The Central Board of Direct Taxes (CBDT) has extended the applicability of rates under safe harbour rules, used as a dispute resolution mechanism for transfer pricing issues, for assessment year 2021-22 and will be effective from April 1, 2021. During AY21 the rates were kept the same as previous years due to Covid 19 pandemic.

“In the Income-tax Rules, 1962, in rule 10TD, in sub-rule (3B), for the words and figures “assessment year 2020-21”, the words and figures “assessment years 2020-21 and 2021-22” shall be substituted,” the Board said in a notification issued September 24.

As per the notification, the rates applicable from FY 2016-17 to FY 2018-19, and later extended to FY 2019-20, will continue to apply for FY 2020-21 as well. Like last year, this year again, the rates have been prescribed for only one year only, instead of a period of three years and five years earlier.

According to safe harbour rules, tax authorities shall accept the transfer price declared by the taxpayer to be at arm’s length, which in turn helps to reduce litigation. The rules are popularly adopted by multinationals in software development, ITeS and KPO industries as they have large transactions between their local and headquartered firms, often leading to transfer pricing issues.

India introduced the first provisions of the rules in 2013, for three years, and revised them in 2017 which were applicable till FY 2019. The operating profit margin was lowered from 30% to 24% for research and development including that of generic pharma drugs, rates were revised for ITeS and BPO to 17-18%, from 20-22% earlier.

A three tier structure was provided for KPOs – at 18%, 21% and 24% – where operating profit margin would depend on the employee cost-to-operating expense ratio.

Tax experts said that lower rates would have attracted industry and given impetus to this alternate dispute resolution mechanism, especially amid an unprecedented economic situation due to Covid-19 which would have given a positive stimulus signal to large taxpayers.

“Given that businesses are amidst an unprecedented economic situation and the past year have been severely impacted due to the pandemic, any lowering of the rates in line with the current economic circumstances would have gone a long way to make it more attractive and lowering of threshold, or adding more transactions, may add more willing taxpayers,” said Nitin Narang, partner- transfer pricing, Nangia & Co LLP.

He added that the rules should be mutually beneficial for both taxpayers and tax authorities. For taxpayers, in terms of reduced compliance burden, cost saving, administrative convenience and resources channelised in other business area, and for tax authorities, in terms of reduced time for review and litigation, agreed margins with computation mechanism and taxes.