Safe harbour rules notified

The government has notified the Safe Harbour Rules. Download a PDF version at Safe Harbour Rules.

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Safe Harbour Rules Draft released for feedback and comments by stakeholders

DRAFT “SAFE HARBOUR RULES”

 

The Ministry of Finance, Government of India, has issued a Press Release on 14th August, 2013 inviting comments and suggestions on Safe Harbour Rules. The draft rules have been framed based on the recommendations of the Rangachary Committee.

 

WHAT IS SAFE HARBOUR?

With increase in business with foreign customers and vendors, many of whom are related parties for the Indian entity doing business with them, the provisions relating to Transfer Price (TP) and Arms Length Price (ALP) have become very critical. It is commonly known that there are many disputes between the Revenue Authorities and the taxpayer on the computation of TP/ALP. In India, the authorities have been very aggressive in arriving at estimates of TP/Alp and their estimate is, quite often, at variance with the TP/ALP declared by the taxpayer. Vide Finance (No. 2) Act, 2009, a new section, viz. 92CB, was inserted in the Income Tax Act, 1961 (Act) which says that the determination of ALP shall be subject to safe harbor rules. It defines “safe harbor” as circumstances in which the income-tax authorities shall accept the transfer price declared by the taxpayer.

 

TO WHOM WOULD THE SAFE HARBOUR RULES APPLY?

The draft Rules propose that safe harbor rules would apply to an “eligible assessee” who enters into an “eligible international transaction” in certain circumstances as specified.

 

WHO IS AN ELIGIBLE ASSESSEE?

An “eligible assessee” means a person who has exercised the option for application of safe harbor rules and who:

  1. Is engaged in providing software development services or ITES or KPO services, with insignificant risk, to a non-resident associated enterprise;
  2. Has made any intra-group loan;
  3. Has provided a corporate guarantee;
  4. Is engaged in providing contract R&D services wholly or partly relating to software development, with insignificant risk, to a non-resident associated enterprise;
  5. Is engaged in providing contract R&D services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a non-resident associated enterprise; or
  6. Is engaged in the manufacture and export of core and non-core auto components and where 90% or more of total turnover during the financial year are in the nature of OEM sales.

 

WHAT IS AN ELIGIBLE INTERNATIONAL TRANSACTION

This refers to an international transaction between the eligible assessee and its associated enterprise. Either or both should be non-resident. The transaction should undertaken by the eligible assessee and should comprise of:

  1. Software development services, ITES or KPO services, where the aggregate value of such transactions during the fiscal year does not exceed INR 100 crores for each of such services.
  2. Advance of intra-group loan, provision of corporate guarantee, contract R&D services wholly or partly relating to software development or generic pharmaceutical drugs and manufacture and export of core and/or non-core auto components.

 

WHAT IS INSIGNIFICANT RISK?

The draft rules propose that an eligible assessee with insignificant risk shall be identified having regard to the following factors:

  1. The non-resident associated enterprise (foreign principal) performs most of the economically significant functions involved in the work. These would include conceptualization and design of the product, providing strategic direction and framework, either through its own employees or through its other associated enterprises (which excludes the eligible assessee). The only role of the eligible assessee would be to carry out the work assigned by the foreign principal;
  2. The capital, funds and other economically significant assets (including intangibles required) are provided by the foreign principal or its other associated enterprises. The eligible assessee is only remunerated for the work carried out by it;
  3. The eligible assessee works under the direct supervision of the foreign principal. The foreign principal should not only have the capability to control or supervise by also actually controls or supervises the activities carried out;
  4. The eligible assessee does not assume or has no economically significant realized risks. This requirement is not a “paper requirement” but shall be judged from the actual conduct of the foreign principal;
  5. The eligible assessee has no ownership right (whether legal or economic) on any intangibles that are generated during the course of rendering of the services. This should vest in the foreign principal as evidenced both by the contract as well as from the conduct of the parties.

