26 March 2025
CBDT expands Safe Harbour Rules thresholds to INR 300 crores and other clarifications
 

The Central Board of Direct Taxes (CBDT) vide Notification1 dated 25 March 2025, 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 (6th Amendment) Rules, 2025, and shall be deemed to have come into force from the date of publication.

1. Increase in threshold of value of international transactions from INR 200 crores to INR 300 crores

Rule 10TD Transaction Safe Harbour
2A(1) Provision of Software Development Services 18% OP/OC 2
2A(2) Provision of Information Technology Enabled Services 18% OP/OC
2A(3) Provision of Knowledge Process Outsourcing Services 18% - 21% and 24% OP/OC depending on the Employee Cost to OC ratio
2A(7) Provision of Contract Research and Development Services (wholly or partially relating to software development) 24% OP/OC
2A(8) Provision of Contract Research and Development Services (wholly or partially relating to generic pharmaceutical drugs) 24% OP/OC

Rule 10TD Sub-Rule 3(B) expands the applicability of these Safe Harbour Rules for Assessment Years 2020-21, 2021-22, 2022-23, 2023-24, 2024-25, 2025-26, and 2026-27 (newly introduced).

Our Comment
The increase in the threshold of international transactions from INR 200 crores to INR 300 crores under Rule 10TD indicates the government's intent to broaden the scope of Safe Harbour Rules (SHR) and provide greater certainty to taxpayers engaged in specific transactions. This broadens the coverage to more multinational entities, allowing them to opt for Safe Harbour provisions without undergoing detailed transfer pricing scrutiny. The extension until AY 2026-27 ensures continuity and predictability, which was otherwise curtailed to one year at a time, and taxpayers had to await the notification for the applicability of the prescribed safe harbour for each year.

2. Validity of the Safe Harbour for one Assessment Year at a time

Rule 10TD (3) provided that the Safe Harbour prescribed shall apply for AY 13-14 following four assessment years (i.e., AY 14-15 to AY 17-18). Subsequently, Rule 10TD (3A) was inserted w.e.f 1 April 2017 that provided that the Safe Harbour prescribed shall apply for AY 2017-18 and the following two assessment years (i.e. AY 2018-19 and AY 2019-20). Thereon, Rule 10TD (3B) was inserted w.e.f 1 April 2020, which provided that the Safe Harbour prescribed shall apply for AY 2020-21 and 2021-22, which was expanded periodically by adding one year. This highlights the evolving approach of the validity of the Safe Harbour Rules under Rule 10TD and the procedural clarification under Rule 10TE. Initially, Safe Harbour was granted for up to five years, then reduced to three years, and now is largely available year by year.

In light of this, the current notification clarifies this under Rule 10TE Sub-Rule (2) which stipulates that the option for safe harbour validly exercised shall continue to remain in force for the period specified in Form No. 3CEFA; provided that nothing contained in this sub-rule shall apply to the option for safe harbour validly exercised under Sub-Rule 3B of Rule 10TD for one assessment year (newly introduced).

Our Comment
As such, any eligible assessee that contemplates opting for the Safe Harbour Rules would file the requisite Form 3CEFA for one assessment year at a time.

3. Expanded Applicability and extended definition of Core Auto components to lithium-ion batteries for use in electric or hybrid electric vehicles

Rule 10TA(b) contains the definition of 'core auto components,' which now also includes 'lithium-ion batteries for use in electric or hybrid electric vehicles.'

The Safe Harbour for manufacture and export of core and non-core auto components3 is 12% and 8.5%, respectively.

Our Comment
By including lithium-ion batteries under Safe Harbour, it sought to align with India's broader policy objectives to promote electric mobility and self-reliance in battery manufacturing (possibly for contract manufacturing model for inbound investment setting up manufacturing in India). The Indian government is fostering a business-friendly, stable tax environment while accelerating the Make in India initiative for the EV sector. While this move seems to be aimed to benefit battery manufacturers, automakers, and global investors, strengthening India's position as an emerging EV hub, given the lower margins in other EV manufacturing hubs this may seem to be uncompetitive. The 12% safe harbour seems high for contract manufacturing and may not be lucrative for relevant taxpayers especially in capital-intensive industries that typically operate on thinner margins.
Overall Comments
Safe Harbour provisions in India, since its introduction in 2013, had hardly received any positive response - due to uncompetitive markups, rigid conditions, and concerns about being automatically flagged for scrutiny if opting out in subsequent years. Even as the safe harbour margins were deemed to be high the authorities have made frequent attempts to induce taxpayers to consider opting in such as - rationalised the safe harbour rates in 2017, notification for applicability of the rates each year, alignment of intra-group loans with global developments in 2023, mandated electronical filing of Form No. 3 CEFA (application for opting Safe Harbour) in 2024, etc.

This notification is a welcome move for multinationals and aligns with inflation, business growth, and the need to provide certainty to companies engaged in high-value cross-border transactions. Even though TP scrutiny has increased, whether an extension of coverage will push taxpayers toward Safe Harbour remains uncertain. The uptake will depend on whether taxpayers view Safe Harbour as a commercially viable alternative rather than just a compliance safeguard.

While the safe harbour margins for various services remain unchanged but continue to be available under the extended Safe Harbour framework. Overall, the safe harbours have been curtailed to specific activities, and in case the authorities want more traction for opting in by taxpayers, they may contemplate exploring:
  • Fixed margins for different manufacturing, trading, or service operations industries.
  • Align with global best practices for safe harbors such as OECD and other jurisdictions.
  • Capping of royalty rates - use of brand or technology, etc.
  • Defined profit range for generic activities such as contract manufacturing, distribution, procurement, marketing, etc.

We have covered the previous extension of the applicability of Safe Harbour Rules in an earlier tax alert, which can be found as follows:
  1. Notification No. 21/2024 dated 25th March 2025 F. No. 370142/6/2025-TPL - Click Here & Press Release Click Here
  2. OP/OC - Operating Profit Margin on Operating Costs - As per Rule 10TA (j), (k) & (l)
  3. As per Rule 10TD(2A) (9) & (10)
  4. Notification No. 01/2024 dated 26 February 2024
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