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The Safe Harbour Rules (SHR) were amended by Notification No. 46/2017 dated 07-06-2017 issued by the Ministry of Finance, Central Board of Direct Taxes (CBDT). The term Safe Harbour is defined under section 92CB of the Income Tax Act, 1961 as circumstances under which the authorities shall accept transfer pricing declared by the assessee. It can also be construed as a conduct which will be deemed not to violate the rules of the Act. This recent amendment has widened the scope of SHRs by including within its ambit a provision relating to Low Value-Adding Intra-Group Services. Indian provisions relating to SHR are in consonance with the guidelines issued under the Base Erosion Profit Shifting plan (BEPS) plan of Organization for Economic Co-operation and development (OECD)/G20.

The Base Erosion Profit Shifting plan (BEPS) was developed by Organization for Economic Co-operation and Development (OECD) and developed by G20 leaders in the year 2013. The main objective behind this plan is to ensure that the governments are well equipped with domestic and international instruments to curb tax avoidance and to make sure that the profits are taxed where the profit generating economic activities are performed and value is created. BEPS outputs are soft laws which are not legally binding but there is an expectation that all countries participating in its formation may inculcate it in their tax regime.

The BEPS action plan 8-10 deals with alignment of transfer pricing outcomes with value creation. It contains a section on Low Value-Adding Intra-Group services. When services are provided by one MNE group[1] to other members of its group they are often referred to as 'Intra Group Services'. Intra group services may include services like legal services, accounting services, central auditing services, financing advice, human resource management, IT service etc. A particular category of intra group services is often referred to as 'Low Value-Adding Intra-Group Services'.

Low value-adding intra-group services are services performed by one member or more than one member of an MNE group on behalf of one or more other group members which are of a supportive nature; are not part of the core business of the MNE group; do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles; and do not involve the assumption or control of substantial or significant risk and do not give rise to the creation of significant risk.

List of low-value adding intra-group services can be like Accounting and auditing, Processing and management of accounts receivable and accounts payable, Human resources activities such as: staffing, recruitment, training, employee development, remuneration services and developing and monitoring of staff health procedures, The monitoring and compilation of data relating to health safety, Information technology services (which are not part of the principal activity of the group), Internal and external communications and public relations support, Legal services, Activities with regard to tax obligations and General services of an administrative or clerical nature

Chapter VII of Base Erosion Profit Shifting plan (BEPS) specifically deals with determination of transfer price in relation to such intra group services.

Low Value-Adding Intra-Group Services can avail the benefits of the elective simplified approach as given under the BEPS action plan.

As mentioned above, the Indian SHRs are in consonance with BEPS plan 8-10. However, according to the view adopted by India there are certain deviations in the definition of low value adding intra group services. Low Value Adding Intra Group Services as defined under the amended SHR 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, are in the nature of support services; 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; are not in the nature of shareholder services or duplicate services; neither require the use of unique and valuable intangibles nor lead to the creation of unique and valuable intangibles; 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 do not have reliable external comparable services that can be used for determining their arm's length price.

A list of 10 services have been excluded from the applicability of this definition namely:

  • research and development services;
  • manufacturing and production services;
  • information technology (software development) services; (IT)
  • knowledge process outsourcing services; (KPO)
  • business process outsourcing services; (BPO)
  • purchasing activities of raw materials or other materials that are used in the manufacturing or production process;
  • sales, marketing and distribution activities;
  • financial transactions;
  • extraction, exploration, or processing of natural resources; and
  • insurance and reinsurance.

In case of receipt of Low value adding Intra-Group Services, the Indian tax authorities have prescribed a threshold limit of INR 10 crore including a mark-up not exceeding 5%. Additional conditions are also laid down by the authorities under which the following aspects are to be certified by the accountant:

  • 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 AE.

In case where an assessee opts for SHR, the provision of section 92 D relating to maintenance of the prescribed documents pertaining to international transactions and sec 92E which lays down the requirement of certificate from Chartered Accountant[2] will continues to apply.

Definition of Cost pool, Duplicate cost, Shareholder's cost & cost allocation keys is not given under the Income Tax Act as well as Safe Harbour Rules. Therefore, resort has to be taken of the concepts given under the BEPS plan.

Contrary to the earlier stand adopted by India, provision for receipt of low value adding intra group services has been made under the Safe Harbour Rules and therefore we consider it as a significant step towards adopting the guidelines of the BEPS plan. India has adopted a slightly different definition of Low Value-Adding Intra-Group Services wherein it is necessary that the services are not in the nature of shareholder services or duplicate services & do not have reliable external comparable services that can be used for determining their arm's length price. Certain services like KPO, BPO,IT services and few more have been specifically excluded from the definition of Value-Adding Intra-Group Services. The threshold limit of INR10 crore (including mark-up not exceeding 5%) prescribed by the amendment for transactions relating to these services may prove to be a bane to large MNE groups as the value of services provided by them to other members of the group undoubtedly surpasses the threshold limit. Another loophole of the amendment is the exclusion of the new guideline under the Simplified approach (BEPS plan) for providing one single invoice describing the category of services in order to support the charge. Under the extant tax regime in India, assesses need to comply with all the provisions laid down under section 92D& 92E of the Income Tax Act, 1961.This acts as an add on to the burden of compliance on the assesses. However we cannot negate the fact that it has brought positive changes in Safe Harbour rules which will benefit the multinational companies based in India.

[1] The term 'Group' means a collection of enterprises related through ownership or control such that it is either required to prepare Consolidated Financial Statements for financial reporting purposes under applicable accounting principles or would be so required if equity interests in any of the enterprises were traded on a public securities exchange.

[2] Accountant means a chartered accountant as defined under clause (b) of sub-section (1) of Section 2 of the Chartered Accountant Act, 1949 who holds a valid certificate of practice. There are certain persons excluded from the definition except for the purposes of representing the assessee under section 288 of Income Tax Act, 1961 and Includes any person any person recognized 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, the entity or its affiliates have presence in more than two countries; and 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, 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 he has professional experience of not less than ten years.'


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Category Income Tax, Other Articles by - Sudhag 



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