The Draft Income-tax Rules, 2026 have proposed a comprehensive overhaul of India's transfer pricing safe harbour framework. Rule 86 plays a foundational role in this revamp by clearly defining critical terms that apply to safe harbour rules for international transactions under Rules 87 to 93.
By standardising definitions across sectors such as IT, pharmaceuticals, automobiles, data centres, and intra-group financing, Rule 86 aims to reduce ambiguity, minimise litigation, and provide certainty to multinational enterprises (MNEs) operating in India.
Who Qualifies as an "Accountant" for Safe Harbour Purposes?
Rule 86 lays down strict eligibility criteria for professionals certifying costs and margins:
An individual accountant or valuer must:
- Have a minimum 10 years of professional experience, and
- Earn annual professional receipts exceeding Rs 50 lakh in the preceding year.
Where services are provided through a firm or entity, the entity's annual receipts must exceed Rs 3 crore.
Foreign professionals undertaking cost certification are also recognised, provided:
- They meet the same experience and turnover thresholds, and
- Their firm or affiliates have a presence in more than two countries.
This significantly raises the bar for certifications under safe harbour provisions.
Clear Scope of Contract R&D Services in Software
Rule 86 precisely defines contract research and development services relating to software, covering advanced activities such as:
- Development of algorithms, operating systems, programming languages and data management software
- Internet technologies and software development tools
- Artificial intelligence, image processing, GIS and specialised computing areas
- Experimental development to bridge technology gaps
However, routine activities like basic debugging (where source code is provided only for routine functions) are explicitly excluded, ensuring differentiation between high-end R&D and support services.
Auto Components Categorised into Core and Non-Core
The rule introduces a sharp distinction between core and non-core auto components:
- Core auto components include engines, transmission systems, suspension and braking systems, and lithium-ion batteries used in EVs.
- All other auto components fall under non-core auto components.
This classification is critical for determining safe harbour margins in the automobile sector.
Corporate Guarantee: What Is Included and Excluded?
Only an explicit corporate guarantee provided by an Indian company to its wholly owned non-resident subsidiary qualifies under Rule 86.
Importantly, the following are excluded:
- Letters of comfort
- Implicit guarantees
- Performance guarantees or similar arrangements
This clarification aligns with judicial precedents and limits unnecessary transfer pricing exposure.
Data Centres vs Data Hosting Services
Rule 86 clearly distinguishes between:
- Data centres: Physical infrastructure with secure premises, servers, power, connectivity and human resources in India.
- Data centre services: Infrastructure-based services, expressly excluding data hosting services.
This distinction is expected to impact safe harbour eligibility for digital infrastructure players.
ITES, KPO and Software Development: Defined Boundaries
The rule provides exhaustive definitions for:
- Information Technology Enabled Services (ITES) such as BPO, call centres, payroll, data processing, remote education (excluding content creation), and clinical database management.
- Knowledge Process Outsourcing (KPO) including engineering design, analytics, GIS, market research and content management.
- Software development services, limited to application development, system support, debugging, adaptation and documentation.
Crucially, all R&D services are excluded from ITES, KPO and routine software development to prevent misclassification.
Low Value-Adding Intra-Group Services: Narrowly Defined
Rule 86 adopts OECD-aligned principles to define low value-adding intra-group services, restricting them to non-core, low-risk support services that:
- Do not use or create valuable intangibles
- Do not involve significant risks
- Are not shareholder or duplicate services
Several services are expressly excluded, including R&D, manufacturing, IT development, KPO, BPO, sales, marketing, financial transactions, natural resource activities, and insurance.
Financial Metrics Clarified: Operating Revenue, Expense and Margins
The rule brings much-needed clarity to financial computations by defining:
- Operating expense and operating revenue, with clear inclusions and exclusions
- Operating profit margin, calculated as operating profit over operating expense
- Relevant tax year, for which safe harbour options are exercised
This standardisation will help reduce disputes over margin calculations.
Why Rule 86 Matters
Rule 86 is not merely definitional; it sets the compliance framework for the entire safe harbour regime under the Draft Income-tax Rules, 2026. By introducing detailed, sector-specific definitions, the rule enhances predictability, aligns with international best practices, and strengthens India's transfer pricing regime.
Taxpayers engaged in international transactions should carefully review these definitions, as eligibility under safe harbour rules will now depend heavily on strict compliance with Rule 86.
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