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In this article I have made an attempt to highlight the shortcomings of Safe Harbour Rules of India.

Smog prevailing on the conditions of “Insignificant Risks”.

Safe Harbour rules in one segment are applicable to Assesses extending Loans to Wholly owned subsidiaries or providing guarantee for them. The depressing part is that “Straight forward rates” have been considered irrespective of the Assesses businessand the economic scenario.

Moreover these rules in the other segment are applicable to Entities having Insignificant Risk. The rules will primarily trigger only when the Foreign Principal is holding the risk. Quantifying the term “Insignificant Risk” is a difficult task but the same hits the purpose of having a certain tax environment. 

Improper combination of “Risk and Return”

The rules get applied only when the foreign principal holds “Significant Risks”. On the other hand the margins expected from such an entity are higher. Good clarity has been provided to define the term “Operating Revenue and Operating Expenses”, but still the term used “other incomes and other expenses not relating to normal operations of the assessee” keep a certain room for error.

Late implementation of the rules

These rules are applicable for 5 years from AY 13-14. So, effectively only 4 years have been provided for exercising the option of “Safe Harbour”. The draft rules were open for public comments in the month of August and it got the stamp on 18th September. Rarely the companies would havethought to implement the upcoming change.

TPD (Documentation) and Accountant’s Report still applicable

Inspiteof opting for Safe Harbour, the companies are still required to incur compliance cost. Preparation of TPD for the first time under these rules will but obvious require justification of “Operating Margins” before the Accountant. Moreover on an enquiry in Vadodara I have not come across a single company opting for these rules. Companies even fear that the opting of 20%+ margins this time under safe harbor will open their previous cases raising doubtful demands. Will the electronic media of uploading through software be useful? The electronic media has conditional formatting for filling Form. 3CEB. Leaving the column of “MAM” blank will surely create a problem for validation.

Assessment Disputes and Related Issues

The validity of application of “SafeHarbour depends on the granting of approval of assessing officer. Where AO doubts the validity of the assesse for its application, he can refer it to the TPO. And once again the traditional chain would continue. Moreover no specific conditions have been laid down for the AO to refer to the TPO.Opting for the new rules this time may increase the chances for Re-opening of Assessments. This is an enough big fear and uncertainty for the tax payers.

Case study:

Company A makes application in Form 3CEFA for applicability of “Safe Harbour Rules” on 27th of August 2014 for the previous year 2013-14. As per the rules under section 10TE, 2 months of time period has been granted to each authority of office.

Assesse makes Application on


(+) 10 days less than 2 months

50 days

Assessing Officer refers to the TPO


(+) 2 months for TPO to decide the validity


Last date of Filing of Return


What should now the company do for Filing ROI? Should it file ROI without TP Audit? What and how to disclose this practical issue? Can ROI be filed without 3CEB? Can 3CEB be filed without having the acknowledgement of applicability of Safe Harbour?

Comparatively Inefficient than Advance Pricing Agreements (APA)   

APAs are more specific with respect to transactions, margins, activities, as well as FAR Analysis. It is clear agreement between the assesse and the department. Ultimately it generates more certainty and ensures control on litigation. APAs are backed up by the “Unilateral, bilateral and multilateral treaties” whereas on opting for safe harbour the assesse cannot take the benefit of “Mutual Agreement Procedures” (MAPs) of the Double Taxation Avoidance Agreements (DTAA).

The above presented are my views. If I am wrong at any point, then a lot of thanks for giving me the required suggestion.


Published by

Mihir Manohar
(CA Final - Article Assistant)
Category Income Tax   Report

  65 Shares   19689 Views


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