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The tax department has notified the ‘safe harbour’ rates for 2020-21 for calculation of transfer pricing by foreign companies in India.
Generally, safe harbour is defined as circumstances in which the tax authority shall accept the transfer price declared by the taxpayer to be at arm’s length.
The Central Board of Direct Taxes, through a notification has extended the applicability of Safe Harbour Rules (SHR) to 2020-21.
As per the notification, the rates under SHR applicable from 2016-17 to 2018-19, and later extended to 2019-20, will continue to apply for 2020-21 as well.
Transfer pricing implies the prices at which various overseas divisions of a company transact with each other.
Nangia & Co LLP, Partner-Transfer Pricing, Nitin Narang said like last year, this year again, the rates have been prescribed for one year only, instead of 3-year and 5-year period earlier.
SHR 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 thereon.
Given that businesses are amid an unprecedented economic situation and the past year has 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 SHR more attractive and lowering of threshold, or adding more transactions, may add more willing taxpayers, Narang added.
Being an alternate dispute resolution mechanism, SHR should have been made more attractive and exhaustive rather than just been extended, to give more impetus, Narang added.
Following international best practice, India introduced the concept of SHR in Finance Act 2009. Post that, the first round of SHR provisions were introduced in August 2013 for a period of three years, followed by a revision in 2017 in the SHR which was applicable till 2019-20.
Different rates were prescribed for different category of international transactions. Of these, the category of software development, and knowledge process outsourcing (KPO) were popularly opted for.
