Power of Board to make safe harbour rules.

167(1)

The determination of—

• (a) income referred to in section 9(2); or
• (b) arm’s length price under section 165 or 166, shall be subject to safe harbour rules.

167(2)

For the purposes of sub-section (1), the Board may make rules for safe harbour.

167(3)

In this section, “safe harbour” means circumstances in which the income tax authorities shall accept,–

• (a) the transfer price; or
• (b) the income, deemed to accrue or arise under section 9(2), declared by the assessee.

Explanation

Section Summary:

Section 167 of the new income tax law grants the Central Board of Direct Taxes (CBDT) the authority to establish "safe harbour rules." These rules provide a framework under which the tax authorities will accept the transfer prices or income declared by taxpayers in specific circumstances, reducing disputes related to transfer pricing and income attribution under Section 9(2).

Key Changes:

1. Introduction of Safe Harbour Rules: This section formalizes the concept of safe harbour rules, which were previously introduced through administrative guidelines. Now, they are codified in the law, providing a statutory basis for their application.
2. Focus on Transfer Pricing and Income Attribution: The section specifically addresses transfer pricing (under Sections 165 and 166) and income deemed to accrue or arise in India under Section 9(2).

Practical Implications:

1. Reduced Litigation: Safe harbour rules provide certainty to taxpayers, especially multinational enterprises (MNEs), by pre-defining acceptable transfer pricing margins or income attribution methods. This reduces the likelihood of disputes with tax authorities.
2. Simplified Compliance: Taxpayers can avoid complex transfer pricing documentation and audits if they adhere to the safe harbour rules, saving time and resources.
3. Impact on MNEs: Multinational companies with cross-border transactions will benefit significantly, as they can rely on these rules to avoid aggressive tax adjustments.

Critical Concepts:

1. Safe Harbour: A provision that allows taxpayers to declare income or transfer prices within a pre-approved range or method, which the tax authorities will accept without further scrutiny.
2. Transfer Pricing: The pricing of transactions between related entities, such as subsidiaries of the same parent company, to ensure they reflect market conditions (arm’s length principle).
3. Section 9(2): Deals with income deemed to accrue or arise in India, such as royalties, fees for technical services, or income from business connections in India.

Compliance Steps:

1. Review Safe Harbour Rules: Taxpayers must review the specific safe harbour rules issued by the CBDT to determine if they qualify.
2. Adopt Safe Harbour Methods: If eligible, taxpayers can adopt the prescribed methods or margins for transfer pricing or income attribution.
3. Maintain Documentation: While safe harbour reduces documentation requirements, taxpayers must still maintain basic records to support their declarations.
4. File Returns Accordingly: Declare income or transfer prices in line with the safe harbour rules in the relevant tax returns.

Examples:

1. Transfer Pricing Scenario: A multinational company in India sells goods to its overseas subsidiary. Under safe harbour rules, the company can apply a pre-approved profit margin (e.g., 10%) on its transactions. If the declared margin is within this range, the tax authorities will accept it without further scrutiny.
2. Income Attribution Scenario: A foreign company provides technical services to an Indian entity. Under safe harbour rules, the foreign company can declare a fixed percentage (e.g., 10%) of the revenue as income attributable to India, which the tax authorities will accept without dispute.

This section provides a structured approach to resolving transfer pricing and income attribution issues, benefiting both taxpayers and tax authorities by reducing disputes and simplifying compliance.