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Overall, a positive move, accepting select recommendations thereby rendering final set of rules flexible and less conservative.

Applicability of 5 year period less but greater certainty as opposed to two year limit envisage in draft rules.

Monetary threshold of Safe Harbour rules being applicable to companies above 100 cr turnover is envisaged as draft rules could have left out several such captive IT and ITES businesses. With removal of gap, it will apply to all captive units. This will benefit large MNCs with captive IT and ITES units, although limit of 20% (turnover less than 500 cr) and 22% (turnover more than 500 cr) margin is relatively on the higher side. MNCs will have to weigh their options and consider Safe Harbour cost to buy peace to avoid litigation. Similarly the limit of 30% for KPO has been reduced to 25% , though an artificial characterization of KPO business is not meaningful. Definitions of what constitute KPO is expected to be rationalized as per the press release. An important change is year to year election of Safe Harbour provisions. Now the press release clarifies that the taxpayer can opt for continuous period upto 5 years for Safe Harbour , thereby making it similar to APA.

Once the taxpayer elects for a Safe Harbour, it has been made mandatory for the tax administration to accept/reject taxpayer proposition within the timeframe of 4 months. This will avoid any uncertainty with respect to eligibility and reopening of assessments. Further, if the taxpayer’s election is rejected, it has been made as appealable. A taxpayer has the right to opt out of Safe Harbour provision at any time.

While the limits have been rationalized for IT and ITES and KPOs, limits for international transaction for contact R&D have remained unchanged. Similarly there has been no change of Safe Harbour limits for auto ancillaries, manufacturing and exports.

In summary, the revised rules make the Safe Harbour credible and efficient alternative to unilateral APA. In fact ,in some cases the tax payer may opt for Safe Harbour, than unilateral APA which will take time to conclude.

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