Provision of software development services or Information Technology (IT) enabled services. |
17% operating margins if the annual transaction value does not exceed INR 1 billion (approximately USD 15 million).
18% operating margins if the transaction value is between INR 1 to INR 2 billion (approximately USD 15 million to USD 30 million) |
The revised rules have reduced the safe harbour margin (from 20% or 22%) but have introduced a cap on the value of international transaction that would qualify for safe harbour provisions. Earlier regulations did not have any cap on the value of transactions. |
Provision of Knowledge Process Outsourcing (KPO) services. |
For annual transaction value that does not exceed INR 2 billion (approximately USD 30 million) operating margins of:
- 24% where employee cost is at least 60% of operating expense; or
- 21% where employee cost is at least 40% but less than 60% of operating expense; or
- 18% where employee cost is less than 40% of operating expense.
Employee cost has been defined to include all costs that are generally grouped under the head employee cost in the profit and loss account and it also includes outsourcing expenses to the extent of employee cost are on actuals or 80% of total expenses, if bifurcation into employee cost and other outsourcing cost is not available. |
The revised rules have reduced the safe harbour margins (from 25%) but have introduced a cap on the value of the international transaction that would qualify for safe harbour provisions. Along with that, now the operating margin is variable and dependent on the employee cost as a percentage of operating expense as compared to a blanket 25% earlier. |
Providing corporate guarantee |
Irrespective of the guaranteed amount, the safe harbour rate has been reduced to 1% per annum of the amount guaranteed. |
The revised rules have reduced the safe harbour guarantee fees (from 1.75% or 2%) to 1% and made its application more simplified irrespective of the guaranteed amount and credit rating of the Associate Enterprise (AE). |
Provision of contract Research and Development (R&D) services (relating to software development or generic pharmaceutical drugs). |
24% operating margin if the annual transaction value does not exceed INR 2 billion (approximately USD 30 million). |
The revised rules have reduced the safe harbour margins (from 30% or 29%) but have introduced a cap on the value of the international transaction. |
Manufacture and export of auto components |
For core auto components - 12% operating margin;
For non-core auto components - 8.5% operating margin |
There is no change in the safe harbour rates. |
Advancing of intra-group loans (for loans denominated in INR and foreign currency) |
CRISIL Credit rating or equivalent of the AE |
Loan in INR – SBI base rate plus BPS |
Loan in foreign currency – LIBOR plus BPS |
AAA to A |
175 |
150 |
BBB-, BBB or BBB+ |
325 |
300 |
BB to B |
475 |
450 |
C to D |
625 |
600 |
Not available and the amount of loan advance to all AE’s does not exceed INR 1 billion as on 31 March of the previous year. |
425 |
400 |
|
Safe harbour interest rates are now based on currency in which loan is denominated and also CRISIL credit rating. The revised safe harbour provisions acknowledge the difference in the currency has an impact on the base rate on which spread is added and have accepted the concept of interest rates linked to LIBOR which was till now heavily litigated by the Tax Authorities. |
Receipt of low value adding intra-group services |
The value of the transaction, including a markup not exceeding 5%, does not exceed a sum of INR 100 million.
Furthermore, there is a requirement that the method of cost pooling, the exclusion of shareholder costs and duplicate costs from the cost pool and the reasonableness of the allocation keys used for allocation of costs to the taxpayer by the overseas AE should be certified by an accountant.
Low value adding intra-group services have been defined to mean services performed by one or more MNE of the group on behalf of other members of the same MNE group and which:
- Are in the nature of support services;
- Are not a part of the core business of the MNE group;
- Are not in the nature of shareholder/duplicate services;
- Should not involve/create unique and valuable intangibles;
- No significant risk is undertaken by service provider;
- Does not have reliable external comparable services to arrive at arm’s length price and do not include services like R&D, manufacturing, IT, software development, KPO, BPO, purchasing, sales, marketing, insurance, etc.
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This is a completely new addition to the rules which is aligned to BEPS Action Plan 8-10. |