Rule-10TH, Income-tax Rules
[Safe Harbour Rules for Specified Domestic Transactions
10TH. Definitions.— For the purposes of this rule and rules 10THA to 10THD,—
(a) "Appropriate Commission" shall have the same meaning as assigned to it in sub-section (4) of section 2 of the Electricity Act, 2003 (36 of 2003);
(b) "Government company" shall have the same meaning as assigned to it in sub-section (45) of section 2 of the Companies Act, 2013 (18 of 2013); ]
Rule-10TG, Income-tax Rules
[Mutual Agreement Procedure not to apply.
10TG. Where transfer price in relation to an eligible international transaction declared by an eligible assessee is accepted by the income-tax authorities under section 92CB, the assessee shall not be entitled to invoke mutual agreement procedure under an agreement for avoidance of double taxation entered into with a country or specified territory outside India as referred to in section 90 or 90A.]
Rule-10TF, Income-tax Rules
[Safe harbour rules not to apply in certain cases.
10TF. Nothing contained in rules 10TA, 10TB, 10TC, 10TD or rule 10TE shall apply in respect of eligible international transactions entered into with an associated enterprise located in any country or territory notified under section 94A or in a no tax or low tax country or territory.]
Rule-10TE, Income-tax Rules
[Procedure.
10TE. (1) For the purposes of exercise of the option for safe harbour, the assessee shall furnish a Form 3CEFA, complete in all respects, to the Assessing Officer on or before the due date specified in Explanation 2 below sub-section (1) of section 139 for furnishing the return of income for—
(i) the relevant assessment year, in case the option is exercised only for that assessment year; or
(ii) the first of the assessment years, in case the option is exercised for more than one assessment year:
Provided that the return of income for the relevant assessment year or the first of the relevant assessment years, as the case may be, is furnished by the assessee on or before the date of furnishing of Form 3CEFA.
(2) The option for safe harbour validly exercised shall continue to remain in force for the period specified in Form 3CEFA or a period of five years whichever is less:
Provided that the assessee shall, in respect of the assessment year or years following the initial assessment year, furnish a statement to the Assessing Officer before furnishing return of income of that year, providing details of eligible transactions, their quantum and the profit margins or the rate of interest or commission shown:
Provided further that an option for safe harbour shall not remain in force in respect of any assessment year following the initial assessment year, if—
(i) the option is held to be invalid for the relevant assessment year by the Transfer Pricing Officer under sub-rule (11) or by the Commissioner under sub-rule (8) in respect of an objection filed by the assessee against the order of the Transfer Pricing Officer under sub-rule (11), as the case may be; or
(ii) the eligible assessee opts out of the safe harbour, for the relevant assessment year, by furnishing a declaration to that effect, to the Assessing Officer:
2[Provided also that nothing contained in this sub-rule shall apply to the option for safe harbour validly exercised under sub-rule (3B) of rule 10TD:]
3[Provided also that in case of the option for safe harbour validly exercised under sub-rule (2A) of rule 10TD, the word "three" shall be substituted for "five".]
(3) On receipt of Form 3CEFA, the Assessing Officer shall verify whether—
(i) the assessee exercising the option is an eligible assessee; and
(ii) the transaction in respect of which the option is exercised is an eligible international transaction,
before the option for safe harbour by the assessee is treated to be validly exercised.
(4) Where the Assessing officer doubts the valid exercise of the option for the safe harbour by an assessee, he shall make a reference to the Transfer Pricing Officer for determination of the eligibility of the assessee or the international transaction or both for the purposes of the safe harbour.
(5) For the purposes of sub-rule (4) and sub-rule (10), the Transfer Pricing Officer may require the assessee, by notice in writing, to furnish such information or documents or other evidence as he may consider necessary, and the assessee shall furnish the same within the time specified in such notice.
(6) Where—
(a) the assessee does not furnish the information or documents or other evidence required by the Transfer Pricing Officer; or
(b) the Transfer Pricing Officer finds that the assessee is not an eligible assessee; or
(c) the Transfer Pricing Officer finds that the international transaction in respect of which the option referred to in sub-rule (1) has been exercised is not an eligible international transaction,
the Transfer Pricing Officer shall, by order in writing, declare the option exercised by the assessee under sub-rule (1) to be invalid and cause a copy of the said order to be served on the assessee and the Assessing Officer:
Provided that no order declaring the option exercised by the assessee to be invalid shall be passed without giving an opportunity of being heard to the assessee.
(7) If the assessee objects to the order of the Transfer Pricing Officer under sub-rule (6) or sub-rule (11) declaring the option to be invalid, he may file his objections with the Commissioner, to whom the Transfer Pricing Officer is subordinate, within fifteen days of receipt of the order of the Transfer Pricing Officer.
(8) On receipt of the objection referred to in sub-rule (7), the Commissioner shall after providing an opportunity of being heard to the assessee pass appropriate orders in respect of the validity or otherwise of the option exercised by the assessee and cause a copy of the said order to be served on the assessee and the Assessing Officer.
(9) In a case where option exercised by the assessee has been held to be valid, the Assessing officer shall proceed to verify whether the transfer price declared by the assessee in respect of the relevant eligible international transactions is in accordance with the circumstances specified in sub-rule (2) 4[or, as the case may be, sub-rule (2A)] of rule 10 TD and, if it is not in accordance with the said circumstances, the Assessing Officer shall adopt the operating profit margin or rate of interest or commission specified in sub-rule (2) 5[or, as the case may be, sub-rule (2A)] of rule 10TD.
(10) Where the facts and circumstances on the basis of which the option exercised by the assessee was held to be valid have changed and the Assessing Officer has reason to doubt the eligibility of an assessee or the international transaction for any assessment year other than the initial Assessment Year falling within the period for which the option was exercised by the assessee, he shall make a reference to the Transfer Pricing Officer for determination of eligibility of the assessee or the international transaction or both for the purpose of safe harbour.
