What the option covers
Under Section 92CB of the Income-tax Act, 1961, safe harbour sets the conditions for accepting a transfer price for an eligible transaction. It does not remove the need to establish eligibility, maintain records under Section 92D or furnish the accountant’s report under Section 92E. The option concerns the transactions covered; the remaining transactions follow the normal transfer pricing provisions. An invalid election returns the covered transaction to ordinary pricing rules. Acceptance does not guarantee that other tax issues or a foreign authority’s position are settled.
The legacy rates below and the worked cases use AY 2025–26 and AY 2026–27 under Rules 10TA–10TG, as amended by Notification 21/2025. AY 2026–27 covers FY 2025–26 and is distinct from tax year 2026–27 under the Income-tax Act, 2025. For that new tax year, apply Section 167 and the notified Rules 86–93. Section 536 governs transition.
Legacy categories and rates for the two assessment years
| Eligible transaction | Rule 10TD condition | What to verify |
|---|---|---|
| Software development and IT-enabled services | 17% operating profit over operating expense up to ₹100 crore; 18% above ₹100 crore up to ₹300 crore. | Identify the eligible transaction values and the relevant risk and activity tests. |
| Knowledge process outsourcing | Up to ₹300 crore. At least 24% margin if employee cost is at least 60% of operating expense; 21% if the ratio is at least 40% but below 60%; 18% under the provision worded as not exceeding 40%. | At exactly 40%, the two published limbs overlap. The 21% margin meets the stricter limb; confirm the treatment if relying on 18%. |
| Contract research and development | 24% for eligible software or generic pharmaceutical contract research, up to ₹300 crore. | The applicable functions and limited-risk conditions must be met. |
| Manufacture and export of auto components | 12% for core or 8.5% for non-core components. | The eligible assessee condition refers to at least 90% of total turnover being original equipment manufacturer sales. Check component definitions; eligible core components include lithium-ion batteries for electric or hybrid electric vehicles. |
| Receipt of low-value-adding intragroup services | Aggregate value including a mark-up of at most 5% must not exceed ₹10 crore. | Check service eligibility. An accountant certifies cost pooling, exclusion of shareholder and duplicate costs, and reasonableness of allocation keys. |
| Eligible corporate guarantee | Annual fee or commission of at least 1% on the amount guaranteed. | Check the explicit guarantee of borrowings of the nonresident wholly owned subsidiary and the eligibility conditions. Above ₹100 crore, the subsidiary needs the prescribed adequate-to-highest-safety rating from a SEBI-registered agency. |
| Eligible INR intragroup loan | One-year SBI MCLR on 1 April plus the prescribed credit-rating spread. | The legacy rated spreads are 175, 325, 475 or 625 basis points; an unrated case uses 425 basis points only under the specified ₹100 crore aggregate condition. |
| Eligible foreign-currency intragroup loan | Relevant currency reference rate on 30 September plus the prescribed spread. | Check the ₹250 crore aggregate breakpoint, recognised rating and currency under the amended rule. The spread can run from 150 to 600 basis points under the applicable rating and size tier. The USD reference is six-month Term SOFR plus 45 basis points; the euro reference is six-month EURIBOR. Apply the rating and size spread separately. |
Operating profit margin is operating revenue less operating expense, divided by operating expense. Use the statutory definitions and relevant transaction data, not simply the business’s total turnover or a book EBITDA figure. A recipient of intragroup services does not obtain a blanket deduction approval from a safe harbour pricing election.
File and verify the election
For these legacy years, the fourth proviso to Rule 10TE(2), as amended by Notification 21/2025, provides the option for one assessment year under Rule 10TD(3B). File Form 3CEFA by the applicable Section 139(1) due date, with the return furnished on or before the date Form 3CEFA is actually filed. Verify current electronic instructions for the relevant year and retain proof of filing. Form 3CEB has its own earlier report deadline under Section 92F(iv); the two forms are not filed together by default.
| Stage | Legacy time limit or effect |
|---|---|
| AO has doubts about eligibility | The AO must refer the question to the TPO within two months after the end of the month in which the AO received Form 3CEFA. A reference is not automatic. |
| TPO receives the reference | The TPO may request evidence by the date specified in the notice. A written invalidation order follows a hearing opportunity and is due within two months from the end of the month of reference receipt. |
| Taxpayer receives an adverse TPO order | File objections with the Commissioner to whom the TPO is subordinate within 15 days of receipt. |
| Commissioner receives objections | The initial-year rule provides for an order after hearing within two months from the end of the month of receipt. |
| Statutory period missed | Rule 10TE provides for the option to be treated as valid in the specified cases. The AO may still verify the declared price against the prescribed circumstances and adopt the prescribed measure if the declared measure does not conform. |
For the new law, use Form 49 under the notified rules. For qualifying information technology services, Rule 89 uses a minimum 15.5% operating profit margin on operating expense if aggregate eligible operating revenue does not exceed ₹2,000 crore, subject to the new definitions and conditions. Check the separate procedure in Rule 91 for those services and Rule 90 for other eligible international transactions. Do not apply the legacy software, ITeS and KPO bands to the new year.
Compare the two approaches on the same basis
Compare incremental income tax and cash effects under the safe harbour price with the expected cost and uncertainty of ordinary benchmarking. Use the same periods, tax rates and discounting assumptions. An election may simplify price acceptance, but document its scope and do not count avoided penalties or secondary adjustments as guaranteed savings. Section 92CE(1)(iv) specifically addresses primary adjustments under the safe harbour rules, subject to the statutory conditions.
