Auto component manufacturers in India face significant transfer pricing compliance obligations for their export transactions. The safe harbour rules under the Direct Tax Code (DTC) 2025 provide a valuable compliance simplification mechanism for eligible auto component manufacturers, with distinct margin thresholds for core and non-core components. This guide explains the core vs non-core classification, the safe harbour margins, and the 90% OEM sales test.
The Safe Harbour Framework for Auto Components
Section 167 — Statutory Basis
Section 167(1) provides that the determination of income referred to in section 9(2) or arm's length price under section 165 or 166 shall be subject to safe harbour rules. Section 167(2) empowers the Board to make rules for safe harbour.
Section 167(3) — Definition of Safe Harbour
Section 167(3) defines "safe harbour" as circumstances in which the income-tax authorities shall accept the transfer price or income declared by the assessee without detailed scrutiny.
Core Auto Components — Definition
Rule 86(c) — Core Auto Components
"Core auto components" means:
- Engine and engine parts: piston and piston rings, engine valves and parts, cooling systems and parts, power train components
- Transmission and steering parts: gears, wheels, steering systems, axles and clutches
- Suspension and braking parts: brake and brake assemblies, brake linings, shock absorbers and leaf springs
- Lithium-ion batteries for use in electric or hybrid electric vehicles
Significance of Lithium-Ion Batteries
The definition of core auto components has been expanded to encompass lithium-ion batteries for use in electric and hybrid electric vehicles. This reflects the growing importance of electric vehicles in India's automotive landscape and ensures that EV component manufacturers can benefit from the higher safe harbour margin.
Non-Core Auto Components — Definition
Rule 86(l) — Non-Core Auto Components
"Non-core auto components" means auto components other than core auto components. This classification is critical for determining safe harbour margins in the automobile sector.
Examples of Non-Core Components
- Interior components (seats, dashboard, trim)
- Exterior components (bumpers, body panels)
- Electrical and electronic components
- Fasteners and hardware
- Rubber and plastic components
- Aftermarket components
Safe Harbour Margins
Rule 89(2) — Safe Harbour Margins
The safe harbour margins for auto components are:
| Category | Safe Harbour Margin | OEM Sales Requirement |
|---|---|---|
| Core Auto Components | 12% of operating expense | 90%+ of turnover must be OEM sales |
| Non-Core Auto Components | 8.5% of operating expense | 90%+ of turnover must be OEM sales |
Operating Profit Margin
The margin is calculated as the operating profit margin in relation to operating expense.
The 90% OEM Sales Test
OEM Sales Definition
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) and spare parts sales.
Calculation
OEM Sales Percentage = (OEM Sales / Total Turnover) × 100
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.
Comparison of Core vs Non-Core
| Aspect | Core Components | Non-Core Components |
|---|---|---|
| Margin | 12% of operating expense | 8.5% of operating expense |
| Examples | Engines, transmissions, brakes, lithium-ion batteries | Interior, exterior, electrical components |
| Strategic Importance | Higher technological content | Lower technological content |
| OEM Sales Requirement | 90%+ | 90%+ |
Procedure for Safe Harbour
Rule 90 — General Procedure
- Form No. 49: The assessee shall furnish Form No. 49 to the Assessing Officer on or before the due date for furnishing the return of income
- Return of Income: The return of income for the relevant tax year is to be furnished on or before the date of filing Form No. 49
- Verification: The Assessing Officer shall verify whether the assessee is an eligible assessee and the transaction is an eligible international transaction
- Reference to Transfer Pricing Officer: If the Assessing Officer doubts the validity of the option, he shall make a reference to the Transfer Pricing Officer
- Order: The Transfer Pricing Officer shall, by order in writing, declare the option to be invalid or valid
Practical Compliance
1. Classify Components
- Determine whether the auto components manufactured are core or non-core
- For lithium-ion batteries, verify they are used in electric or hybrid vehicles
2. Monitor OEM Sales
- Track OEM sales separately from other sales
- Maintain records of OEM sales contracts
- Identify customers that qualify as OEMs
3. 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
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
Consequences of Non-Compliance
Invalid Option
If the 90% OEM sales test is not met or the margin threshold is not satisfied:
- The safe harbour option may be invalid
- The transfer price will be determined under the regular transfer pricing provisions
Penalties
Non-compliance may 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 safe harbour. Our direct tax experts help auto component manufacturers understand the core vs non-core classification, 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 safe harbour or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex auto components 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 safe harbour matters.