Explanation.—For purposes of this sub-rule the facts and circumstances include:—
(a) functional profile of the assessee in respect of the international transaction;
(b) the risks being undertaken by the assessee;
(c) the substantive contractual conditions governing the role of the assessee in respect of the international transaction;
(d) the conduct of the assessee as referred to in sub-rule (2) or sub-rule (3) of rule 10TB; or
(e) the substantive nature of the international transaction.
(11) The Transfer Pricing Officer on receipt of a reference under sub-rule (10) shall, by an order in writing, determine the validity or otherwise of the option exercised by the assessee for the relevant year after providing an opportunity of being heard to the assessee and cause a copy of the said order to be served on the assessee and the Assessing Officer.
(12) Nothing contained in this rule shall affect the power of the Assessing Officer to make a reference under section 92CA in respect of international transaction other than the eligible international transaction.
(13) Where no option for safe harbour has been exercised under sub-rule (1) by an eligible assessee in respect of an eligible international transaction entered into by the assessee or the option exercised by the assessee is held to be invalid, the arm's length price in relation to such international transaction shall be determined in accordance with the provisions of sections 92C and 92CA without having regard to the profit margin or the rate of interest or commission as specified in sub-rule (2) 6[or, as the case may be, sub-rule (2A)] of rule 10TD.
(14) For the purposes of this rule,—
(i) no reference under sub-rule(4) shall be made by an Assessing Officer after expiry of a period of two months from the end of the month in which Form 3CEFA is received by him;
(ii) no order under sub-rule (6) or sub-rule (11) shall be passed by the Transfer Pricing Officer after expiry of a period of two months from the end of the month in which the reference from the Assessing officer under sub-rule(4) or sub-rule (10), as the case may be, is received by him;
(iii) the order under sub-rule (8) shall be passed by the Commissioner within a period of two months from the end of the month in which the objection filed by the assessee under sub-rule (7) is received by him.
(15) If the Assessing Officer or the Transfer Pricing Officer or the Commissioner, as the case may be, does not make a reference or pass an order, as the case may be, within the time specified in sub-rule (14), then the option for safe harbour exercised by the assessee shall be treated as valid.]
Rule-10TD, Income-tax Rules
[Safe Harbour.
10TD. (1) Where an eligible assessee has entered into an eligible international transaction and the option exercised by the said assessee is not held to be invalid under rule 10TE, the transfer price declared by the assessee in respect of such transaction shall be accepted by the income-tax authorities, if it is in accordance with the circumstances as specified in sub-rule (2) 1[or, as the case may be, sub-rule (2A)].
(2) The circumstances referred to in sub-rule (1) in respect of the eligible international transaction specified in column (2) of the Table below shall be as specified in the corresponding entry in column (3) of the said Table:—
Sl. No. Eligible International Transaction Circumstances
(1) (2) (3)
1. Provision of software development services referred to in item (i) of rule 10TC.
The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is -
(i) not less than 20 per cent, where the aggregate value of such transactions entered into during the previous year does not exceed a sum of five hundred crore rupees; or
(ii) not less than 22 per cent, where the aggregate value of such transactions entered into during the previous year exceeds a sum of five hundred crore rupees.
2. Provision of information technology enabled services referred to in item (ii) of rule 10TC.
The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is -
(i) not less than 20 per cent, where the aggregate value of such transactions entered into during the previous year does not exceed a sum of five hundred crore rupees; or
(ii) not less than 22 per cent, where the aggregate value of such transactions entered into during the previous year exceeds a sum of five hundred crore rupees.
3. Provision of knowledge process outsourcing services referred to in item (iii) of rule 10TC. The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 25 per cent.
4. Advancing of intra-group loans referred to in item (iv) of rule 10TC where the amount of loan does not exceed fifty crore rupees. The Interest rate declared in relation to the eligible international transaction is not less than the base rate of State Bank of India as on 30th June of the relevant previous year plus 150 basis points.
5. Advancing of intra-group loans referred to in item (iv) of rule 10TC where the amount of loan exceeds fifty crore rupees. The Interest rate declared in relation to the eligible international transaction is not less than the base rate of State Bank of India as on 30th June of the relevant previous year plus 300 basis points.
6. Providing corporate guarantee referred to in sub-item (a) of item (v) of rule 10TC. The commission or fee declared in relation to the eligible international transaction is at the rate not less than 2 per cent per annum on the amount guaranteed.
7. Providing corporate guarantee referred to in sub-item (b) of item (v) of rule 10TC. The commission or fee declared in relation to the eligible international transaction is at the rate not less than 1.75 per cent. per annum on the amount guaranteed.
8. Provision of contract research and development services wholly or partly relating to software development referred to in item (vi) of rule 10TC. The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 30 per cent.
9. Provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs referred to in item (vii) of rule 10TC. The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 29 per cent.
10. Manufacture and export of core auto components referred to in item (viii) of rule 10TC. The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 12 per cent.
11. Manufacture and export of non-core auto components referred to in item (ix) of rule 10TC. The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 8.5 per cent.
2[(2A) The circumstances referred to in sub-rule (1) in respect of the eligible international transaction specified in column (2) of the Table below shall be as specified in the corresponding entry in column (3) of the said Table:—
Sl. No. Eligible International Transaction Circumstances
(1) (2) (3)
1.
Provision of software development services referred to in item (i) of rule 10TC.
The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is -
(i) not less than 17 per cent, where the value of international transaction does not exceed a sum of one hundred crore rupees; or
(ii) not less than 18 per cent, where the value of international transaction exceeds a sum of one hundred crore rupees but does not exceed a sum of two hundred crore rupees.
2.
Provision of information technology enabled services referred to in item (ii) of rule 10TC.
The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is -
(i) not less than 17 per cent, where the aggregate value of such transactions entered into during the previous year does not exceed a sum of one hundred crore rupees; or
(ii) not less than 18 per cent, where the aggregate value of such transactions entered into during the previous year exceeds a sum of one hundred crore rupees but does not exceed a sum of two hundred crore rupees.