Six worked examples
All six examples are hypothetical and apply the legacy rules for AY 2025–26 unless otherwise stated. Values and costs are for the relevant eligible transactions on the stated assumptions.
1. Software margin and the cost of certainty
Zenon incurs ₹30 crore of operating expense. At an assumed ordinary benchmark of 13%, profit is ₹3.90 crore and billing is ₹33.90 crore. At the eligible safe harbour margin of 17%, profit is ₹5.10 crore and billing ₹35.10 crore. At an assumed 25.168% effective Section 115BAA rate, tax on the two illustrated profits is ₹98,15,520 and ₹1,28,35,680 respectively. The additional annual tax is ₹30,20,160.
If expected avoidable costs for that same year were ₹25 lakh, the net extra cost would be ₹5,20,160 before other effects. If ₹25 lakh instead describes total expected costs over five years, an undiscounted sensitivity with the same annual tax difference for each of five years gives ₹1,26,00,800 of net extra cost. That is a modelling scenario, not a five-year election or a prediction that future rates remain unchanged.
2. KPO employee cost ratio
Intellect Analytics has ₹28 crore of employee cost, ₹15 crore of technology and data costs and ₹7 crore of premises and overhead. Assuming these qualify as operating expenses, total expense is ₹50 crore and the employee ratio is 56%. For eligible KPO, that is the 21% limb. Required operating profit is ₹10.50 crore, producing billing of ₹60.50 crore on these assumptions, within the ₹300 crore cap.
3. Low-value-adding services received
Global Pharma receives qualifying routine support and is allocated ₹6 crore of qualifying cost. A 5% mark-up is ₹30 lakh; the ₹6.30 crore invoice, including mark-up, is below ₹10 crore. Check whether each service actually meets the definition, segregate any nonqualifying activity, and obtain the required accountant certification. The pricing election does not itself establish deductibility.
4. Explicit guarantee of a subsidiary’s borrowing
Bharat Heavy gives an eligible full-year explicit guarantee for a German wholly owned subsidiary’s EUR 20 million loan. At an assumed ₹90 per euro, the exposure is ₹180 crore. At 1% the illustrated annual fee is ₹1.80 crore. At ₹180 crore the ₹100 crore threshold is exceeded. Assume the subsidiary satisfies the applicable credit-rating condition at this exposure and verify that condition before electing. Report the guarantee separately in the accountant’s report.
5. ₹208 crore of eligible software transactions
CloudScale expected ₹185 crore but finishes FY 2024–25 at ₹208 crore of eligible international software transactions. The actual value exceeds ₹100 crore but does not exceed ₹300 crore, so the 18% margin band remains available if the other conditions are met. If the actual eligible value exceeded ₹300 crore, this legacy category would not apply and the ordinary transfer pricing analysis would be required.
6. A notice challenges the software classification
FinTech reports ₹45 crore of operating revenue at a 17% margin on operating expense. This implies operating expense of about ₹38.4615 crore. If the same expense base were used for a qualifying KPO scenario with a 65% employee cost ratio, the difference between a 24% and 17% margin would be about ₹2.6923 crore of operating profit. This is a sensitivity, not an assessment or a statutory result of invalidation. Support the activity with contracts, job records, timesheets and deliverables. A record showing that 90% of hours were spent coding is relevant evidence, not a statutory classification test.
For example, if the AO received the form on 30 November 2025, the initial reference window ends 31 January 2026. If the TPO received a reference on 20 January, the ordinary order deadline is 31 March 2026. An adverse order received 3 April gives 15 days to 18 April on the assumed calendar. Respond to a document request by the date in the notice; there is no universal 30-day response period in this process.
Frequently asked questions
Can other transactions still use ordinary benchmarking?
Yes. Identify the eligible transactions covered by the form, preserve the applicable aggregation rules, and separately benchmark the transactions outside the election.
Is Form 3CEB still required?
Yes, if Section 92E applies. Maintain the applicable Section 92D records too.
Can a tolerance band fill a safe harbour margin shortfall?
No ordinary comparability adjustment or Rule 10CA(7) tolerance is applied to an accepted safe harbour price. A 16.50% margin is 0.50 percentage points below a 17% floor; check the prescribed AO treatment if the option itself is valid.
Does a late TPO action settle every issue?
The rule can treat the option as valid when the specified deadline is missed. Check the actual receipt dates and the distinction between validity and whether the declared price meets the prescribed conditions.
Can a taxpayer withdraw the option?
For the two assessment years here, file a separate election for each year for which it is sought. Do not assume a right to retract an election for a year already filed. If dealing with a valid historical multi-year election, check the separate opt-out rule for subsequent years.
Does this protect against foreign double taxation?
No. Foreign authorities are not bound by the Indian election. Rule 10TG bars the taxpayer from invoking the mutual agreement procedure for the eligible transaction when the declared price is accepted under Section 92CB; the new Rule 93 has a corresponding provision. Evaluate that consequence before filing.
Sources
- Income-tax Act, 1961: sections 92CB, 92CE, 92D, 92E and 115BAA
- CBDT Notification 46/2017: safe harbour framework
- CBDT Notification 21/2025: ₹300 crore threshold and one-year election
- Income Tax Department: transfer pricing and safe harbour guidance
- Income-tax Act, 2025: sections 167 and 536
- Notified Income-tax Rules, 2026: Rules 86–93 and Form 49
- Income Tax Department: Form 49 guidance
- CBDT Notification 104/2023: currency reference rates and foreign currency loan spreads
- Finance Act, 2025: surcharge and cess assumptions