20 December 2023
CBDT amends Safe Harbour Rule 10TA and Rule 10TD effective 1 April 2024
 
The Central Board of Direct Taxes (CBDT) vide Notification1 dated 19 December 2023 has sought to amend the Safe Harbour rules, specifically Rule 10TA and 10TD of the Income-tax Rules, 1962 (the Rules). These rules may be called the Income-tax (29th Amendment) Rules, 2023, and shall be deemed to have come into force from 1 April 2024.

Restriction of which loss or income should be excluded from operating expenses or income

The definition of 'operating expenses'2 under Safe Harbour has been amended, specifically, for the exclusion of 'loss on the transfer of assets or investment' on assets where depreciation is included in the operating expenses.

The definition of 'operating income'3 under Safe Harbour has been amended, specifically, for the exclusion of 'income on transfer of assets or investment' on assets where depreciation is included in the operating expenses.

Alignment of intra-group loans with global developments

As per Rule 10TA(f), there was a restriction of the eligibility of intra-group loans to only loans that were 'sourced in Indian rupees'. This sub-clause (i) has now been omitted, and thereon, it may be viewed that loans that are sourced in any currency can be considered as eligible, subject to the other conditions.

The Safe Harbour was prescribed for advancing intra-group loans4 that are denominated in Indian Rupees (INR) or foreign currency; earlier, the reference to 'credit rating' was specified as a CRISIL credit rating or its equivalent. The amendment has now omitted the reference to 'CRISIL' and has added an explanation and defined 'credit rating' to mean: "a credit rating assigned to the associated enterprise by a Securities and Exchange Board of India registered and Reserve Bank of India accredited credit rating agency which is applicable for the relevant previous year."

It also clarifies that if the Associated Enterprise (AE) has only one applicable credit rating, that shall be taken, however if they have more than one applicable credit rating, then the least of such rating should be applied.

In connection with the Safe Harbour prescribed for advancing intra-group loans denominated in foreign currency5
  • The earlier reference to 'six-month London Inter-Bank Offer Rate' (LIBOR) has now been replaced with a currency specific reference rate as follows:
    Currency Reference Rate
    USD 6-month Term Secured Overnight Financing rate (SOFR)6 + 45 basis points
    EURO 6-month Euro Inter Bank Offered Rate (EURIBOR)7
    GBP 6-month Term Sterling Overnight Index Average (SONIA)8 + 30 basis points
    YEN 6-month Tokyo Term Risk Free Rate (TORF)9 + 10 basis points
    AUD 6-month Bank Bill Swap Rates (BBSW)10
    SGD 6-month Compounded Singapore Overnight Rate Average (SORA)11 + 45 basis points
    This is in alignment with the discontinuation of LIBOR globally and the adoption of relevant currency-wise reference rates with a suggested increase in the spread as well.
  • Earlier, there was a blanket range of credit ratings which is now specified, e.g., AAA to A is now AAA, AA+, AA, AA-, A+, A, A-. The Safe Harbour interest rate declared over the above reference rate is as below:
    Credit rating of the AE Loan12 Less than INR 2.5 Billion Loan13 More than INR 2.5 Billion
    AAA, AA+, AA, AA-, A+, A, A- or equivalent 150 basis points 150 basis points
    BBB+, BBB, BBB- or equivalent 300 basis points 300 basis points
    BB+, BB, BB-, B+, B, B- or equivalent 400 basis points 450 basis points
    C+, C , C-, D or equivalent or not available 400 basis points 600 basis points

Note
  • Earlier, there were no thresholds for the loan amount to determine applicability for Safe Harbour (where credit rating was available), this is now amended to provide different Safe Harbour for loans below INR 2.5 billion and above INR 2.5 billion.
  • The overseas AE that seeks to borrow funds in foreign currency, which is less than INR 2.5 billion from Indian counterparts and has a credit rating of BB+ or lesser, would now be eligible for lower spread (i.e. reduced from 450/600 bps to 400 bps), subject to the impact of moving from LIBOR as a base reference rate.
  1. Notification No. 104/2023F. No. 370142/26/2023-TPL
  2. As per Rule 10TA(j)(vi)
  3. As per Rule 10TA(k)(iii)
  4. As per Rule 10TD(2A) (4) & (5)
  5. As per Rule 10TD(2A) (5)
  6. Currently administered by Chicago Mercantile Exchange (CME)
  7. Currently administered by European Money Markets Institute
  8. Currently administered by ICE Benchmark Administration/Refinitiv
  9. Currently benchmarked by QUICK Benchmarks Inc
  10. Currently administered by Australian Securities Exchange
  11. Currently administered by Monetary Authority of Singapore
  12. Aggregate Value of loans to all AE as on 31 March of the relevant previous year
  13. Aggregate Value of loans to all AE as on 31 March of the relevant previous year
Our Comments
This notification is a welcome move for multinationals engaged in intra-group loans, which aligns the global practices of shifting the reliance from LIBOR as a base rate to currency-specific base reference rates. It is an attempt to provide administrative clarity and certainty to the taxpayers.

We have covered the previous extension of the applicability of Safe Harbour Rules in an earlier tax alert, which can be found here.
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