Draft Income Tax Rules – Update on Safe Harbour Rules

1) Provision of IT services*; 2) Others: – Provision of contract R&D services wholly or partly relating to generic pharmaceutical drugs – Manufacturing & export of core auto components – Manufacturing & export of non-core auto components – Provision of data centre services (NEW) – Advancing intra-group loans by eligible assessee – Providing corporate guarantee by eligible assessee – Receipt of low value-adding intra-group services

*Common category for Software development, ITeS, KPO & Contract R&D in relation to software development

Changes in Form No.49

Hence, the new form outlines the mandatory deduction and set-off restrictions applicable when opting for SH for EB. These restrictive provisions are designed to ensure that the profit% of 4%/2% is final, preventing taxpayers from further reducing their taxable income through additional claims

New Rule 91 on SH procedure for IT services

A separate, simplified rule has now been introduced exclusively for the SH procedure relating to IT services. Under the earlier framework, the procedural requirements for all eligible international transactions were consolidated within a single rule, without distinction between different categories. The new structure therefore streamlines compliance by carving out a dedicated procedure specifically for IT services, as promised by the 2026 Budget. The key provisions are outlined below:

1. Duration

• Once exercised validly, the SH remains in force for 5 consecutive tax years.
• If an Assessee withdraws their option (by furnishing a declaration), they cannot re-exercise it until the original 5-year period expires.

2. Application filing

• Form No. 49 to be submitted and verified electronically (Digital Signature or EVC) to the DGIT (Systems).
• Must be filed during the first tax year and not beyond 30th June of the following year

3. Automated verification & approval process

• The system verifies if the assessee and transactions are ‘eligible’ and the option is valid.
• Acceptance or rejection will be communicated within two months from the end of the filing month.
• Application will be rejected only upon providing specific reasons and after giving an opportunity to the assessee to rectify any identified defects.

4. Annual compliance

• For each of the four years following the first year, a statement detailing quantum of eligible transactions and profit margins achieved must be filed before filing the tax return (Format of the statement yet to be specified).
• Upon acceptance, the assessee must file tax returns for each of the 5 years as per SH provisions on or before the due date for filing return of income
• The Assessing Officer can make reference to the TPO for transactions other than the eligible IT services covered by the SH.

Further it is specified that the DGIT (Systems) with the approval of CBDT can lay down any further data structure, formats or procedures in connection with furnishing/verification of the above documents, including any required modifications.

For an assessee to qualify as an eligible assessee in respect of IT services, the conditions relating to assumption of only insignificant risks and the foreign principal performing the economically significant functions will continue to apply. In this context, actual conduct takes precedence over contractual terms.

The responsibility to determine whether an assessee is an eligible assessee, bearing insignificant risk, for contract R&D lies with AO or TPO or DGIT (systems) whereas it has been shifted from AO/TPO to DGIT (Systems) for software development, ITeS & KPO services.

Note: As the new category of Data center services are not covered under the provision of IT services, one has to follow the general procedures relating to the other eligible transactions, which involve verification of the SH Application by tax authorities.

Relaxation in Accountant definition

To support the government’s vision of home-grown accounting and advisory firms to become global leaders, the definition of Accountant for the purposes of SH Rules has been rationalised, as announced in the Budget. The definition of Accountant is relied in the SH Rules only in connection with the management services safe harbor, for certification of the cost pool. The earlier rule provided a preference to Global firms for the certification as it requires the firm certifying the same to be present in more than 2 countries.

Currently the requirement to have presence in more than two countries has been removed for Indian Chartered Accountants who are members or partners in accountancy or valuation services entities. This condition is now applicable only in the case of persons recognised for undertaking cost certification by the Government of the country where the associated enterprise is registered or incorporated or any of its agencies.

Further the revenue threshold to be fulfilled by an Accountant has been relaxed:

• Accountant pursuing the profession of accountancy individually or is a valuer – Annual professional receipts in the year preceding the year in which cost certification is undertaken > INR 50 lakhs (Old rule- Rs. 1 crore);
• Member or partner in an accountancy or valuation services entity – Annual receipt of the entity in the year preceding the year in which cost certification is undertaken > INR 3 crores (Old rule- Rs. 10 crores).

2026-27 and shall continue to apply for subsequent block periods, unless modified. However, for transactions other than IT services, the SH application in Form No. 49 will still need to be filed for each individual year.

Further, with updates to the SH Rules as per Budget 2026, the corresponding changes have been incorporated in the SH rates in the draft Rules:

New / Updated definitions

The following definitions have been included in connection with SH in the new Rules:

Data centre and Data centre services, Contract manufacturer, Custom bonded area, Eligible assessee, Eligible business, Gross receipts and Specified electronic goods in connection with the business activity of storage of components in a warehouse in a custom bonded area for sale to a contract manufacturer.

Key considerations

More clarity is needed on whether SH for IT services can be opted for a period shorter than five years, or if only a continuous 5 year term is permitted. More guidance is also required on whether, if the assessee withdraws from the Safe Harbour regime for IT services during the 5 year period, such withdrawal will have retrospective effect or apply only prospectively to future years. As the cost allocation certificate for low value-adding services must be filed together with the SH form, it should be obtained in advance. Timely coordination with the AE’s location will be required to obtain the certificate. Under the current and prior SH Rules, five factors must be assessed to determine whether an Assessee qualifies as an eligible Assessee with insignificant risk. It remains to be seen how this will be implemented in practice, in the case of IT service providers where the verification process has now become automated.