Special provisions concerning the avoidance of tax, specifically empowering to Board to make "safe harbour" rules : Clause 167 of the Income Tax Bill, 2025 Vs. Section 92CB of the Income-tax Act, 1961

Clause 167 Power of Board to make safe harbour rules.

Income Tax Bill, 2025

Introduction

Clause 167 of the Income Tax Bill, 2025 introduces special provisions concerning the avoidance of tax, specifically empowering the Central Board of Direct Taxes (the "Board") to make "safe harbour" rules. These rules pertain to the determination of income in certain cross-border and specified domestic transactions, particularly regarding the arm's length price and income deemed to accrue or arise in India. This clause is a significant legislative mechanism aimed at providing certainty, reducing litigation, and simplifying compliance in transfer pricing and related international taxation matters. Section 92CB of the Income-tax Act, 1961, inserted in 2009 and amended in 2020, is the existing statutory provision on the Board's power to make safe harbour rules. Both Clause 167 and Section 92CB serve similar objectives but differ in scope, language, and underlying legislative context. This commentary provides a detailed analysis of Clause 167, followed by a comprehensive comparison with Section 92CB, with a focus on each item/provision, legislative intent, practical implications, and areas of convergence and divergence.

Objective and Purpose

Safe harbour rules in transfer pricing and international tax are designed to provide taxpayers with certainty regarding the tax treatment of certain transactions. The principal objectives are:

• To reduce protracted litigation and disputes between taxpayers and tax authorities over the determination of arm's length prices.
• To simplify compliance for taxpayers engaged in cross-border transactions, especially where transfer pricing analysis is complex, subjective, and resource-intensive.
• To enhance the ease of doing business and attract foreign investment by providing a predictable tax environment.
• To enable the tax administration to allocate resources more efficiently, focusing on high-risk or high-value cases rather than routine or low-risk transactions.

The legislative history of safe harbour rules reflects global best practices, as many jurisdictions have adopted such mechanisms in response to the increasing complexity of international taxation and transfer pricing.

Detailed Analysis of Clause 167 of the Income Tax Bill, 2025

Sub-section (1): Scope of Safe Harbour Application

This sub-section lays out the transactions and income streams to which safe harbour rules may apply:

• Income referred to in section 9(2): Section 9(2) generally deals with income deemed to accrue or arise in India, typically in the context of business connections, digital economy, or other specified circumstances.
• Arm's length price u/s 165 or 166: These sections presumably correspond to the new Bill's provisions on transfer pricing for international and specified domestic transactions, replacing or updating the current sections 92C and 92CA of the 1961 Act.

The phrase "shall be subject to safe harbour rules" makes it mandatory for such determinations to consider safe harbour rules if they exist, thereby providing a statutory foundation for such rules.

Sub-section (2): Power of the Board

This provision confers explicit rule-making authority on the Board (CBDT) to prescribe safe harbour rules for the transactions/income specified in sub-section (1). The delegation of powers is consistent with the need for flexibility and adaptability in responding to evolving business practices and international tax norms.

Sub-section (3): Definition of Safe Harbour

This sub-section provides a clear statutory definition of "safe harbour" for the purposes of Clause 167. The key elements are:

• The income-tax authorities are bound to accept the transfer price or the deemed income as declared by the assessee, provided the transaction falls within the prescribed safe harbour rules.
• This creates a statutory presumption in favour of the taxpayer, subject to compliance with the prescribed conditions.

Salient Features and Interpretative Issues

• Mandatory Acceptance: The language "shall accept" indicates a mandatory obligation on the tax authorities, reducing discretion and potential disputes.
• Scope of Application: The clause covers both transfer pricing (arm's length price) and deemed income u/s 9(2), potentially widening the ambit compared to the existing law.
• Rule-making Power: The Board's power is broad but circumscribed by the need to specify "circumstances" and conditions under which safe harbour applies.
• Potential for Ambiguity: The actual scope and effectiveness of the safe harbour regime will depend on the detailed rules framed by the Board. Issues may arise regarding the eligibility criteria, thresholds, and procedural requirements.

Practical Implications

Impact on Taxpayers

• Certainty and Predictability: Taxpayers can rely on safe harbour rules to avoid disputes over transfer pricing or deemed income, provided they comply with the prescribed parameters.
• Reduced Compliance Burden: Safe harbour rules typically prescribe simplified documentation and compliance requirements, reducing the administrative burden.
• Eligibility Criteria: Not all taxpayers or transactions may be eligible; the rules may set thresholds based on transaction value, industry, or risk profile.
• Potential Trade-Offs: In exchange for certainty, taxpayers may accept less favourable pricing or income recognition terms than might be achieved through full transfer pricing analysis.

Impact on Tax Administration

• Resource Allocation: The administration can focus its resources on complex or high-risk cases, improving overall efficiency.
• Reduced Litigation: Fewer disputes are likely to arise over transactions covered by safe harbour rules.
• Consistency and Transparency: Prescribed rules promote uniformity in tax treatment, reducing scope for arbitrary or inconsistent assessments.

Broader Policy Considerations

• Alignment with International Standards: Safe harbour regimes are endorsed by the OECD Transfer Pricing Guidelines, though care must be taken to avoid double taxation or non-taxation in cross-border scenarios.
• Dynamic Rule-Making: The Board's ability to update rules ensures responsiveness to changing business practices and international developments.

