CBDT Revises Safe Harbour Rules for Transfer Pricing: A Comprehensive Guide

1. Introduction

The Central Board of Direct Taxes (CBDT), on March 25, 2025, issued Notification No. 21/2025, amending the Safe Harbour Rules (SHR) under Chapter X of the Income‑tax Act, 1961. These revisions significantly expand the applicability and relevance of SHR for multinational enterprises (MNEs), aim to reduce litigation, and improve certainty in transfer pricing assessments  

2. Background: Understanding Safe Harbour

Safe Harbour Rules, introduced under Section 92CB and Rules 10TA–10TG of the Income‑tax Rules, are optional provisions designed to simplify compliance: eligible taxpayers declaring transfer prices or margins within prescribed thresholds are automatically deemed to have met the arm’s length standard, avoiding detailed audits or dispute resolution
First notified in September 2013, SHR initially covered selected sectors such as software development, ITES/KPO, contract R&D, auto components, intra-group loans, and guarantees. Since then, CBDT has extended SHR year by year 

3. Key Amendments Effective March 25, 2025

3.1 Increased Turnover Threshold

• Previous threshold: INR 200 crore for eligibility in specified international transactions.

• New threshold: Raised to INR 300 crore, thereby enabling more taxpayers to access SHR for IT, ITES, KPO, contract R&D, auto‑component
  manufacturing, corporate loans, and guarantees.

3.2 Inclusion of Lithium‑Ion Batteries

The definition of “core auto components” under Rule 10TA(b) now explicitly includes lithium-ion batteries for use in electric or hybrid vehicles, aligning SHR with India’s EV transition and supporting businesses in the electric mobility ecosystem with a standard 12% mark‑up.

3.3 Extended Applicability Period

The amended SHR now applies to Assessment Years (AY) 2025‑26 and 2026‑27, covering Financial Years 2024‑25 and 2025‑26, providing taxpayers greater timeframe and clarity in planning.

4. Eligibility Criteria and Safe Harbour Rates

While the monetary threshold has increased, the prescribed benchmark margins and interest/guarantee commission rates remain unchanged:

• Software & IT services: 18% cost‑plus margin for INR 100–300 crore inclusive international value.

• IT‑enabled services & KPO: 18% or 30% margin depending on the category.

• Contract R&D services: 24% margin for software or generic pharmaceutical work.

• Core auto components (including lithium-ion batteries): 12% margin.

• Non-core auto components: Standing at 8.5% margin if below threshold.

• Intra-group loans & guarantees: Fees aligned with SBI base rate + specified basis points depending on loan amount (50 crore threshold), and guarantee commissions of 2% per annum.

5. Key Implications

5.1 Wider Coverage

The higher threshold (INR 300 crore) ensures more entities—especially mid-sized IT, R&D, manufacturing and EV component firms—can opt for SHR, minimizing compliance burdens.

5.2 EV Sector Boost

Including lithium‑ion batteries as core auto components signals policy support for sustainable industry growth, offering tax predictability to EV-related companies.

5.3 Tax Certainty & Reduced Litigation

With SHR applicable through AY 2026‑27, taxpayers gain a stable window for strategic planning and risk mitigation. Revenue authorities benefit from fewer protracted disputes.

5.4 Limitations

Since benchmark margins remain unchanged, larger value transactions may still find SHR less attractive if comparables suggest lower margins. Also, once SHR is opted for, taxpayers cannot invoke Mutual Agreement Procedure (MAP) under DTAA treaties.

6. Practical Considerations for Taxpayers

6.1 Eligibility Assessment

Taxpayers need to verify if their international related-party transactions fall within the revised INR 300 crore threshold and eligible categories.

6.2 Documentation & Filing

An election to apply SHR must be made by filing Form 3CEFA, before the due date of ITR filing. Proper internal and benchmarking documentation remains essential, though audit requirements are lighter.

6.3 Choosing SHR vs APA

While Safe Harbour offers formulaic certainty, Advance Pricing Agreements (APA)—which are valid for five years and do not have value thresholds—may still suit large or complex taxpayers. Notably, APAs do not prevent MAP access and offer bilateral certainty.

7. Broader Regulatory Context

7.1 Transfer Pricing Framework

India’s transfer pricing regime, rooted in Sections 92 to 92F of the Income‑tax Act and Rules 10B, 10C, and 10D1 among others, seeks to enforce the arm's length principle across international and specified domestic transactions.

Safe Harbour stands as an alternative to the more arduous compliance under the general transfer pricing regime, reducing administrative burden while preserving regulatory oversight.

7.2 Trends Across Jurisdictions

Globally, jurisdictions are revising SHR to accommodate emerging industries—such as EV, pharmaceuticals, IT services—balancing ease of compliance with anti‑avoidance vigilance.

7.3 Policy Intent

The revisions reinforce the government’s aim to attract and retain foreign investment, ensure transparent pricing in border transactions, and support expanding sectors like knowledge services and electric mobility.

8. Looking Ahead & Recommendations

• Continued stakeholder engagement: CBDT may revisit margins and further expand sectors based on feedback and evolving economic contexts.

• Annual review alignment: SHR applicability to each AY separately ensures alignment with evolving norms and data integrity.

• Taxpayer flexibility: Entities should evaluate whether SHR or unilateral/bilateral APA aligns better with their risk profile and transaction volumes.

• Internal readiness: Even within SHR, robust record-keeping—including contemporaneous benchmarking—remains critical.

9. Conclusion

The CBDT’s amendments through Notification No. 21/2025 mark a significant evolution of India’s Safe Harbour Rules, broadening their reach and reinforcing tax certainty. By raising the turnover threshold, adding EV-related components, and extending coverage to AY 2026‑27, the initiative reflects India’s strategic push toward greater ease of doing business and adaptability to emerging industries. Yet, taxpayers must carefully assess applicability—balancing formulaic relief of SHR against detailed certainty offered by APAs.

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