Deloitte's Feedback On Draft Safe Harbour Rules

The then Hon'ble Finance Minister in his budget speech of Finance Act (No 2) 2009, introduced safe harbour provision to improve the investment climate in the country, facilitate resolutions of tax disputes and to reduce the impact of judgmental errors in determining the transfer price in the international transactions. The safe harbour provisions substantially reduce the administrative burden for the tax administration i.e. minimal examination or limited number of companies being picked up for detailed scrutiny of the transfer pricing compliance by the taxpayers. They can choose to concentrate their time and resources on larger taxpayers, transactions or issues. Generally, the adoption of safe harbour rules provide many benefits both for the taxpayers and tax administration in terms of predictability as well as continuity for all the participating organisations, thereby eliminating the possibility of litigation between the taxpayers and the tax administration. Out of the 7812 rulings pronounced by the Income Tax Appellate Tribunals (ITAT), only in 14 per cent of the cases the transfer pricing adjustments made were sustained in favour of the tax administration. This shows that the margins adopted in the course of transfer pricing assessment proceedings do not meet the arm's length criteria and are substantially higher. Therefore adoption of a reasonable safe harbour margin would go a long way in benefiting the tax administration too. Attached are Deloitte’s comments in relation to the Draft Rules.

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