3.
Provision of knowledge process outsourcing services referred to in item (iii) of rule 10TC.
The value of international transaction does not exceed a sum of two hundred crore rupees and the operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is -
(i) not less than 24 per cent. and the Employee Cost in relation to the Operating Expense is at least sixty per cent.
(ii) not less than 21 per cent. and the Employee Cost in relation to the Operating Expense is forty per cent. or more but less than sixty per cent. or
(iii) not less than 18 per cent and the Employee Cost in relation to the Operating Expense does not exceed forty per cent.
4.
Advancing of intra-group loans referred to in item (iv) of rule 10TC where the amount of loan is denominated in Indian Rupees (INR).
The interest rate declared in relation to the eligible international transaction is not less than the one-year marginal cost of funds lending rate of State Bank of India as on 1st April of the relevant previous year plus,-
(i) 175 basis points, where the associated enterprise has CRISIL credit rating between AAA to A or its equivalent;
(ii) 325 basis points, where the associated enterprise has CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent;
(iii) 475 basis points, where the associated enterprise has CRISIL credit rating between BB to B or its equivalent;
(iv) 625 basis points, where the associated enterprise has CRISIL credit rating between C to D or its equivalent; or
(v) 425 basis points, where credit rating of the associated enterprise is not available and the amount of loan advanced to the associated enterprise including loans to all associated enterprises in Indian Rupees does not exceed a sum of one hundred crore rupees in the aggregate as on 31st March of the relevant previous year.
5.
Advancing of intra-group loans referred to in item (iv) of rule 10TC where the amount of loan is denominated in foreign currency.
The interest rate declared in relation to the eligible international transaction is not less than the six-month London Inter-Bank Offer Rate of the relevant foreign currency as on 30th September of the relevant previous year plus, -
(i) 150 basis points, where the associated enterprise has CRISIL credit rating between AAA to A or its equivalent;
(ii) 300 basis points, where the associated enterprise has CRISIL credit rating of BBB-, BBB or BBB+ or its equivalent;
(iii) 450 basis points, where the associated enterprise has CRISIL credit rating between BB to B or its equivalent;
(iv) 600 basis points, where the associated enterprise has CRISIL credit rating between C to D or its equivalent; or
(v) 400 basis points, where credit rating of the associated enterprise is not available and the amount of loan advanced to the associated enterprise including loans to all associated enterprises does not exceed a sum equivalent to one hundred crore Indian rupees in the aggregate as on 31st March of the relevant previous year.
6.
Providing corporate guarantee referred to in sub-item (a) or sub-item (b) of item (v) of rule 10TC.
The commission or fee declared in relation to the eligible international transaction is at the rate not less than one per cent per annum on the amount guaranteed.
7.
Provision of contract research and development services wholly or partly relating to software development referred to in item (vi) of rule 10TC.
The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24 per cent, where the value of the international transaction does not exceed a sum of two hundred crore rupees.
8.
Provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs referred to in item (vii) of rule 10TC.
The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24 per cent, where the value of the international transaction does not exceed a sum of two hundred crore rupees.
9.
Manufacture and export of core auto components referred to in item (viii) of rule 10TC.
The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 12 per cent.
10.
Manufacture and export of non-core auto components referred to in item (ix) of rule 10TC.
The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is not less than 8.5 per cent.
11.
Receipt of low value-adding intra-group services in item (x) of rule 10TC.
The entire value of the international transaction, including a mark-up not exceeding 5 per cent., does not exceed a sum of ten crore rupees:
Provided that the method of cost pooling, the exclusion of shareholder costs and duplicate costs from the cost pool and the reasonableness of the allocation keys used for allocation of costs to the assessee by the overseas associated enterprise, is certified by an accountant.]
(3) The provisions of sub‐rules (1) and (2) shall apply for the assessment year 2013-14 and four assessment years immediately following that assessment year.
3[(3A) The provisions of sub-rules (1) and (2A) shall apply for the assessment year 2017-18 and two assessment years immediately following that assessment year:
Provided that where an eligible assessee is eligible to exercise option under sub-rule (2) or, as the case may be, sub-rule (2A) above, the assessee shall have the right to choose the option which is most beneficial to him.]
4[(3B) The provisions of sub-rules (1) and (2A) shall apply for the 4a[assessment years 2020-21 and 2021-22 ].]
(4) No comparability adjustment and allowance under the second proviso to sub-section (2) of section 92C shall be made to the transfer price declared by the eligible assessee and accepted under sub-rules (1) and (2) 5[or, as the case may be, (2A)] above.
(5) The provisions of sections 92D and 92E in respect of an international transaction shall apply irrespective of the fact that the assessee exercises his option for safe harbour in respect of such transaction.]
Rule-10TC, Income-tax Rules
[Eligible international transaction.
10TC. 'Eligible international transaction' means an international transaction between the eligible assessee and its associated enterprise, either or both of whom are non-resident, and which comprises of:
(i) provision of software development services;
(ii) provision of information technology enabled services;
(iii) provision of knowledge process outsourcing services;
(iv) advance of intra-group loan;
(v) provision of corporate guarantee, where the amount guaranteed,—
(a) does not exceed one hundred crore rupees; or
(b) exceeds one hundred crore rupees, and the credit rating of the associated enterprise, done by an agency registered with the Securities and Exchange Board of India, is of the adequate to highest safety;
(vi) provision of contract research and development services wholly or partly relating to software development;
(vii) provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs;
(viii) manufacture and export of core auto components; 1[***]
(ix) manufacture and export of non-core auto components 2[; or]
by the eligible assessee.
3[(x) receipt of low value-adding intra-group services from one or more members of its group,]
Rule-10TB, Income-tax Rules
[Eligible assessee.