 

WHAT ARE THE CIRCUMSTANCES THAT ARE SPECIFIED

The circumstances specified are set out in the table below:

 

Eligible International Transaction Circumstances specified
Software development services Operating Profit Margin (OPM) is 20% or more on Operating Expenses (OE).
ITES OPM is 20% or more on OE.
KPO OPM is 30% or more on OE.
Intra-group loans where the amount of loan advanced does not exceed INR 50 crores. Interest rate should be at least base rate of SBI as at 30th June of the relevant fiscal year + 150 basis points.
Intra-group loans where the amount of loan advanced exceeds INR 50 crores. Interest rate should be at least base rate of SBI as at 30th June of the relevant fiscal year + 300 basis points.
Corporate guarantee not exceeding INR 100 crores Commission of 2% or more per annum on the guaranteed amount.
Contract R&D services relating to software development OPM is 30% or more of OE
Contract R&D services relating to pharmaceutical drugs OPM is 29% or more of OE
Manufacture and export of core auto components OPM is 12% or more on OE
Manufacture and export of non-core auto components OPM is 8.50% or more on OE

 

HOW ARE OPERATING EXPENSE (OE), OPERATING REVENUE (OR) AND OPERATING PROFIT MARGIN (OPM) DEFINED?

OE means the cost incurred during the course of its normal operations and in connection with eligible international transactions for the fiscal year. It includes depreciation and amortization expenses relating to the assets used by the taxpayer but excludes the following:

  1. Interest expense;
  2. Provision for unascertained liabilities;
  3. Pre-operating expenses;
  4. Loss arising out of translation of foreign currency items;
  5. Extra-ordinary items;
  6. Loss on sale of assets/investments of the taxpayer;
  7. Other items not relating to the operating activities of the taxpayer.

 

OR means the revenue of the taxpayer earned during the course of its normal operations and in connection with eligible international transactions for the fiscal year. It excludes the following:

  1. Interest income;
  2. Provision no longer required written back;
  3. Refunds relating to income-tax expense of taxpayer;
  4. Income arising out of translation of foreign currency items;
  5. Extra-ordinary items;
  6. Income on sale of assets/investments of the taxpayer;
  7. Other items not relating to the operating activities of the taxpayer.

 

OPM is defined as (OR-OE)/OE.

 

OTHER IMPORTANT POINTS IN THE DRAFT RULES

  1. Documentation requirements shall continue to apply;
  2. Eligible assessee may not invoke MAP for such transactions where the TP of the eligible assessee is accepted by the Revenue authorities;
  3. For exercising option of safe harbour, Form3CEG should be submitted to the Assessing Officer on or before the due date for filing annual return of income.
  4. Assessing Officer may conduct enquiry to ascertain whether the taxpayer is entitled to apply for safe harbour.
  5. Software development services, ITES, KPO etc have all been defined in the proposed rules and may be referred to.
  6. The rules shall be effective A.Y. 2013-14 and 2014-15.
  7. The rules shall not apply for international transactions entered into with an associated enterprise located in a “no tax” or “low tax” country as defined, or located in a territory specified in section 94A of the Act.

Links:

Draft Safe Harbour rules

Rangachary Commission Report Part 1

Rangachary Commission Report Part 2 to 6

 

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

Important Updates: Companies Act, 1956 Form 23AC, Form 23 ACA and Form 23B

The following important information should be noted:

1. The last date for filing Form 23B without payment of fees by Statutory Auditor for the accounting year 2012-13 has been extended to 23.12.2012 or due date of filing of Form 23AC and Form 23ACA, whichever is later.

2. The revised date for filing of Form 23AC (Non-XBRL) and 23ACA (Non-XBRL) as per the revised Schedule VI without payment of additional fees has been extended yet again as is now as follows:

a. For Companies holding AGM or whose due date for holding AGM is before 21.09.2012, the date shall be 03.11.2012 or due date of filing, whichever is later;

b. For Companies holding AGM or whose due date for holding AGM is on or after 21.09.2012, the date shall be 22.11.2012 or due date of filing, whichever is later.

