribution of ITC

• ISD can be used only for transfer of ITC pertaining to Input Services including activities listed in Schedule II of CGST Act as deemed services.

Note : ISD cannot avail and distribute ITC on goods/capital goods

• Amount of credit distributed should not exceed Amount of credit available.

• ITC should be distributed on monthly basis, i.e., ITC available for distribution in a month should be distributed in the same month.

• ISD shall distribute all the ITC received in GSTR 6A. Further, ISD should separately distribute eligible ITC and ineligible ITC. Reversal of Ineligible ITC shall be on part of the recipient.

• The excess/wrongly distributed credit can be recovered as per Section 21 from the recipients of credit along with interest by initiating action under section 73 /74 or 74A.

B. Manner of Allocation of ITC

C. Manner of Distribution of ITC

Note: the term “turnover”, in relation to any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act reduced by amount of any duty or tax levied under specific entries of the Seventh Schedule to the Constitution of India.

Therefore, Turnover includes all taxable supplies, Zero – rated Supplies, Exempt Supplies and Non – Taxable Supplies but excludes any duty or tax levied.

D. Pro – rata distribution of ITC

ITC to be distributed to one of the recipients is to be calculated by applying the following formula:

C1= (T1/ T) x C

R1 = one of the recipients, whether registered or not

C1 = ITC to be distributed to R1

C = Total ITC available for distribution

T1 = Turnover of R1 during the relevant period

T = Aggregate Turnover during the relevant period of all recipients to whom the input service is attributable the term “relevant period” shall be—

Scenario Relevant period
Recipients of the credit have turnover in their States/Union Territories in Preceding FY
Preceding Financial year
Some/all recipients of credit do not have any Turnover in their States/Union Territories in P receding FY
Last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed

Eg : A company XYZ Ltd. has its Head Office (HO) in Maharashtra, registered as an ISD. The company has two branches in Maharashtra & Karnataka. The HO receives an invoice for input services (e.g., advertising services) with ITC of ₹1,00,000. The turnover of the branches during the relevant period is ₹5,00,000 & ₹10,00,000 of Maharashtra & Karnataka respectively.

Branch Turnover (₹) ITC Share ITC Type Distribution
Maharashtra (Same State)
₹5,00,000
(5,00,000/15,00,000) × ₹1,00,000 = ₹33,333
CGST ₹16,667 + SGST ₹16,667
Karnataka (Different State)
₹10,00,000
(10,00,000/15,00,000) × ₹1,00,000 = ₹66,667
IGST ₹66,667

Same State (Maharashtra): ITC is distributed as CGST & SGST. Different State (Karnataka): ITC is distributed as IGST.

E. Distribution of ITC by ISD on taxes paid under RCM

For the distribution of credit in respect of input services, attributable to one or more distinct persons, subject to RCM, a registered person, having the same PAN and State code as an Input Service Distributor, may issue an invoice or, as the case may be, a credit or debit note as per rule 54(1A) to transfer the credit of such common input services to ISD, and such credit shall be distributed by the said ISD to its recipients. (Notification 12/2024 – CT).

An ISD cannot pay taxes, it can only distribute the ITC to its recipients. Therefore, the following steps need to be followed:

Scenario:

An entity has its head office and ISD registration in Telangana. The head office receives legal services amounting to INR 1,00,000/- on 04th April 2025 on behalf of all its branches.

Step 1: Issuing Invoice to ISD

• The head office issues an invoice to the ISD under Rule 54(1A) for transferring the ITC on 4th April 2025.

• This invoice is reported in GSTR-1 for the period April 2025, so that it gets reflected in GSTR-6A of ISD.

Step 2: RCM Tax Payment

• Since legal services are covered under RCM, the head office in Telangana ( as it has same PAN and is in same state as ISD) pays GST under RCM in GSTR 3B for the period April 2025.

• This amount is to be reported in Table 3.1(d) of GSTR-3B.

Step 3: Claiming ITC on RCM

• Since the head office has paid GST under RCM, it is eligible to claim the same as ITC under Table 4(A)(3) of GSTR-3B.

Step 4: ISD Distributes ITC

• ISD receives ITC in GSTR-6A and distributes the ITC to different branches based on turnover in its GSTR 6 for the period April 2025.

F. What Happens if Distributed ITC Decreases Later?

• ISD shall issue ISD credit note for reduction of credit in case where ITC which was already distributed gets reduced for any reason.

• ITC on account of ISD-CN shall be reduced in same proportion in which the ITC was distributed on original invoice, and the amount so apportioned shall be-

a. reduced from the amount to be distributed in GSTR 6 in the month of Credit note

b. Where ITC to be reduced exceeds ITC to be distributed for a particular unit, difference shall be added to the output liability of the recipient unit

G. What steps to take if ITC is wrongly distributed?

ISD IMPLEMENTATION – ROADMAP

Identify & Categorize Expenses – Identify common expenses for ISD allocation from the list of all business expenses.

Identify distinct persons using common services – Identify distinct persons receiving common services among all the distinct persons referred to in Section 25

Assess ISD Registration Needs – Decide if common input services should be sourced for multiple units and obtain ISD registration.

Vendor Communication – Identify vendors providing common services and communicate with vendors to update the ISD registration details for raising invoices to ISD.