10TB. (1) Subject to the provisions of sub-rules (2) and (3), the 'eligible assessee' means a person who has exercised a valid option for application of safe harbour rules in accordance with rule 10TE, and—
(i) is engaged in providing software development services or information technology enabled services or knowledge process outsourcing services, with insignificant risk, to a non-resident associated enterprise (hereinafter referred as foreign principal);
(ii) has made any intra-group loan;
(iii) has provided a corporate guarantee;
(iv) is engaged in providing contract research and development services wholly or partly relating to software development, with insignificant risk, to a foreign principal;
(v) is engaged in providing contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal; 1[***]
(vi) is engaged in the manufacture and export of core or non-core auto components and where ninety per cent or more of total turnover during the relevant previous year is in the nature of original equipment manufacturer sales 2[; or]
3[(vii) is in receipt of low value-adding intra-group services from one or more members of its group.]
(2) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in item (i) of sub-rule (1), the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the following factors, namely:—
(a) the foreign principal performs most of the economically significant functions involved, including the critical functions such as conceptualisation and design of the product and providing the strategic direction and framework, either through its own employees or through its other associated enterprises, while the eligible assessee carries out the work assigned to it by the foreign principal;
(b) the capital and funds and other economically significant assets including the intangibles required, are provided by the foreign principal or its other associated enterprises, and the eligible assessee is only provided a remuneration for the work carried out by it;
(c) the eligible assessee works under the direct supervision of the foreign principal or its associated enterprise which not only has the capability to control or supervise but also actually controls or supervises the activities carried out through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis;
(d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant;
(e) the eligible assessee has no ownership right, legal or economic, on any intangible generated or on the outcome of any intangible generated or arising during the course of rendering of services, which vests with the foreign principal as evident from the contract and the conduct of the parties.
(3) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in items (iv) and (v) of sub-rule (1), the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the following factors, namely:—
(a) the foreign principal performs most of the economically significant functions involved in research or product development cycle, including the critical functions such as conceptualisation and design of the product and providing the strategic direction and framework, either through its own employees or through its other associated enterprises while the eligible assessee carries out the work assigned to it by the foreign principal;
(b) the foreign principal or its other associated enterprises provides the funds or capital and other economically significant assets including intangibles required for research or product development and also provides a remuneration to the eligible assessee for the work carried out by it;
(c) the eligible assessee works under the direct supervision of the foreign principal or its other associated enterprise which has not only the capability to control or supervise but also actually controls or supervises research or product development, through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis;
(d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant;
(e) the eligible assessee has no ownership right, legal or economic, on the outcome of the research which vests with the foreign principal and is evident from the contract as well as the conduct of the parties.]
Rule-10TA, Income-tax Rules
[Safe Harbour Rules for International Transactions]
Definitions.
10TA. For the purposes of this rule and rule 10TB to rule 10TG,—
1[(a) "accountant" means an accountant referred to in the Explanation below sub-section (2) of section 288 of the Act and includes any person recognised for undertaking cost certification by the Government of the country where the associated enterprise is registered or incorporated or any of its agencies, who fulfils the following conditions, namely:—
(I) if he is a member or partner in any entity engaged in rendering accountancy or valuation services then,—
(i) the entity or its affiliates have presence in more than two countries; and
(ii) the annual receipt of the entity in the year preceding the year in which cost certification is undertaken exceeds ten crore rupees;
(II) if he is pursuing the profession of accountancy individually or is a valuer then,—
(i) his annual receipt in the year preceding the year in which cost certification is undertaken, from the exercise of profession, exceeds one crore rupees; and
(ii) he has professional experience of not less than ten years.]
2[(aa)] "contract research and development services wholly or partly relating to software development" means the following, namely:—
(i) research and development producing new theorems and algorithms in the field of theoretical computer science;
(ii) development of information technology at the level of operating systems, programming languages, data management, communications software and software development tools;
(iii) development of Internet technology;
(iv) research into methods of designing, developing, deploying or maintaining software;
(v) software development that produces advances in generic approaches for capturing, transmitting, storing, retrieving, manipulating or displaying information;
(vi) experimental development aimed at filling technology knowledge gaps as necessary to develop a software programme or system;
(vii) research and development on software tools or technologies in specialised areas of computing (image processing, geographic data presentation, character recognition, artificial intelligence and such other areas);or
(viii) upgradation of existing products where source code has been made available by the principal 3[, except where the source code has been made available to carry out routine functions like debugging of the software];
(b) "core auto components" means,—
(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;
(c) "corporate guarantee" means explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short-term or long-term borrowing.
