Income-tax (16th Amendment) Rules, 2013 on Safe Harbour Rules

[TO BE PUBLSIHED IN THE GAZETTE OF INDIA EXTRAORDINARY, PART II, SECTION 3, SUB-SECTION (ii)]

GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF REVENUE [CENTRAL BOARD OF DIRECT TAXES]

Notification New Delhi, the 18th September, 2013

INCOME – TAX

S.O. 2810(E). In exercise of the powers conferred by section 92CB read with section 295 of the Income-tax Act, 1961(43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1. (1) These rules may be called the Income-tax (16th Amendment), Rules, 2013.

(2) They shall come into force from the date of their publication in the Official Gazette. 2. In the Income-tax Rules, 1962, - (A) in Part-II, in sub-part D relating to special cases, after rule 10T, the following rules shall be inserted, namely:- ‘Safe Harbour Rules 10TA. Definitions.For the purposes of this rule and rule 10TB to rule 10TG, -
(a) “contract research and development services wholly or partly relating to software development” means the following, namely:- (i) research and development producing new theorems and algorithms in the field of theoretical computer science;

(ii) development of information technology at the level of operating systems, programming languages, data management, communications software and software development tools; (iii) development of Internet technology; (iv) research into methods of designing, developing, deploying or maintaining software; (v) software development that produces advances in generic approaches for capturing, transmitting, storing, retrieving, manipulating or displaying information; (vi) experimental development aimed at filling technology knowledge gaps as necessary to develop a software programme or system; (vii) research and development on software tools or technologies in specialised
areas of computing (image processing, geographic data presentation, character recognition, artificial intelligence and such other areas);or (viii) upgradation of existing products where source code has been made available by the principal; (b) “core auto components” means ,--- (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; (c) “corporate guarantee” means explicit corporate guarantee extended by a company to its wholly owned subsidiary being a non-resident in respect of any short-term or long- term borrowing.
Explanation.- For the purposes of this clause, explicit corporate guarantee does not include letter of comfort, implicit corporate guarantee, performance guarantee or any other guarantee of similar nature; (d) “generic pharmaceutical drug” means a drug that is comparable to a drug already approved by the regulatory authority in dosage form, strength, route of administration, quality and performance characteristics, and intended use;

(e) “information technology enabled services” means the following business process outsourcing services provided mainly with the assistance or use of information technology, namely:-

(i) back office operations;
(ii) call centres or contact centre services; (iii) data processing and data mining; (iv) insurance claim processing; (v) legal databases; (vi) creation and maintenance of medical transcription excluding medical advice; (vii) translation services;
(viii) payroll; (ix) remote maintenance; (x) revenue accounting; (xi) support centres;
(xii) website services; (xiii) data search integration and analysis; (xiv) remote education excluding education content development; or (xv) clinical database management services excluding clinical trials, but does not include any research and development services whether or not in the nature of contract research and development services; (f) “intra-group loan” means loan advanced to wholly owned subsidiary being a non- resident, where the loan– (i) is sourced in Indian rupees;

(ii) is not advanced by an enterprise, being a financial company including a bank or a financial institution or an enterprise engaged in lending or borrowing in the normal course of business; and (iii) does not include credit line or any other loan facility which has no fixed term for repayment; (g) “knowledge process outsourcing services” means the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, namely:- (i) geographic information system; (ii) human resources services; (iii) engineering and design services; (iv) animation or content development and management; (v) business analytics; (vi) financial analytics; or
(vii) market research, but does not include any research and development services whether or not in the nature of contract research and development services; (h) “non-core auto components” mean auto components other than core auto components;
(i) “no tax or low tax country or territory” means a country or territory in which the maximum rate of income-tax is less than fifteen per cent.;
(j) “operating expense” means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including depreciation and amortisation expenses relating to the assets used by the assessee, but not including the following, namely:- (i) interest expense; (ii) provision for unascertained liabilities; (iii) pre-operating expenses; (iv) loss arising on account of foreign currency fluctuations; (v) extra-ordinary expenses;

(vi) loss on transfer of assets or investments; (vii) expense on account of income-tax; and (viii) other expenses not relating to normal operations of the assessee; (k) “operating revenue” means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations but not including the following, namely:- (i) interest income; (ii) income arising on account of foreign currency fluctuations; (iii) income on transfer of assets or investments; (iv) refunds relating to income-tax; (v) provisions written back; (vi) extraordinary incomes; and (vii) other incomes not relating to normal operations of the assessee; (l) “operating profit margin” in relation to operating expense means the ratio of operating profit, being the operating revenue in excess of operating expense, to the operating expense expressed in terms of percentage; (m) “software development services” means,- (i) business application software and information system development using known methods and existing software tools; (ii) support for existing systems; (iii) converting or translating computer languages; (iv) adding user functionality to application programmes; (v) debugging of systems; (vi) adaptation of existing software; or (vii) preparation of user documentation, but does not include any research and development services whether or not in the nature of contract research and development services.

10TB. Eligible assessee.– (1) Subject to the provisions of sub-rules (2) and (3), the ‘eligible assessee’ means a person who has exercised a valid option for application of safe harbour rules in accordance with rule 10TE, and - (i) is engaged in providing software development services or information technology enabled services or knowledge process outsourcing services, with insignificant risk, to a non-resident associated enterprise (hereinafter referred as foreign principal); (ii) has made any intra-group loan; (iii) has provided a corporate guarantee; (iv) is engaged in providing contract research and development services wholly or partly relating to software development, with insignificant risk, to a foreign principal; (v) is engaged in providing contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal; or (vi) is engaged in the manufacture and export of core or non-core auto components and where ninety per cent. or more of total turnover during the relevant previous year is in the nature of original equipment manufacturer sales. (2) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in item (i) of sub-rule (1), the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the following factors, namely:- (a) the foreign principal performs most of the economically significant functions involved, including the critical functions such as conceptualisation and design of the product and providing the strategic direction and framework, either through its own employees or through its other associated enterprises, while the eligible assessee carries out the work assigned to it by the foreign principal;
(b) the capital and funds and other economically significant assets including the intangibles required, are provided by the foreign principal or its other associated enterprises, and the eligible assessee is only provided a remuneration for the work carried out by it;
(c) the eligible assessee works under the direct supervision of the foreign principal or its associated enterprise which not only has the capability to control or supervise but also actually controls or supervises the activities carried out through