Manage GST on RCM Expenses

1.Identify common expenses under Reverse Charge Mechanism (RCM).

2.Route GST payments to the registered office in the ISD-registered state.

3.This registered office in same state as the ISD shall transfer the ITC related

to RCM to ISD for further distribution.

Compliances by ISD

1. Ensure invoices are raised to the recipients of the ISD for ITC distributed and distribute the ITC to the recipients of ISD as per Rule 39.

2. Ensure timely filing of GSTR-6 (ISD return). Compliances by Regular Registrations Ensure that regular registrations claim the eligible ITC and reverse the Ineligible ITC distributed by ISD.

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Key Valuation and Regulatory Insights on Acquiring a Tech Driven/R&D Company in India

Key Valuation and Regulatory Insights on Acquiring a Tech Driven/R&D Company in India

Home > Key Valuation and Regulatory Insights on Acquiring a Tech Driven/R&D Company in India

Unlocking Value Valuation & Regulatory Insights on Tech M&A.pdf (1024 x 576 px)

When a buyer company acquires a research and development (R&D) driven business in India, the process involves much more than just assessing financial metrics.

Beyond the traditional valuation methods, there are unique considerations tied to intellectual property, innovation potential, and regulatory frameworks that govern the R&D landscape.

In this article, we delve into the key valuation approaches and related regulatory aspects that come into play during such acquisitions, helping both buyers and sellers navigate the complexities of these strategic deals in the rapidly evolving Indian market.

NEED FOR VALUATION

Determining Fair Market Value (FMV):

Valuation helps establish the fair market value of the R&D unit’s tangible and intangible assets, ensuring the acquisition price is justified.

Tax Compliance:

Proper valuation is essential for adhering to tax regulations, including compliance with the Indian Income Tax Act, FEMA, and transfer pricing rules.

Determining Synergies:

Valuation helps assess the strategic fit of the R&D unit within the acquirer’s existing business model, identifying potential synergies or efficiencies from the acquisition.

Negotiation Leverage:

Accurate valuation provides both parties with a solid basis for negotiation, reducing the potential for conflicts and ensuring that the buyer does not overpay

Regulatory Requirements

in India

Foreign Exchange Management Act (FEMA):

If the transaction is with a foreign company/ Non-resident, the pricing of shares of the Indian R&D company must comply with guidelines on valuation to prevent undervaluation or overvaluation RBI mandates an independent valuer be appointed to conduct the valuation in cross-border acquisitions.

Valuation is typically required by:

• A Category I Merchant Banker registered with SEBI, or

• A Chartered Accountant following internationally accepted pricing methodologies.

Income Tax Act, 1961:

• Section 56(2)(viib): This provision requires shares issued by a private company to be at fair market value.

• Rule 11UA/11UAE: These rules provide specific methodologies for determining the fair market value of shares and assets

• Section 9(1)(i): This section deals with income arising from the transfer of capital assets or the sale of intellectual property. For foreign investors, this section is significant as it deals with the taxability of capital gains in India, including the sale of IP rights.

Understanding the scope of this section is vital for structuring the deal to minimize adverse tax implications for both the buyer and seller.

• Transfer Pricing Regulations: If the R&D unit involves cross-border transactions, an arm’s length pricing assessment is mandatory.

Companies Act, 2013:

Valuation is needed for asset or share transfers to determine the fair value, to be performed by a Registered Valuer only.

Valuation Approaches

The valuation process serves as the foundation for negotiations, legal compliance, tax planning, and overall business strategy.

Income Approach:

Discounted Cash Flow (DCF) is commonly used to value R&D units based on their future revenue potential from innovations or intellectual property (IP).

Market Approach:

Comparable transaction multiples or industry benchmarks may be applied, especially for tech/R&D-oriented businesses.

Cost Approach:

If the R&D unit is pre-revenue or in the nascent stage, its value may be derived based on the replacement cost of assets, infrastructure, or skilled personnel.

Specific Considerations for R&D Valuation

Intangible Assets:

• Accurate valuation of patents, technologies, trademarks, trade secrets, and other IP created by the R&D unit need specialized valuation using methods like Relief-from-Royalty or Excess Earnings.

• Synergies & Strategic Benefits: The valuation may incorporate the strategic benefits to the acquiring USA company, like integration into its global R&D network.

• Stage of Development: The lifecycle stage (early-stage vs. established products) affects the valuation approach

• Tax and Regulatory Incentives: India offers specific tax benefits for R&D, such as under Section 35(2AB). These should be factored into cash flow projections.

Cross-Border Challenges

• Currency Risk: The valuation must account for exchange rate fluctuations between currencies.

• Regulatory Approvals: RBI approval might be needed for fund inflow/outflow, depending on the structure of the acquisition. IP Ownership Transfer: Ensure compliance with Indian IP laws and review existing agreements to avoid complications.

Documentation & Reporting

• A valuation report must be prepared in compliance with accounting and regulatory standards, ensuring transparency and defensibility.

• Engage a qualified valuation professional or firm with expertise in cross-border transactions.

How can team SBC help ?

Unlocking Value Valuation & Regulatory Insights on Tech M&A.pdf (1024 x 576 px)

 

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