Explanation.—For the purposes of this clause, explicit corporate guarantee does not include letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of similar nature;
4[(ca) "employee cost" includes,—
(i) salaries and wages;
(ii) gratuities;
(iii) contribution to Provident Fund and other funds;
(iv) the value of perquisites as specified in clause (2) of section 17 of the Act;
(v) employment related allowances, like medical allowance, dearness allowance, travel allowance and any other allowance;
(vi) bonus or commission by whatever name called;
(vii) lump sum payments received at the time of termination of service or superannuation or voluntary retirement, such as gratuity, severance pay, leave encashment, voluntary retrenchment benefits, commutation of pension and similar payments;
(viii) expenses incurred on contractual employment of persons performing tasks similar to those performed by the regular employees;
(ix) outsourcing expenses, to the extent of employee cost, wherever ascertainable, embedded in the total outsourcing expenses:
Provided that where the extent of employee cost embedded in the total outsourcing expenses is not ascertainable, eighty per cent of the total outsourcing expenses shall be deemed to be the employee cost embedded in the total outsourcing expenses;
(x) recruitment expenses;
(xi) relocation expenses;
(xii) training expenses;
(xiii) staff welfare expenses; and
(xiv) any other expenses related to employees or the employment;]
(d) "generic pharmaceutical drug" means a drug that is comparable to a drug already approved by the regulatory authority in dosage form, strength, route of administration, quality and performance characteristics, and intended use;
(e) "information technology enabled services" means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:—
(i) back office operations;
(ii) call centres or contact centre services;
(iii) data processing and data mining;
(iv) insurance claim processing;
(v) legal databases;
(vi) creation and maintenance of medical transcription excluding medical advice;
(vii) translation services;
(viii) payroll;
(ix) remote maintenance;
(x) revenue accounting;
(xi) support centres;
(xii) website services;
(xiii) data search integration and analysis;
(xiv) remote education excluding education content development; or
(xv) clinical database management services excluding clinical trials,
but does not include any research and development services whether or not in the nature of contract research and development services;
(f) "intra-group loan" means loan advanced to wholly owned subsidiary being a non-resident, where the loan—
(i) is sourced in Indian rupees;
(ii) is not advanced by an enterprise, being a financial company including a bank or a financial institution or an enterprise engaged in lending or borrowing in the normal course of business; and
(iii) does not include credit line or any other loan facility which has no fixed term for repayment;
(g) "knowledge process outsourcing services" means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:—
(i) geographic information system;
(ii) human resources services;
(iii) engineering and design services;
(iv) animation or content development and management;
(v) business analytics;
(vi) financial analytics; or
(vii) market research,
but does not include any research and development services whether or not in the nature of contract research and development services;
5[(ga) "low value-adding intra-group services" means services that are performed by one or more members of a multinational enterprise group on behalf of one or more other members of the same multinational enterprise group and which,—
(i) are in the nature of support services;
(ii) are not part of the core business of the multinational enterprise group, i.e., such services neither constitute the profit-earning activities nor contribute to the economically significant activities of the multinational enterprise group;
(iii) are not in the nature of shareholder services or duplicate services;
(iv) neither require the use of unique and valuable intangibles nor lead to the creation of unique and valuable intangibles;
(v) neither involve the assumption or control of significant risk by the service provider nor give rise to the creation of significant risk for the service provider; and
(vi) do not have reliable external comparable services that can be used for determining their arm's length price, but does not include the following services, namely:—
(i) research and development services;
(ii) manufacturing and production services;
(iii) information technology (software development) services;
(iv) knowledge process outsourcing services;
(v) business process outsourcing services;
(vi) purchasing activities of raw materials or other materials that are used in the manufacturing or production process;
(vii) sales, marketing and distribution activities;
(viii) financial transactions;
(ix) extraction, exploration, or processing of natural resources; and
(x) insurance and reinsurance;]
(h) "non-core auto components" mean auto components other than core auto components;
(i) "no tax or low tax country or territory" means a country or territory in which the maximum rate of income-tax is less than fifteen per cent;
(j) "operating expense" means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including 6[costs relating to Employee Stock Option Plan or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee, reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee, amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of those associated enterprises and which relate to normal operations of the assessee and] depreciation and amortisation expenses relating to the assets used by the assessee, but not including the following, namely:—
(i) interest expense;
(ii) provision for unascertained liabilities;
(iii) pre-operating expenses;
(iv) loss arising on account of foreign currency fluctuations;
(v) extraordinary expenses;
(vi) loss on transfer of assets or investments;
(vii) expense on account of income-tax; and
(viii) other expenses not relating to normal operations of the assessee:
7[Provided that reimbursement to associated enterprises of expenses incurred by the associated enterprises on behalf of the assessee shall be at cost:
Provided further that amounts recovered from associated enterprises on account of expenses incurred by the assessee on behalf of the associated enterprises and which relate to normal operations of the assessee shall be at cost;]
(k) "operating revenue" means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations 8[including costs relating to Employee Stock Option Plan or similar stock-based compensation provided for by the associated enterprises of the assessee to the employees of the assessee] but not including the following, namely:—
(i) interest income;
(ii) income arising on account of foreign currency fluctuations;
(iii) income on transfer of assets or investments;
(iv) refunds relating to income-tax;
(v) provisions written back;
(vi) extraordinary incomes; and
(vii) other incomes not relating to normal operations of the assessee.
(l) "operating profit margin" in relation to operating expense means the ratio of operating profit, being the operating revenue in excess of operating expense, to the operating expense expressed in terms of percentage;
9[(la) "relevant previous year" means the previous year relevant to the assessment year in which the option for safe harbour is validly exercised;]
(m) "software development services" means,—
(i) business application software and information system development using known methods and existing software tools;
(ii) support for existing systems;
(iii) converting or translating computer languages;
(iv) adding user functionality to application programmes;
(v) debugging of systems;
(vi) adaptation of existing software; or
(vii) preparation of user documentation,
but does not include any research and development services whether or not in the nature of contract research and development services.]
Rule-10T, Income-tax Rules
Miscellaneous.
10T. (1) Mere filing of an application for an agreement under these rules shall not prevent the operation of Chapter X of the Act for determination of arms' length price under that Chapter till the agreement is entered into.
(2) The negotiation between the competent authority in India and the competent authority in the other country or countries, in case of bilateral or multilateral agreement, shall be carried out in accordance with the provisions of the tax treaty between India and the other country or countries.]
Rule-10S, Income-tax Rules
Renewing an agreement.
10S. Request for renewal of an agreement may be made as a new application for agreement, using the same procedure as outlined in these rules except pre-filing consultation as referred to in rule 10H.
Rule-10RB, Income-tax Rules
1[Relief in tax payable under sub-section (1) of section 115JB due to operation of sub-section (2D) of section 115JB.
10RB. (1) For the purposes of sub-section (2D) of section 115JB, the tax payable by the assessee company under sub-section (1) of section 115JB, for the previous year referred to in that section, shall be reduced by the following amount, namely:-
(A-B) - (D-C), where,
A = Tax payable by the assessee company under sub-section (1) of section 115JB on the book profit of the previous year including the past income;
B = Tax payable by the assessee company under sub-section (1) of section 115JB on the book profit of the previous year after reducing the book profit with the past income;
C = Aggregate of tax payable by the assessee company under sub-section (1) of section 115JB on the book profit of those past year or years to which the past income belongs;
D = Aggregate of tax payable by the assessee company under sub-section (1) of section 115JB on the book profit of past year or years, referred to in item C, after increasing the book profit with the relevant past income of such year or years:
Provided that if the value of (A-B)-(D-C) in the formula is negative, its value shall be deemed to be zero.
