Quick answer: Yes, India now has a transfer pricing safe harbour for data centres. The Income-tax Rules, 2026, in force from 1 April 2026, accept the price declared for data centre services provided to a foreign company if the Indian operator earns an operating profit margin of at least 15% on its operating expense and validly exercises the option. The safe harbour does not remove the documentation requirement, does not cover related-party transactions around the data centre, and closes the Mutual Agreement Procedure for the covered transaction.
Data centres are among the few businesses where a transfer pricing question begins with concrete, steel and a power contract. An Indian entity builds or operates a facility, a foreign group sells cloud services from it, and the Indian entity is paid a cost-based fee by its overseas associate. Until this year, defending that fee meant a benchmarking exercise built largely on comparables that did not look much like a capital-intensive infrastructure operator.
The 2026 rules change the starting point. A dedicated safe harbour now exists for data centre services, and it sits alongside a tax exemption that foreign cloud companies can claim on income from using Indian data centres. This article explains what the safe harbour says, who can use it, how the 15% margin is computed, what stays outside it, and how to decide whether to elect it. It is written for CFOs, heads of tax, finance controllers and the advisers who support them.
A word on sources. The rule-level detail below is drawn from the notified Income-tax Rules, 2026 as summarised in professional commentary, and from official Income Tax Department material. Before any position is taken in a return or in Form 49, check the wording against the official notification.
What Changed in 2026 for Data Centre Transfer Pricing
The Union Budget for 2026-27 announced two linked measures for the sector: a long-dated tax exemption for foreign companies that use Indian data centres to serve global customers, and a safe harbour for the Indian operator. The Press Information Bureau’s Budget note records that where the Indian data centre is a related entity of the foreign company and works as a cost-plus centre, a safe harbour margin of 15 percent on cost was proposed.
The CBDT then notified the Income-tax Rules, 2026 on 20 March 2026 as Notification No. 22/2026 (G.S.R. 198(E)), and the Rules came into force on 1 April 2026. The final rules largely mirrored the February draft, with changes to threshold testing, withdrawal timelines and disclosures in Form 49, as KPMG’s summary of the final rules explains. The statutory base is section 167 of the Income-tax Act, 2025, with the international transaction provisions in Rules 86 to 93, as set out in detailed professional commentary on the safe harbour rules.
| Item | Position under the 2026 framework |
|---|---|
| Legal basis | Section 167, Income-tax Act, 2025; Rules 86 to 93, Income-tax Rules, 2026 |
| Eligible transaction | Provision of data centre services to a foreign company (Rule 88) |
| Safe harbour margin | Operating profit margin of at least 15% on operating expense (Rule 89(2)) |
| Revenue cap | None recorded for this category; the Rs 2,000 crore cap applies to IT services only |
| Block period | Three tax years starting with 2026-27, continuing unless modified (Rule 89(4)) |
| Election | Form No. 49, on or before the due date of the return, with the return filed first (Rule 90) |
| Still required | Transfer pricing documentation (section 171) and accountant’s report in Form 48 (section 172) |
| Excluded counterparties | Associated enterprises in notified jurisdictional areas or in countries with a maximum tax rate below 15% (Rule 92) |
| Dispute resolution | Mutual Agreement Procedure not available for a transaction accepted under the safe harbour (Rule 93) |
Who Qualifies as an Eligible Data Centre Provider?
What counts as data centre services
The Rules define data centre services by what the operator actually provides. According to commentary on Rule 86, the definition has three building blocks:
- Physical infrastructure: land, buildings, mechanical and electrical power equipment, cooling systems and security.
- IT infrastructure: servers, computers, storage systems, operating systems, security solutions, networks and associated software platforms, and networking equipment.
- Human resources in India who operate and support the facility.
This is narrower than “anything that runs in a data centre”. An entity that only licenses software, resells cloud capacity or advises on an installed base is not providing data centre services in this sense, even if its customers think of it as part of the cloud. The draft rules published in February 2026 also carved out data hosting services, as the draft Income-tax Rules and commentary on them noted. Check how the final text draws that line before an election is made.