Comparative Analysis: Clause 167 vs. Section 92CB 

Textual Comparison

Aspect	Clause 167 of the Income Tax Bill, 2025	Section 92CB of the Income-tax Act, 1961
Scope of Application	(a) Income referred to in section 9(2); (b) Arm's length price u/s 165 or 166.	(a) Income referred to in clause (i) of section 9(1); (b) Arm's length price u/s 92C or 92CA.
Rule-making Power	Board may make rules for safe harbour.	Board may make rules for safe harbour.
Definition of Safe Harbour	Circumstances in which the income-tax authorities shall accept: (a) the transfer price; or (b) the income, deemed to accrue or arise u/s 9(2), declared by the assessee.	Circumstances in which the income-tax authorities shall accept: the transfer price or income, deemed to accrue or arise under clause (i) of section 9(1), as declared by the assessee.

Analysis of Key Provisions

1. Scope of Transactions Covered

• Section 92CB: Applies to income u/s 9(1)(i) (business connection, property, asset or source of income in India, transfer of a capital asset situated in India) and to arm's length price u/ss 92C (computation of arm's length price) and 92CA (reference to Transfer Pricing Officer).
• Clause 167: Refers to income u/s 9(2) (which may reflect an updated or restructured provision in the new Bill, potentially covering broader or different categories of deemed income) and arm's length price u/ss 165 or 166 (presumably the Bill's analogues to 92C and 92CA).

The shift from "section 9(1)(i)" to "section 9(2)" may indicate an expansion or redefinition of the scope of deemed income, possibly to address new business models (such as digital economy transactions) or to align with global tax trends (e.g., BEPS Pillar One and Two).

2. Nature of Safe Harbour Rules

Both provisions empower the Board to prescribe rules specifying the circumstances in which declared transfer prices or deemed incomes will be accepted without further scrutiny. However, Clause 167's language appears more streamlined and less encumbered by legacy references, suggesting an intent to modernize and rationalize the safe harbour framework.

3. Definition and Operation of "Safe Harbour"

Both provisions define "safe harbour" as circumstances in which the tax authorities "shall accept" the taxpayer's declared transfer price or deemed income. The mandatory language reduces discretion and is designed to enhance taxpayer certainty.

4. Rule-Making and Delegated Legislation

The power to make rules is similarly worded in both provisions. The effectiveness of the safe harbour regime in both cases is contingent on the detailed rules framed by the Board, which may specify:

• Eligible taxpayers or transactions (e.g., based on turnover, industry, or risk profile).
• Thresholds or margins (e.g., minimum profit margins, maximum transaction values).
• Compliance and documentation requirements.
• Procedural aspects (e.g., application process, renewal, withdrawal of benefit).

5. Legislative Context and Policy Evolution

Section 92CB was introduced in 2009, at a time when India was grappling with a surge in transfer pricing litigation and uncertainty. The provision has since been amended to expand its scope, notably in 2020, to cover deemed income u/s 9(1)(i). Clause 167, as part of the new Bill, seeks to consolidate, update, and possibly expand the safe harbour concept to reflect contemporary business realities and international developments.

6. Potential Issues and Ambiguities

• Overlap or Gaps: The transition from the old to the new provisions may create interpretative challenges, especially if the scope of section 9(2) in the new Bill differs from section 9(1)(i) in the old Act.
• Interaction with International Tax Norms: The safe harbour rules must be crafted carefully to avoid conflicts with tax treaties and OECD guidelines, particularly to prevent double taxation or non-taxation.
• Judicial Review: The rules made by the Board remain subject to judicial scrutiny for reasonableness, non-arbitrariness, and compliance with constitutional and statutory mandates.

Practical Implications for Stakeholders

For Businesses and Multinational Enterprises

• Choice and Flexibility: Taxpayers may opt for safe harbour rules where available, balancing the benefits of certainty against the potential cost of accepting less favourable pricing.
• Compliance Planning: Businesses must monitor eligibility criteria and ensure robust documentation to avail of safe harbour benefits.
• Strategic Considerations: For large or complex transactions not covered by safe harbour rules, traditional transfer pricing analysis and documentation will remain necessary.

For Tax Professionals and Advisors

• Advisory Role: Professionals must stay abreast of evolving rules and advise clients on the optimal use of safe harbour provisions.
• Risk Management: Advisors should assess the risk of audit or litigation for transactions outside the safe harbour regime.

For Tax Authorities

• Administrative Efficiency: Safe harbour rules can streamline assessments and reduce the volume of disputes.
• Monitoring and Enforcement: Authorities must ensure that the rules are not misused and that only eligible transactions benefit from the regime.

Comparative Perspective: International Practice and OECD Guidelines

Safe harbour rules are recognized in the OECD Transfer Pricing Guidelines (Chapter IV), which recommend their use in limited circumstances to reduce compliance burdens and administrative costs. However, the OECD cautions against overly broad safe harbour regimes that may undermine the arm's length principle or create risks of double taxation or non-taxation. The Indian approach, as reflected in both Section 92CB and Clause 167, is consistent with OECD recommendations in providing for safe harbour rules by delegated legislation, subject to appropriate safeguards and limitations.

Conclusion

Clause 167 of the Income Tax Bill, 2025, represents an evolution of India's statutory framework for safe harbour rules in the context of transfer pricing and deemed income. It consolidates and updates the existing regime under Section 92CB of the Income-tax Act, 1961, with a view to enhancing certainty, reducing litigation, and aligning with international best practices. The core features-mandatory acceptance of declared prices/income, broad rule-making power, and clear definition of safe harbour-are retained and streamlined. The ultimate efficacy of the regime will depend on the detailed rules framed by the Board, their alignment with global standards, and their adaptability to emerging business models and international tax developments. As India transitions to the new legislative framework, careful attention must be paid to the scope, thresholds, and procedural aspects of safe harbour rules to ensure they serve their intended purpose without creating new avenues for dispute or abuse.

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Full Text:

Clause 167 Power of Board to make safe harbour rules.

 

Dated: 24-4-2025