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

Pricing of MOA Subscription Shares

It has been decided that in cases, where non-residents (including NRIs) make investment in an Indian company in compliance with the provisions of the Companies Act, 1956, by way of subscription to Memorandum of Association, such investments may be made at face value subject to their eligibility to invest under the FDI scheme. Pricing of Subscription Shares is at par value

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

CHANGE IN REPORTING REQUIREMENT FOR PO/LO/BO

The Reserve Bank of India has made an addition to the reporting requirements of Project Office (PO), Liaison Office (LO) and Branch Office (BO). In addition to the Annual Activity Certificate, a report containing the following information shall also be filed with DGP concerned as well as the AD bank. In addition, this report shall also be filed with the DGP within 5 working days of establishment of the PO/LO/BO in any state.

1. Details of the Foreign Entity
a. Name
b. Address
c. Date and Place of Incorporation
d. E-mail ID or Web address

2. Details of Office in India
a. Type of Office – Liaison Office /
Branch Office / Project Office or
for others indicate type
b. Address
c. Contact Number
d. Date of opening of Office

3. Head of Office in India
a. Name
b. Nationality
c. Designation
d. Address
e. Passport Particulars
i. Passport Number
ii. Place of Issue
iii. Date of Issue
iv. Date of Expiry
v. Any other relevant
information
f. E-mail address
g. Land line number
h. Mobile number

4. Whether all foreign nationals employed at Liaison/Branch/Project Offices are on E Visas.
If not, indicate details of such foreign nationals.

5. Whether the foreign nationals on Evisas have reported to mandatory authorities i.e. Police Station etc. If not, name of such nationals / nationality along with relevant details and reasons for not complying with requirement

6. List of Personnel employed, including foreigners in India Office

7. List of foreigners other than employees who visited Indian Office in connection with the activities of the company with details.

8. Projects/ Contracts/Collaborations worked upon or initiated during the year along with details

9. List of equipment imported for business activities in India

10. Details of suppliers or services rendered to the Government Sector.

11. Details of places / states visited along with dates, accommodation used.

12. Details of contact with Government Departments / PSUs including names of officials

13. Details of contact with Civil Society Bodies / Trusts / Non-Government Organisation.

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

Reduced Withholding Tax On Borrowings From Abroad and Long-Term Infrastructure Bonds

The Finance Act, 2012 has introduced section 194LC in the Income Tax Act. This section provides for lower withholding tax at the rate of 5% on interest payments by Indian companies on borrowings made in foreign currency by such companies from a source outside India. The lower rate of withholding tax is for monies borrowed or bonds issued during the period from 1.7.2012 to 30.6.2015. It is further provided that the rate of interest on such borrowings, for the purpose of eligibility under the section 194LC, shall be as approved by the Central Government. The Central Government has now issued guidelines for eligibility to reduced withholding tax rates and related matters vide its circular number 07/2012 dt. 21st September, 2012.

There are principally two modes of borrowing (referred to as “monies borrowed” in the said section) which are covered, subject to approval of the Central Government:

a. Monies borrowed under a loan agreement
b. Long term Infrastructure Bonds

Therefore, the approval of the Central Government is required in respect of both the loan agreement or bond issue and the rate of interest to be paid on such borrowings.

Considering the fact that there would be a large number of cases of overseas borrowings or bond issues to be undertaken by Indian companies, providing a mechanism involving approval in each and every specific case would entail avoidable compliance burden on the borrower/issuer of bond. In order to mitigate the compliance burden and hardship, the Central Board of Direct Taxes [with the approval of Central Government] has now conveyed the approval of Central Government for the purposes of section 194LC in respect of the loan agreements and issue of long term infrastructure term bond by Indian companies which satisfy the conditions mentioned in paras A, B and C below:

A. In respect of agreements for loan
a. The borrowing of money should be under a loan agreement.
b. The monies borrowed under the loan agreement by the Indian company should comply with clause (d) of sub section (3) of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. FEMA3/2000-RB viz. Foreign Exchange Management (Borrowing or Lending in Foreign exchange) Regulations 2000, dated May 3, 2000, as amended from time to time, (that is, “ECB regulations”), either under the automatic route or under the approval route.
c. The borrowing company should have obtained a Loan Registration Number (LRN) issued by the Reserve Bank of India (RBI) in respect of the Agreement.
d. No part of the borrowing has taken place under the said agreement before 1st July, 2012.
e. The agreement should not be restructuring of an existing agreement for borrowing in foreign currency solely for taking benefit of reduced withholding tax rates.
f. The end use of the funds and other conditions as laid out by the RBI under ECB regulations should be followed during the entire term of the loan agreement under which the borrowing has been made.