Who the counterparty must be
The eligible transaction is the provision of data centre services to a foreign company. The Income Tax Department’s own FAQs on the Taxation and Other Laws (Amendment) Bill, 2026 describe the intended case: an Indian company that is an associated enterprise of the foreign company providing cloud services and is remunerated on its cost. That description is a useful test of whether your structure is the one the safe harbour was written for.
Conditions to check before relying on the safe harbour
- The Indian entity provides data centre services as defined, and not a broader or different service.
- The recipient is a foreign company that is an associated enterprise.
- The entity is remunerated on a cost-plus basis, so that the operating profit margin on operating expense can be measured.
- The associated enterprise is not in a notified jurisdictional area or a no-tax or low-tax territory, which Rule 92 excludes.
- The option has been validly exercised in Form No. 49 for the tax year.
In practice, the third and fifth conditions cause the most trouble. Many operators bill on a basis that is only loosely cost-linked, and many finance teams discover the filing requirement after the return is already prepared.
How the 15% Margin Works in Practice
Operating profit margin is operating profit divided by operating expense, expressed as a percentage, where operating profit is operating revenue minus operating expense. The safe harbour is met where this margin is at least 15% for the eligible transaction. Commentary on Rule 89(2) records no turnover ceiling for this category, which is a notable difference from IT services, where the Rs 2,000 crore revenue threshold applies.
What goes into operating expense
The definition matters more than the percentage. A data centre has large depreciation, power and financing costs, and each of them is treated differently.
| Included in operating expense | Excluded from operating expense |
|---|---|
| Costs incurred in the tax year in relation to the transaction in normal operations | Interest expense |
| Depreciation and amortisation on assets used | Provisions for unascertained liabilities |
| Reimbursements to or from associated enterprises at cost | Pre-operating expenses |
| Stock-based compensation provided by associates to the entity’s employees | Foreign currency fluctuation losses |
| Costs that sit within the eligible transaction after segmentation | Extraordinary expenses, losses on transfer of assets or investments (other than assets whose depreciation is included), and income-tax expense |
These inclusions and exclusions follow the definition of operating expense in Rule 86 as set out in the professional commentary. Operating revenue is defined on the same logic and excludes interest income, foreign currency gains, provisions written back, extraordinary income and similar items.
A worked example (illustrative)
Consider an Indian operator that provides data centre services only to its foreign associate. The figures below are illustrative and are not drawn from any client.
| Line item | Rs crore | Treatment |
|---|---|---|
| Power and cooling | 120 | Included |
| Facility salaries and contractor costs | 60 | Included |
| Depreciation on buildings, power and IT infrastructure | 150 | Included |
| Maintenance, security and insurance | 40 | Included |
| Other operating costs | 30 | Included |
| Total operating expense | 400 | Base for the margin |
| Interest on project loan | 90 | Excluded from operating expense |
| Foreign exchange loss | 5 | Excluded from operating expense |
| Minimum operating revenue at 15% | 460 | 400 x 1.15 |
| Operating profit and margin | 60 (15.0%) | (460 – 400) / 400 |
At revenue of Rs 460 crore the operator sits exactly on the floor. At Rs 458 crore the margin is 14.5% and the safe harbour is not met, because Rule 89(5) allows no comparability adjustment or tolerance range once a price is accepted under the safe harbour.
The example also shows a point that finance teams should model before electing. The Rs 90 crore of interest sits outside the operating expense base, so the margin is earned on operating costs only. A heavily debt-funded operator should check whether Rs 60 crore of operating profit leaves it adequately placed after finance cost. If it does not, the question for the group is whether the safe harbour is the right election, or whether the financing arrangements need attention, and not whether the rule can be stretched.
Two further practical points. First, the test is annual, so monthly invoices are provisional and a year-end true-up should be built into the intercompany agreement. Second, the 15% is a floor. Nothing in the rule penalises a higher margin, but any margin above the floor is the foreign associate’s cost and may be questioned in its home jurisdiction, so it should be a deliberate decision and not an accident of billing.
