The Central Board of Direct Taxes (CBDT) has introduced key amendments to the Safe Harbour Rules under the Income-tax Act, 1961, through Notification No. 21/2025, issued on March 25, 2025. These changes aim to provide greater clarity and extend the benefits of Safe Harbour provisions to more taxpayers.
What are Safe Harbour Rules?
Safe Harbour Rules are legal provisions that protect businesses, individuals, or entities from liability or penalties if certain conditions are met. These Rules provide certainty and a degree of protection across various areas of law, including taxation, intellectual property, corporate governance, and data protection. In taxation, Safe Harbour Rules offer predefined margins for transfer pricing transactions, ensuring tax certainty for businesses engaged in international transactions. By following these provisions, taxpayers can avoid challenges from the Income Tax Department, reducing tax disputes and compliance burdens. More broadly, Safe Harbour Rules simplify regulatory compliance by allowing businesses to adhere to standardized Rules, minimizing legal risks and administrative complexities.
The recent amendments (prominently highlighted in bold blue italics) introduce significant updates to the existing Safe Harbour framework. Here’s a detailed look at the modifications and their implications:
| Rule 10TA (b) (iii) – Definition of “Core Auto Components” | |
|---|---|
| (i) | Engine and engine parts, including piston and piston rings, engine valves and parts cooling systems and parts and power train components |
| (ii) | Transmission and steering parts, including gears, wheels, steering systems, axles and clutches |
| (iii) | Suspension and braking parts, including brake and brake assemblies, brake linings, shock absorbers and leaf springs |
| (iv)* | Lithium ion batteries for use in electric or hybrid electric vehicles |
|
Note: *The revised Safe Harbour provisions now include lithium-ion batteries used in electric and hybrid vehicles under Rule 10TA(b)(iv). This is a significant policy shift aligned with India’s electric vehicle (EV) and clean energy initiatives. Companies involved in manufacturing or dealing in EV lithium-ion batteries are now eligible for Safe Harbour benefits, encouraging foreign investments and facilitating technology transfer within India’s electric vehicle (EV) sector. |
|
| Rule 10TD (2A) | ||
|---|---|---|
| Sl. No | Description of Transaction | Amendment |
| 1 | Provision of software development services (Rule 10TC, item (i)) | (ii) not less than 18 per cent, where the value of international transaction exceeds a sum of one hundred crore rupees but does not exceed a sum of three hundred crore rupees.* |
| 2 | Provision of information technology enabled services (Rule 10TC, item (ii)) | (ii) not less than 18 per cent, where the aggregate value of such transactions entered into during the previous year exceeds a sum of one hundred crore rupees but does not exceed a sum of three hundred crore rupees.* |
| 3 | Provision of knowledge process outsourcing services (Rule 10TC, item (iii)) | The value of international transaction does not exceed a sum of three hundred crore rupees* and the operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense is— |
| 7 | Provision of contract R&D services wholly or partly related to software development (Rule 10TC, item (vi)) | The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24 per cent, where the value of the international transaction does not exceed a sum of three hundred crore rupees.* |
| 8 | Provision of contract R&D services wholly or partly related to generic pharmaceutical drugs (Rule 10TC, item (vii)) | The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred is not less than 24 per cent, where the value of the international transaction does not exceed a sum of three hundred crore rupees.* |
|
*The amendment increases the aggregate value of the respective transactions from two hundred crore to three hundred crore. |
||
| Rule Reference | Provision | Amendment Details |
|---|---|---|
| Rule 10TD(3B) | The provisions of sub-rules (1) and (2A) shall apply for the [assessment years 2020-21, 2021-22, 2022-23, 2023-24, 2025-26 and 2026-27.]* |
*The amendment to Rule 10TD(3B) extends the applicability of Safe Harbour Rules to Assessment Years 2025-26 and 2026-27. Businesses can continue to rely on Safe Harbour margins for an additional two years, offering enhanced tax certainty, particularly for long-term cross-border transactions. |
| Rule 10TE(2), 4th Proviso |
[Provided also 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.]* |
*The amendment inserts a clarification in Rule 10TE (2), 4th Proviso, stating that Safe Harbour benefits under Rule 10TD apply for one assessment year at a time. |
Looking Forward: What Businesses Need to Do Now
Businesses must re-apply annually to avail Safe Harbour benefits, ensuring compliance with renewal procedures and eliminating ambiguity in the process.
The 2025 amendments to the Safe Harbour Rules enhance clarity, stability, and applicability for businesses. By broadening the scope of eligible transactions, raising profit margin thresholds, and extending Safe Harbour benefits for an additional two years, these revisions strengthen the regulatory framework for companies engaged in international transactions. Businesses are advised to assess these changes and refine their transfer pricing policies to maintain compliance and optimize tax benefits.
