The auto components manufacturing sector is a significant contributor to India's economy. The safe harbour regime under the Income Tax Act, 2025 provides clear benchmarks for auto component manufacturers, distinguishing between core and non-core components with different operating profit margins. Understanding this distinction is essential for manufacturers with international transactions.
The Regulatory Framework
Rule 89 of the Income Tax Rules, 2026 prescribes the safe harbour for manufacture and export of auto components. The regime distinguishes between:
- Core Auto Components: 12% operating profit margin
- Non-Core Auto Components: 8.5% operating profit margin
Core Auto Components
Definition
Core auto components are defined as:
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Engine and Engine Parts: Piston and piston rings, engine valves and parts, cooling systems and parts, power train components
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Transmission and Steering Parts: Gears, wheels, steering systems, axles, and clutches
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Suspension and Braking Parts: Brake and brake assemblies, brake linings, shock absorbers, and leaf springs
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Lithium-Ion Batteries: For use in electric or hybrid electric vehicles
Margin
Core auto components manufacturing attracts a safe harbour margin of 12% operating profit margin on operating expense.
Non-Core Auto Components
Definition
Non-core auto components are auto components other than core auto components.
Margin
Non-core auto components manufacturing attracts a safe harbour margin of 8.5% operating profit margin on operating expense.
Eligibility Conditions
OEM Sales Requirement
The safe harbour applies where 90% or more of total turnover during the relevant tax year is in the nature of original equipment manufacturer sales. This ensures that the safe harbour is targeted at manufacturers who supply directly to vehicle manufacturers.
Export Requirement
The safe harbour applies to the manufacture and export of auto components. The components must be exported to a non-resident associated enterprise.
Operating Profit Margin
Definition
Operating profit margin in relation to operating expense means the ratio of operating profit, being the operating revenue in excess of operating expense, to the operating expense expressed in terms of percentage.
Operating Expense
Operating expense includes costs incurred in the tax year in relation to the international transaction during the course of normal operations, including:
- Employee costs
- Raw material costs
- Manufacturing overheads
- Depreciation and amortisation
- Other operating expenses
Operating Revenue
Operating revenue includes revenue earned in the tax year in relation to the international transaction during the course of normal operations, excluding:
- Interest income
- Income on account of foreign currency fluctuations
- Income on transfer of assets or investments
- Extraordinary incomes
- Other incomes not relating to normal operations
Certification Requirements
The safe harbour for auto components manufacturing requires certification by an accountant confirming:
- The operating profit margin declared is not less than the prescribed margin
- 90% or more of total turnover is in the nature of OEM sales
- The components qualify as core or non-core as claimed
Expert Legal Guidance
Understanding the auto components safe harbour is essential for manufacturers with export transactions. Anuj Desai & Associates provides expert advisory services on transfer pricing compliance, helping taxpayers assess eligibility, classify components correctly, and ensure compliance with all safe harbour conditions.