What the Safe Harbour Does Not Cover
The safe harbour is transaction-specific. It protects one price, for one defined service, between the Indian operator and its foreign associate. Five areas stay outside it:
- The reseller leg. Khaitan & Co’s analysis notes that the safe harbour is limited to transactions between the Indian operator and its overseas associate. It does not extend to later transactions between the foreign company and an Indian reseller, where those parties are associated.
- Other intercompany charges. Technology support, management fees, cost allocations, licences and intra-group loans each need their own analysis. Some, such as intra-group loans, have separate safe harbour categories with different conditions.
- Non-eligible activities of the same entity. If the operator also provides managed services, software or consulting outside the definition, those revenues and costs must be segmented and tested under the regular rules.
- Transactions with excluded jurisdictions. Rule 92 removes safe harbour protection for associates in notified jurisdictional areas and low-tax or no-tax territories.
- Documentation and reporting. Rule 89(6) confirms that sections 171 and 172 continue to apply, so the documentation and the accountant’s report are still required.
Safe Harbour or Regular Transfer Pricing Method: How to Decide
Electing the safe harbour is a choice, not a default. The regular approach, usually a transactional net margin method with a benchmarking study, remains available. The table sets out the trade-offs.
| Parameter | Safe harbour | Regular method with benchmarking |
|---|---|---|
| Pricing basis | Prescribed floor of 15% on operating expense | Arm’s length range from comparable companies |
| Benchmarking | Not needed to support the margin | Required, and sensitive to comparable selection |
| Tolerance or adjustments | None allowed once accepted (Rule 89(5)) | Range and tolerance rules of the regular method apply |
| Documentation and Form 48 | Still required (sections 171 and 172) | Required |
| Mutual Agreement Procedure | Not available for the accepted transaction (Rule 93) | Available under the treaty |
| Audit exposure | Verification of eligibility; reference to the Transfer Pricing Officer if the Assessing Officer doubts the option | Full review of the arm’s length price |
| Best suited to | Routine cost-plus operators with a clean cost base and an associate in a normal-tax jurisdiction | Operators with unusual risk, heavy leverage, or an associate whose home authority expects a different return |
An Advance Pricing Agreement under section 168 is a third route for operators that want certainty beyond a fixed margin. It takes longer and costs more, so it suits large, long-term arrangements. For most routine cost-plus operators the real choice is between the safe harbour and the regular method, and the right answer depends on the numbers in your own cost base, not on the headline percentage.
The Companion Tax Exemption and Why It Matters for the Transfer Pricing File
The safe harbour is one half of the framework. The other half is an exemption in Schedule IV of the Income-tax Act, 2025 (serial number 13C) for income of a foreign company from procuring data centre services from a specified data centre in India, available up to 31 March 2047. As the Income Tax Department’s FAQs explain, the conditions include that the foreign company does not own or operate the physical infrastructure or resources of the data centre, that all sales to users in India go through an Indian reseller, and that prescribed information is furnished.
The Taxation and Other Laws (Amendment) Bill, 2026 proposed relaxing these conditions by removing the requirement for the Central Government to notify the foreign company and the data centre, and by allowing data centres that are leased and operated by an Indian company. PRS Legislative Research’s summary of the Bill sets out the changes. Reports indicate that the Bill has since been enacted as the Taxation and Other Laws (Amendment) Act, 2026, but the current statutory text should be confirmed before the conditions are applied to a structure.
Why does this belong in a transfer pricing article? Because the same facts will be read by two audiences. The Transfer Pricing Officer reads them for functions, assets and risks. The exemption test reads them for who actually operates the servers. Khaitan & Co’s analysis points out that ambiguity remains over what “operating” the servers means, and that excessive control rights held by the foreign company could put the exemption and the permanent establishment position at risk. A functional analysis that describes the foreign associate as controlling day-to-day operations of the facility may support one position and undermine the other. The two files must tell the same story.
