The auto components export safe harbour under the Direct Tax Code (DTC) 2025 provides a valuable compliance simplification mechanism for eligible manufacturers. A key condition for eligibility is the 90% OEM sales test, requiring that 90% or more of total turnover during the relevant tax year must be in the nature of original equipment manufacturer (OEM) sales. This guide explains the 90% OEM sales test and its implications for auto component exporters.
The Auto Components Safe Harbour Framework
Rule 88 — Eligible International Transactions
Rule 88 specifies that manufacture and export of core or non-core auto components is an eligible international transaction for safe harbour, provided:
- Ninety percent or more of the total turnover during the relevant tax year is in the nature of original equipment manufacturer (OEM) sales
Rule 89(2) — Safe Harbour Margins
The safe harbour margins for auto components are:
| Category | Safe Harbour Margin |
|---|---|
| Core Auto Components | 12% of operating expense |
| Non-Core Auto Components | 8.5% of operating expense |
Rule 86(c) — Core Auto Components
"Core auto components" means:
- Engine and engine parts, including piston and piston rings, engine valves and parts, cooling systems and parts, power train components
- Transmission and steering parts, including gears, wheels, steering systems, axles and clutches
- Suspension and braking parts, including brake and brake assemblies, brake linings, shock absorbers and leaf springs
- Lithium-ion batteries for use in electric or hybrid electric vehicles
Rule 86(l) — Non-Core Auto Components
"Non-core auto components" means auto components other than core auto components.
The 90% OEM Sales Test
What are OEM Sales?
Original Equipment Manufacturer (OEM) sales refer to sales of components to vehicle manufacturers for use in the production of vehicles. OEM sales are distinct from:
- Aftermarket sales (sales of components for replacement or repair)
- Replacement parts sales
- Spare parts sales
Calculation of OEM Sales Percentage
The OEM sales percentage is calculated as:
OEM Sales Percentage = (OEM Sales / Total Turnover) × 100
Where:
- OEM Sales = Sales of components to vehicle manufacturers for use in vehicle production
- Total Turnover = All sales during the relevant tax year
The 90% Threshold
To qualify for the safe harbour:
- At least 90% of the total turnover during the relevant tax year must be in the nature of OEM sales
Practical Application
The 90% threshold must be met for each tax year in which the safe harbour is claimed. If the threshold is not met in any tax year, the safe harbour option may be invalid.
Why the 90% OEM Sales Test Matters
1. Eligibility for Safe Harbour
The 90% OEM sales test is a key eligibility condition for the auto components safe harbour. If the threshold is not met, the safe harbour option is not available.
2. Transfer Pricing Compliance
If the safe harbour is not available, the auto component exporter must undertake a full transfer pricing study and documentation exercise.
3. Tax Certainty
Meeting the 90% OEM sales test provides tax certainty, as the transfer price is automatically accepted by the tax authorities.
4. Audit Risk
Failure to meet the 90% OEM sales test increases the risk of transfer pricing audits and adjustments.
Practical Compliance
1. Monitor OEM Sales
- Track OEM sales separately from other sales
- Maintain records of OEM sales contracts
- Identify customers that qualify as OEMs
2. Calculate OEM Sales Percentage
- Calculate the OEM sales percentage for each tax year
- Ensure the calculation is accurate and documented
- Verify that the threshold is met
3. Maintain Documentation
- Maintain records of OEM sales
- Maintain records of total turnover
- Document the calculation of the OEM sales percentage
4. Exercise Safe Harbour Option
- File Form No. 49 on or before the due date for furnishing the return of income
- Ensure the return of income is furnished on or before the date of filing Form No. 49
5. Monitor Compliance
- Monitor the OEM sales percentage throughout the year
- Take corrective action if the threshold may not be met
- Maintain proper records
Consequences of Non-Compliance
Invalid Option
If the 90% OEM sales test is not met:
- The safe harbour option may be invalid
- The transfer price will be determined under the regular transfer pricing provisions
Penalties
Non-compliance may also result in:
- Penalty under Section 442 for failure to maintain documentation
- Penalty under Section 457 for failure to furnish information
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on auto components export safe harbour. Our direct tax experts help auto component exporters understand the 90% OEM sales test, monitor compliance, and navigate the regulatory framework. We assist in eligibility assessment, Form 49 filing, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on auto components export safe harbour or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex auto components export safe harbour framework requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- Eligibility Assessment: Evaluation of safe harbour eligibility
- OEM Sales Monitoring: Guidance on tracking and calculating OEM sales
- Option Exercise: Assistance with Form No. 49 filing
- Representation: Representation before Transfer Pricing Officers
Contact us for expert legal guidance on your auto components export safe harbour matters.