(2) For the purposes of sub-rule (1) past income shall be the amount of income of past year or years included in the book profit or the previous year on account of an advance pricing agreement entered into by the assessee under section 92CC or on account of secondary adjustment required to be made under section 92CE.
(3) On application of provision of sub-rule (1), the tax credit allowed to the assessee under section 115JAA shall be reduced by the amount which is equal to the amount of reduction that has been allowed under sub-rule (1).
(4) The assessee company shall make a claim for relief under sub-section (2D) of section 115JB in Form No. 3CEEA electronically by uploading signed printout of said Form in the manner specified by the Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be.
(5) Form No.3CEEA shall be verified by the person who is authorised to verify the return of income of the assessee company under section 140.
(6) The Principal Director General of Income-tax (Systems) or the Director General of Income-tax (Systems), as the case may be, shall specify the procedure for filing of the Form No. 3CEEA and shall also be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the statements so furnished under this rule.
Explanation 1.- The value of amount "A" in the formula shall be deemed to be zero, if there is no tax payable under sub-section (1) of section 115JB on the book profit of that previous year including the past income
Explanation 2.- The value of amount "B" in the formula shall be deemed to be zero, if there is no tax payable under sub-section (1) of section 115JB on the book profit of that previous year after reducing the book profit with the past income.
Explanation 3.- For the purposes of calculation of amount "C" in the formula, if in any past year or years there is no tax payable under sub-section (1) of section 115JB on the book profit of that year or years, the tax payable for that year or years shall be deemed to be zero.
Explanation 4.- For the purposes of calculation of amount "D" in the formula, if in any past year or years there is no tax payable under sub-section (1) of section 115JB on the book profit of that year or years after increasing the book profit with the relevant past income of such year or years, the tax payable for that year or years shall be deemed to be zero.]
Rule-10RA, Income-tax Rules
[Procedure for giving effect to rollback provision of an Agreement.
10RA. (1) The effect to the rollback provisions of an agreement shall be given in accordance with this rule.
(2) The applicant shall furnish modified return of income referred to in section 92CD in respect of a rollback year to which the agreement applies along with the proof of payment of any additional tax arising as a consequence of and computed in accordance with the rollback provision.
(3) The modified return referred to in sub-rule(2) shall be furnished along with the modified return to be furnished in respect of first of the previous years for which the agreement has been requested for in the application.
(4) If any appeal filed by the applicant is pending before the Commissioner (Appeals), Appellate Tribunal or the High Court for a rollback year, on the issue which is the subject matter of the rollback provision for that year, the said appeal to the extent of the subject covered under the agreement shall be withdrawn by the applicant before furnishing the modified return for the said year.
(5) If any appeal filed by the Assessing Officer or the Principal Commissioner or Commissioner is pending before the Appellate Tribunal or the High Court for a rollback year, on the issue which is subject matter of the rollback provision for that year, the said appeal to the extent of the subject covered under the agreement shall be withdrawn by the Assessing Officer or the Principal Commissioner or the Commissioner, as the case may be, within three months of filing of modified return by the applicant.
(6) The applicant, the Assessing Officer or the Principal Commissioner or the Commissioner, shall inform the Dispute Resolution Panel or the Commissioner (Appeals) or the Appellate Tribunal or the High Court, as the case may be, the fact of an agreement containing rollback provision having been entered into along with a copy of the same as soon as it is practicable to do so.
(7) In case effect cannot be given to the rollback provision of an agreement in accordance with this rule, for any rollback year to which it applies, on account of failure on the part of applicant, the agreement shall be cancelled.]
Rule-10R, Income-tax Rules
Cancellation of an agreement .
10R . (1) An agreement shall be cancelled by the Board for any of the following reasons:
(i) the compliance audit referred to in rule 10P has resulted in the finding of failure on the part of the assessee to comply with the terms of the agreement;
(ii) the assessee has failed to file the annual compliance report in time;
(iii) the annual compliance report furnished by the assessee contains material errors; or
(iv) the agreement is to be cancelled under sub-rule (4) of rule 10Q [or sub-rule (7) of rule 10RA].
(2) The Board shall give an opportunity of being heard to the assessee, before proceeding to cancel an application.
(3) The competent authority in India shall communicate with the competent authority in the other country or countries and provide reason for the proposed cancellation of the agreement in case of bilateral or multilateral agreement.
(4) The order of cancellation of the agreement shall be in writing and shall provide reasons for cancellation and for non-acceptance of assessee's submission, if any.
(5) The order of cancellation shall also specify the effective date of cancellation of the agreement, where applicable.
(6) The order under the Act, declaring the agreement as void ab initio, on account of fraud or misrepresentation of facts, shall be in writing and shall provide reason for such declaration and for non-acceptance of assessee's submission, if any.
(7) The order of cancellation shall be intimated to the Assessing Officer and the Transfer Pricing Officer, having jurisdiction over the assessee.
Rule-10Q, Income-tax Rules
Revision of an agreement.
10Q. (1) An agreement, subsequent to it having been entered into, may be revised by the Board, if,—
(a) there is a change in critical assumptions or failure to meet a condition subject to which the agreement has been entered into;
(b) there is a change in law that modifies any matter covered by the agreement but is not of the nature which renders the agreement to be non-binding ; or
(c) there is a request from competent authority in the other country requesting revision of agreement, in case of bilateral or multilateral agreement.
(2) An agreement may be revised by the Board either suo motu or on request of the assessee or the competent authority in India or the Director General of Income-tax (International Taxation).