Documentation and FAR Analysis for a Data Centre
Electing the safe harbour shortens the pricing argument, not the file. Your transfer pricing documentation should still explain the business in plain terms and support eligibility. A FAR analysis of functions, assets and risks is the backbone of that explanation, and for a data centre it has some specific questions.
| Dimension | Questions to answer for a data centre | Why it matters |
|---|---|---|
| Functions | Who designs capacity, procures power and equipment, runs operations, manages uptime and handles customer-facing decisions? | Shows whether the Indian entity is a service provider or something more |
| Assets | Who owns or leases the land, building, power and cooling plant and IT infrastructure? Who controls them in practice? | Separates legal title from operational control |
| Risks | Who bears utilisation risk, service-level penalties, power price movements, obsolescence and financing risk? | A cost-plus return fits an entity that does not carry demand risk |
| Contracts and conduct | Do the agreements match how the parties actually behave? | Tax authorities look at conduct as well as contract |
Unlike the IT services category, the commentary reviewed for this article does not list a separate insignificant-risk test for data centre services. Even so, a cost-plus return only makes commercial sense where the foreign associate carries the demand and utilisation risk. A FAR analysis that shows the Indian entity bearing significant market risk will invite questions about why it is on a fixed margin. Your transfer pricing policy should set out the pricing logic, the cost base and the true-up mechanism so that the documentation and the invoices agree.
How to Test Readiness and Elect the Safe Harbour: Step by Step
- Define the service. Write down exactly what the Indian entity provides and map each element to the definition of data centre services.
- Confirm the counterparty and jurisdiction. Check that the recipient is a foreign associated enterprise and that it is not in a Rule 92 excluded territory.
- Build the operating expense bridge. Reconcile the general ledger to the Rule 86 definition, identifying every exclusion, reclassification and judgement. The computation should be reproducible from the audited accounts.
- Run the margin test on actuals and forecast. Test the current year and the next two years of the block, including a year-end true-up for revenue.
- Segment non-eligible activities. Separate any services, costs and revenues that fall outside the definition.
- Compare with the regular method. Estimate the arm’s length range and compare it with the 15% floor, including the effect of excluded interest and the loss of MAP access.
- File Form No. 49. Furnish the form electronically on or before the due date for the return, with the return filed first, through the income tax e-filing portal. Check the transfer pricing filing due dates for the date that applies to you.
- Maintain the file. Keep the section 171 documentation current, obtain the Form 48 accountant’s report, and diarise an annual eligibility check across the three-year block.
Common Mistakes We See
- Treating 15% as automatic. The percentage applies only to an eligible transaction, with a valid election, and where the margin is measured on the defined operating expense.
- Averaging across activities. Blending data centre revenue with other services inflates or deflates the margin and may disqualify the transaction.
- Overlooking the interest exclusion. Finance costs sit outside operating expense, which changes the economics for leveraged operators.
- Filing out of sequence. Form 49 must be furnished on or before the return due date, and the return must be filed on or before the date of the form.
- Assuming the paperwork disappears. Sections 171 and 172 continue to apply, and Form 48 is still required.
- Forgetting the MAP bar. If the foreign tax authority adjusts the associate’s side, there is no treaty route for the accepted transaction.
- Ignoring the exemption conditions. Contracts that give the foreign company control over the servers can create problems well beyond transfer pricing.
Questions CFOs and Heads of Tax Should Ask Before Electing
- What exactly does the Indian entity provide, and does each service fit the definition?
- Is our remuneration genuinely cost-based, and can we reconcile it to the accounts?
- How much of our cost base is financing, and is the 15% margin on operating expense enough after interest?
- Would the arm’s length range from a benchmarking study be higher or lower than 15%?
- Are we comfortable giving up the Mutual Agreement Procedure for this transaction?
Frequently Asked Questions
Did India introduce a transfer pricing safe harbour for data centre services in 2026?
