Few months back, Indian Government in the February 2020 Budget stipulated a number of significant proposals on Transfer Pricing Regime in relation to Safe Harbour Rules and APAs. In this article, we examine the changes to Indian Safe Harbour and APA rules critically evaluating the benefit and implications of these changes for multinational companies insofar as their cross-border compliances are concerned.

Expanding the scope of Safe Harbour and Advance Pricing Agreement (‘APA’) with respect to Profit Attribution


Ashutosh M Rastogi
Dhruv Seth

Introduction of both Safe Harbour Rules and APA regime brought significant relief to non-resident taxpayers by providing certainty on transfer pricing of inter-company transactions. Acknowledging the need for similar certainty on profit attribution to non-residents, Budget 2020 proposed to extend Safe Harbour Rules and APA framework to profit attribution under Indian Tax Code[1].



A. Application of Safe Harbour Rules
Section 92CB of Indian Tax Code defines the term Safe Harbour as ‘circumstances under which the income-tax authorities shall accept the transfer pricing declared by the assessee’.  The Rule provides minimum operating profit margin that a taxpayer is expected to earn for certain categories of international transactions, which if maintained shall be accepted as arm’s length by Indian Tax Authorities.

Current Scenario:

The existing safe harbour provisions applied only for determination of arm’s length price for transactions between legal entities did not cover Permanent Establishment (‘PE’).

Proposed Amendment

  • Safe Harbour Rules[2] have been expanded to cover profits attributable to PE[3];
  • It is also clarified that amended provision would be applicable only from Assessment Year (‘AY’) 2020-21 and onwards.


In order to attribute profits to PE under India’s domestic tax law, the current provisions of the Indian Tax Code[4] follow generalised apportionment principle (i.e. on the basis of ‘turnover’ or ‘receipt’ or ‘manner determined by AO’). This has been a primary cause of litigation in number of cases. In order to minimize litigation and provide clarity on profit attribution to PE, the budget has proposed changes in the transfer pricing provisions. This would enable non-residents to take benefit of the existing safe harbour rules prescribed under Indian regulation. Thus, the safe harbour rules will now be applicable to the income accruing or arising, directly or indirectly, through or from any business connection/property/ assets/transfer of capital assets/source in India[5]

For PE forms such as project or branch office, the availability of safe harbour option shall now provide the much needed certainty. Once the cost base for a given project/branch office is determined, arm’s length operating margin can be established in line with the Safe Harbour Rules. However, since safe harbour rules are mostly based on the satisfaction of minimum profitability threshold, guidance would still be needed on determination of the relevant cost base, especially in the case of PE which is a legal fiction arising under treaty provisions.

Once effective, the safe harbour provision shall assist the multinational companies to
pre-emptively ascertain income attributable to Indian presence and avoid unnecessary litigation.

B. Application of Advance Pricing Agreement
Currently APA provisions provide tax certainty in determination of ALP for five future years as well as for four earlier years (Rollback).

Proposed Amendment

  • It is proposed to expand the scope of the Advance Pricing Agreement provisions to include determination of profit attributable[6] to a PE;
  • It is also proposed that the benefit of rollback can be availed for PEs;
  • The provision will apply to an APA entered into on or after April 1, 2020.


In the context of PE two questions are relevant;

  • Whether a PE exists?
  • How to attribute profits to a PE (if a PE exists)?

The extension of APA facility for Income attribution to PE shall help address the second question while with respect to the first question the taxpayer already has alternative remedies such as approaching the Authority for Advance Ruling[7] or undertaking a MAP (‘Mutual Agreement Procedure’) Proceeding where double taxation poses a major risk.

Fixed Place PE

The extension of APA facility to PE shall in particular benefit the transfer pricing of Branch/Project Offices which are the most commonly deployed forms of PE. The profit attribution in such cases until now has been fraught with uncertainty due to complex attribution approaches.

Dependent Agent PE

Multinational Companies often carry out agency operations through a corporate set-up for boosting direct sales in Indian market. In such cases the agency commission requires benchmarking to ensure that an arm’s length remuneration is paid to the Indian Agent. In such cases Dependent Agent Permanent Establishment [‘DAPE’] can result under tax treaty provision raising profit attribution issues. In a number of cases[8]  it has been held that no further profit attribution is required where the dependent Agent i.e. Company has already been remunerated on an arm’s length basis.

The extension of APA facility to profit attribution may now help in establishing certainty on profit attribution even in the DAPE context which has been a litigation prone area.


In April 2019, the Government had released draft guidance on profit attribution to PE. The guidance considered both demand and supply side factors for profit attribution and offers a formula based approach for profit determination. Indian Government’s predilection towards the formulary approach is by now well-known especially after the release of ‘draft profit attribution rules’[9]. The alternative is authorized OECD approach based on Functional and Benchmarking Analysis. This approach is based on the ‘separate entity’ principle which hypothesizes PE as a distinct and separate entity amenable to a separate delineation of its functions, assets and risks. Once the functional and risk profiling for PE is complete, attribution of profits to PE proceeds in same manner as for separate legal entities. It would be interesting to see which approach Indian Government adopts while concluding APA’s on profit attribution.

Recently, in the post Covid environment on May 20, 2020, Indian Government also released the Safe Harbour Rules applicable for Financial Year 2019-20. While the thresholds were released in the Covid environment, Government persisted with the same thresholds as for previous year without any downward revisions (mainly because Indian economy has been  impacted by Covid post March 2020). However, these thresholds shall apply only for one year ie FY 2019-20. For financial year 2020-21, the safe harbour thresholds shall be specified next year by when it is expected to have greater clarity on economic impact of Covid on the performance of different sectors.


Article has been authored by Ashutosh Mohan Rastogi (Founding Partner) and Dhruv Seth (Senior Associate) – Amicus – Advocates & Solicitors.

Views Expressed are Personal.


[1] Section 9(1)(i) of the Income Tax Act, 1961

[2] Section 92CB read with Rule 10TA to TF

[3] Under section 9(1)(i)

[4] Rule 10 of the Income Tax Rules, 1962

[5] Section 9(1)(i) of the Income Tax Act, 1961 (‘Act’)

[6] Ibid at Pt. 3

[7] Indian Tax Code provides non-residents with the facility of an advance ruling on questions governing non-resident taxation – an application to this effect must be made to the Indian Authority for Advance Ruling (Section 245) of the Indian Tax Code.

[8] DIT (International Taxation) v. Morgan Stanley & Co. Inc., (2007) 7 SCC 1; Commissioner Of Income Tax v. Hyundai Heavy Industries Co. Ltd AIR 2007 SC 2445 and Rolls Royce Singapore Pvt. Ltd. v. ACIT [TS-515-HC-2011(DEL)]

[9] Public Consultation on the proposal for amendment of Rules for Profit Attribution to Permanent Establishment dated 18th April 2019.

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