(3) Except when the agreement is proposed to be revised on the request of the assessee, the agreement shall not be revised unless an opportunity of being heard has been provided to the assessee and the assessee is in agreement with the proposed revision.
(4) In case the assessee is not in agreement with the proposed revision the agreement may be cancelled in accordance with rule 10R.
(5) In case the Board is not in agreement with the request of the assessee for revision of the agreement, the Board shall reject the request in writing giving reason for such rejection.
(6) For the purpose of arriving at the agreement for the proposed revision, the procedure provided in rule 10L may be followed so far as they apply.
(7) The revised agreement shall include the date till which the original agreement is to apply and the date from which the revised agreement is to apply.
Rule-10P, Income-tax Rules
Compliance Audit of the agreement.
10P. (1) The Transfer Pricing Officer having the jurisdiction over the assessee shall carry out the compliance audit of the agreement for each of the year covered in the agreement.
(2) For the purposes of sub-rule (1), the Transfer Pricing Officer may require—
(i) the assessee to substantiate compliance with the terms of the agreement, including satisfaction of the critical assumptions, correctness of the supporting data or information and consistency of the application of the transfer pricing method;
(ii) the assessee to submit any information, or document, to establish that the terms of the agreement has been complied with.
(3) The Transfer Pricing Officer shall submit the compliance audit report, for each year covered in the agreement, to the Director General of Income-tax (International Taxation) in case of unilateral agreement and to the competent authority in India, in case of bilateral or multilateral agreement, mentioning therein his findings as regards compliance by the assessee with terms of the agreement.
(4) The Director General of Income-tax (International Taxation) shall forward the report to the Board in a case where there is finding of failure on part of assessee to comply with terms of agreement and cancellation of the agreement is required.
(5) The compliance audit report shall be furnished by the Transfer Pricing Officer within six months from the end of the month in which the Annual Compliance Report referred to in rule 10-O is received by the Transfer Pricing Officer.
(6) The regular audit of the covered transactions shall not be undertaken by the Transfer Pricing Officer if an agreement has been entered into under rule 10L except where the agreement has been cancelled under rule 10R.
Rule-10-O, Income-tax Rules
Furnishing of Annual Compliance Report.
10-O. (1) The assessee shall furnish an annual compliance report to Director General of Income-tax (International Taxation) for each year covered in the agreement.
(2) The annual compliance report shall be in Form 3CEF.
(3) The annual compliance report shall be furnished in quadruplicate, for each of the years covered in the agreement, within thirty days of the due date of filing the income-tax return for that year, or within ninety days of entering into an agreement, whichever is later.
(4) The Director General of Income-tax (International Taxation) shall send one copy of annual compliance report to the competent authority in India, one copy to the Commissioner of Income-tax who has the jurisdiction over the income-tax assessment of the assessee and one copy to the Transfer Pricing Officer having the jurisdiction over the assessee.
Rule-10N, Income-tax Rules
Amendments to Application.
10N. (1) An applicant may request in writing for an amendment to an application at any stage, before the finalisation of the terms of the agreement.
(2) The Director General of Income-tax (International Taxation) (for unilateral agreement) or the competent authority in India (for bilateral or multilateral agreement) may, allow the amendment to the application, if such an amendment does not have effect of altering the nature of the application as originally filed.
(3) The amendment shall be given effect only if it is accompanied by the additional fee, if any, necessitated by such amendment in accordance with fee as provided in rule 10-I.
Rule-10MA, Income-tax Rules
[Roll Back of the Agreement.
10MA. (1) Subject to the provisions of this rule, the agreement may provide for determining the arm's length price or specify the manner in which arm's length price shall be determined in relation to the international transaction entered into by the person during the rollback year (hereinafter referred to as "rollback provision").
(2) The agreement shall contain rollback provision in respect of an international transaction subject to the following, namely:—
(i) the international transaction is same as the international transaction to which the agreement (other than the rollback provision) applies;
(ii) the return of income for the relevant rollback year has been or is furnished by the applicant before the due date specified in Explanation 2 to sub-section (1) of section 139;
(iii) the report in respect of the international transaction had been furnished in accordance with section 92E;
(iv) the applicability of rollback provision, in respect of an international transaction, has been requested by the applicant for all the rollback years in which the said international transaction has been undertaken by the applicant; and
(v) the applicant has made an application seeking rollback in Form 3CEDA in accordance with sub-rule (5);
(3) Notwithstanding anything contained in sub-rule (2), rollback provision shall not be provided in respect of an international transaction for a rollback year, if,—
(i) the determination of arm's length price of the said international transaction for the said year has been subject matter of an appeal before the Appellate Tribunal and the Appellate Tribunal has passed an order disposing of such appeal at any time before signing of the agreement; or
(ii) the application of rollback provision has the effect of reducing the total income or increasing the loss, as the case may be, of the applicant as declared in the return of income of the said year.
(4) Where the rollback provision specifies the manner in which arm's length price shall be determined in relation to an international transaction undertaken in any rollback year then such manner shall be the same as the manner which has been agreed to be provided for determination of arm's length price of the same international transaction to be undertaken in any previous year to which the agreement applies, not being a rollback year.
(5) The applicant may, if he desires to enter into an agreement with rollback provision, furnish along with the application, the request for the same in Form No. 3 CEDA with proof of payment of an additional fee of five lakh rupees:
[Provided that in a case where an application has been filed on or before the 31st day of March, 2015, Form No.3CEDA along with proof of payment of additional fee may be filed at any time on or before the 30th day of June, 2015 or the date of entering into the agreement whichever is earlier:]
[Provided further that in a case where an agreement has been entered into on or before the 31st day of March, 2015, Form No.3CEDA along with proof of payment of additional fee may be filed at any time on or before the 30th day of June, 2015 and, notwithstanding anything contained in rule 10Q, the agreement may be revised to provide for rollback provision in the said agreement in accordance with this rule.]
Rule-10M, Income-tax Rules
Terms of the agreement .