Yes. The Income-tax Rules, 2026, notified on 20 March 2026 and in force from 1 April 2026, added the provision of data centre services to a foreign company as an eligible international transaction under the safe harbour framework in section 167 of the Income-tax Act, 2025. The taxpayer must meet the prescribed conditions and validly exercise the option.
What is the safe harbour margin for data centre services in India?
The margin is an operating profit of at least 15% on operating expense, as recorded in commentary on Rule 89(2). It is a floor, tested each tax year on the eligible transaction.
Does the 15% margin apply to every cloud company in India?
No. It applies to an eligible Indian entity that provides data centre services, as defined, to a foreign company, and only where the option is validly exercised. Software, reselling and other cloud services performed by the same or other entities must be analysed separately.
Is there a turnover limit for the data centre safe harbour?
Commentary on the notified Rules records no aggregate revenue cap for this category. The Rs 2,000 crore threshold applies to IT services, not to data centre services. Confirm this against the official text before filing.
How do I opt for the data centre safe harbour?
File Form No. 49 electronically on or before the due date for furnishing the return of income, with the return furnished on or before the date of the form. The Assessing Officer verifies eligibility and may refer doubtful cases to the Transfer Pricing Officer. The applicable dates are tracked in our transfer pricing filing due dates guide.
Do I still need transfer pricing documentation if I use the safe harbour?
Yes. Sections 171 and 172 continue to apply, so the documentation must be maintained and the accountant’s report in Form 48 obtained. The safe harbour protects the declared price. It does not replace the records.
Can I use the Mutual Agreement Procedure if the safe harbour is accepted?
Not for that transaction. Rule 93 bars the treaty route once the transfer price is accepted under the safe harbour. The bar is transaction-specific, so other transactions remain unaffected.
How long does the safe harbour election last?
For eligible transactions other than IT services, the framework applies for a block of three consecutive tax years starting with 2026-27, with later blocks continuing unless the CBDT modifies the Rules. PwC’s India tax summary records the block structure and the MAP restriction.
How does the safe harbour relate to the tax exemption for foreign cloud companies?
They are separate but complementary. The Schedule IV exemption relieves the foreign company’s income from procuring data centre services from a specified data centre, up to 31 March 2047, subject to conditions. The safe harbour fixes the remuneration of the Indian operator. The facts must support both, which is why the transfer pricing file and the exemption analysis should be prepared together.
Conclusion
The data centre safe harbour gives eligible Indian operators something they rarely had before: a defined route to price acceptance for a capital-intensive, cost-plus business. It rewards preparation. The finance teams that benefit most will be those that define the service precisely, reconcile the operating expense base to the accounts, test the margin before year-end, and align the contracts, the FAR analysis and the exemption analysis.
It is not a reason to stop thinking. A leveraged operator, a mixed-service entity or a structure with an associated reseller may do better under the regular method or an advance pricing agreement. If you are weighing that decision, SBC’s Transfer Pricing Services in India cover documentation, benchmarking, policy design and compliance, and can be scoped around your operating model.
Sources and Further Reading
- Income Tax Department: Income-tax Rules, 2026, Notification No. 22/2026
- Income Tax Department: FAQs on the Taxation and Other Laws (Amendment) Bill, 2026
- Press Information Bureau: Budget 2026-27 technology and data centre measures
- KPMG TaxNewsFlash: Transfer pricing changes in the final Income-tax Rules, 2026
- PRS Legislative Research: Taxation and Other Laws (Amendment) Bill, 2026
- OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022
- OECD BEPS Action 13: Transfer Pricing Documentation and Country-by-Country Reporting
Disclaimer
This article is provided for general informational and educational purposes only. It should not be considered legal, tax, financial or professional advice. Tax laws, rules, forms and administrative guidance, including the Income-tax Act, 2025 and the Income-tax Rules, 2026, may change, and the position described here may be updated or clarified. Readers should verify the latest information from the Income Tax Department, the CBDT, the Ministry of Finance and other relevant official sources before taking any decision. Please consult a qualified professional for advice specific to your circumstances.