B. In respect of issue of Bonds
a. The bond issue by the Indian company should be authorized under ECB regulations either under the automatic route or under the approval route.
b. The bond issue should have a Loan Registration Number issued by the RBI.
c. The term “long term” means that the bond to be issued should have original maturity term of three years or more.
d. The bond issue proceeds should be utilized in the “infrastructure sector” only.
e. The term “infrastructure sector” shall have same meaning as is assigned to it by RBI under the ECB regulations.

C. Rate of interest
The Central Government has also approved the interest rate for the purpose of section 194LC as any rate of interest which is within the All-in-cost ceilings specified by the RBI under ECB regulations as is applicable to the borrowing by loan agreement or through a bond issue, as the case may be, having regard to the tenure thereof.

In view of the above, any loan agreement or bond issue, which satisfies the above conditions, would be treated as approved by the Central Government for the purposes of section 194LC. In the case of other long-term Infrastructure Bonds where the Indian company receives subscription of such Bonds in foreign currency and such bond issue is not covered under ECB regulations, the approval, for purpose of section 194LC shall be on case to case basis.

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

OVERSEAS DIRECT INVESTMENTS BY INDIAN PARTY-RATIONALISATION

RBI/2012-13/203
A.P. (DIR Series) Circular No. 29
September 12, 2012

To,
All Category – I Authorised Dealer Banks

Madam / Sir,

Overseas Direct Investments by Indian Party – Rationalisation
Attention of the Authorised Dealer (AD – Category I) banks is invited to the Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] (the Notification), as amended from time to time. It has been decided to amend the guidelines relating to submission of Annual Performance Report (APR) as under:

2. An Indian party, which has set up / acquired a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) overseas in terms of the Regulations of the Notification ibid, shall submit, to the designated Authorised Dealer every year, an Annual Performance Report (APR) in Form ODI Part III in respect of each JV or WOS outside India and other reports or documents as may be specified by the Reserve Bank from time to time, on or before the 30th of June each year. The APR, so required to be submitted, has to be based on the latest audited annual accounts of the JV / WOS, unless specifically exempted by the Reserve Bank.

3. The exemption granted for submission of APR based on the un-audited accounts of the JV / WOS subject to the terms and conditions as specified in the A.P (DIR Series) Circular No. 96 dated March 28, 2012 shall continue.

4. Necessary amendments to the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 are being issued separately.

5. AD – Category I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

6. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.

Yours faithfully,
(Dr. Sujatha Elizabeth Prasad)
Chief General Manager-In-Charge

Disclaimer:
Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.

OVERSEAS INVESTMENT BY INDIAN PARTIES IN PAKISTAN

RBI/2012-13/198
A. P. (DIR Series) Circular No. 25
September 7, 2012

To
All Category – I Authorised Dealer Banks

Madam / Sir,

Overseas Investment by Indian Parties in Pakistan

Attention of the Authorised Dealer (AD – Category I) banks is invited to the Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004] (the Notification), as amended from time to time.

2. In terms of Regulation 6 (2) of the Notification ibid, “Notwithstanding anything contained in these Regulations, investment in Pakistan shall not be permitted.” It has now been decided that the overseas direct investment by Indian Parties in Pakistan shall henceforth be considered under the approval route under Regulation 9 of the Notification, ibid.

3. Necessary amendments to the Foreign Exchange Management (Transfer or Issue of Any Foreign Security), Regulations, 2004 are being issued separately.

4. AD – Category I banks may bring the contents of this circular to the notice of their constituents and customers concerned.
5. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) and are without prejudice to permissions/approvals, if any, required under any other law.

Yours faithfully,
Dr. (Smt.) Sujatha Elizabeth Prasad
Chief General Manager-In-Charge

Disclaimer:

Proteus Consultants and I are not responsible for any and all losses, claims, damages and liabilities arising out of or related to following anything that may be posted in this blog. If you rely upon anything posted here, you do so at your sole risk and responsibility.