10M . (1) An agreement may among other things, include—
(i) the international transactions covered by the agreement;
(ii) the agreed transfer pricing methodology, if any;
(iii) determination of arm's length price, if any;
(iv) definition of any relevant term to be used in item (ii) or (iii);
(v) critical assumptions;
[(va) rollback provision referred to in rule 10MA;]
(vi) the conditions if any other than provided in the Act or these rules.
(2) The agreement shall not be binding on the Board or the assessee if there is a change in any of critical assumptions or failure to meet conditions subject to which the agreement has been entered into.
(3) The binding effect of agreement shall cease only if any party has given due notice of the concerned other party or parties.
(4) In case there is a change in any of the critical assumptions or failure to meet the conditions subject to which the agreement has been entered into, the agreement can be revised or cancelled, as the case may be.
(5) The assessee which has entered into an agreement shall give a notice in writing of such change in any of the critical assumptions or failure to meet conditions to the Director General of Income-tax (International Taxation) as soon as it is practicable to do so.
(6) The Board shall give a notice in writing of such change in critical assumptions or failure to meet conditions to the assessee, as soon as it comes to the knowledge of the Board.
(7) The revision or the cancellation of the agreement shall be in accordance with rules 10Q and 10R respectively.
Rule-10L, Income-tax Rules
Procedure.
10L. (1) If the application referred to in rule 10K has been allowed to be proceeded with, the team or the competent authority in India or his representative shall process the same in consultation and discussion with the applicant in accordance with provisions of this rule.
(2) For the purpose of sub-rule (1), it shall be competent for the team or the competent authority in India or its representative to—
(i) hold meetings with the applicant on such time and date as it deem fit;
(ii) call for additional document or information or material from the applicant;
(iii) visit the applicant's business premises; or
(iv) make such inquiries as it deems fit in the circumstances of the case.
(3) For the purpose of sub-rule (1), the applicant may, if he considers it necessary, provide further document and information for consideration of the team or the competent authority in India or his representative.
(4) For bilateral or multilateral agreement, the competent authority shall forward the application to Director General of Income-tax (International Taxation) who shall assign it to one of the teams.
(5) The team, to whom the application has been assigned under sub-rule (4), shall carry out the enquiry and prepare a draft report which shall be forwarded by the Director General of Income-tax (International Taxation) to the competent authority in India.
(6) If the applicant makes a request for bilateral or multilateral agreement in its application, the competent authority in India shall in addition to the procedure provided in this rule invoke the procedure provided in rule 44GA.
(7) The Director General of Income-tax (International Taxation) (for unilateral agreement) or the competent authority in India (for bilateral or multilateral agreement) and the applicant shall prepare a proposed mutually agreed draft agreement enumerating the result of the process referred to in sub-rule (1) including the effect of the arrangement referred to in sub-rule (5) of rule 44GA which has been accepted by the applicant in accordance with sub-rule (8) of the said rule.
(8) The agreement shall be entered into by the Board with the applicant after its approval by the Central Government.
(9) Once an agreement has been entered into the Director General of Income-tax (International Taxation) or the competent authority in India, as the case may be, shall cause a copy of the agreement to be sent to the Commissioner of Income-tax having jurisdiction over the assessee.
Rule-10K, Income-tax Rules
Preliminary processing of application .
10K . (1) Every application filed in Form No. 3CED shall be complete in all respects and accompanied by requisite documents.
(2) If any defect is noticed in the application in Form No. 3CED or if any relevant document is not attached thereto or the application is not in accordance with understanding reached in [any] pre-filing consultation referred to in rule 10H, the Director General of Income-tax (International Taxation) (for unilateral agreement) and competent authority in India (for bilateral or multilateral agreement) shall serve a deficiency letter on the applicant before the expiry of one month from the date of receipt of the application.
(3) The applicant shall remove the deficiency or modify the application within a period of fifteen days from the date of service of the deficiency letter or within such further period which, on an application made in this behalf, may be extended, so however, that the total period of removal of deficiency or modification does not exceed thirty days.
(4) The Director General of Income-tax (International Taxation) or the competent authority in India, as the case may be, on being satisfied, may pass an order providing that application shall not be allowed to be proceeded with if the application is defective and defect is not removed by applicant in accordance with sub-rule (3).
(5) No order under sub-rule (4) shall be passed without providing an opportunity of being heard to the applicant and if an application is not allowed to be proceeded with, the fee paid by the applicant shall be refunded.
Rule-10J, Income-tax Rules
Withdrawal of application for agreement.
10J. (1) The applicant may withdraw the application for agreement at any time before the finalization of the terms of the agreement.
(2) The application for withdrawal shall be in Form No. 3CEE.
(3) The fee paid shall not be refunded on withdrawal of application by the applicant.
Rule-10-I, Income-tax Rules
Application for advance pricing agreement .
10-I . (1) Any person, [referred to in rule 10G] may, if desires to enter into an agreement furnish an application in Form No. 3CED along with the requisite fee.
(2) The application shall be furnished to Director General of Income-tax (International Taxation) in case of unilateral agreement and to the competent authority in India in case of bilateral or multilateral agreement.
(3) Application in Form No. 3CED may be filed by the person referred to in rule 10G at any time—
(i) before the first day of the previous year relevant to the first assessment year for which the application is made, in respect of transactions which are of a continuing nature from dealings that are already occurring; or
(ii) before undertaking the transaction in respect of remaining transactions.
(4) Every application in Form No. 3CED shall be accompanied by the proof of payment of fees as specified in sub-rule (5).
(5) The fees payable shall be in accordance with following table based on the amount of international transaction entered into or proposed to be undertaken in respect of which the agreement is proposed:
Amount of international transaction entered into or proposed to be undertaken in respect of which agreement is proposed during the proposed period of agreement.
Fee
Amount not exceeding Rs. 100 crores 10 lacs
Amount not exceeding Rs. 200 crores 15 lacs
Amount exceeding Rs. 200 crores 20 lacs
