Auto component manufacturers in India face significant transfer pricing compliance obligations. 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 safe harbour margins, the distinction between core and non-core components, and the compliance requirements.
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. The word "shall" makes acceptance mandatory — income-tax authorities have no discretion to recompute the ALP or income once the conditions are met.
Safe Harbour — A Brief Introduction
Safe Harbour Rules (SH Rules) lay down prescribed margins or pricing benchmarks, which, if followed by eligible taxpayers, are automatically accepted by tax authorities without extensive scrutiny. The SH Rules provide a structured process for businesses to simplify transfer pricing in international transactions and help companies avoid disputes with tax authorities.
Core vs Non-Core Auto Components
Core Auto Components — Definition
Core auto components include:
- 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
Non-Core Auto Components
All other auto components fall under non-core auto components. This classification is critical for determining safe harbour margins in the automobile sector.
Rationale for the Distinction
This distinction finds place in safe harbour rules which prescribe different profitability thresholds for the two kinds of components. The distinction has also been endorsed by Indian jurisprudence.
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.
Eligibility Conditions
1. Eligible Assessee
The eligible assessee must be engaged in the manufacture and export of core or non-core auto components.
2. OEM Sales Requirement
Ninety percent or more of the total turnover during the relevant tax year must be in the nature of original equipment manufacturer (OEM) sales.
3. Eligible International Transaction
The manufacture and export of core or non-core auto components is an eligible international transaction for safe harbour purposes.
4. Revenue Threshold
While the safe harbour rules do not specify a revenue cap for auto components, the OEM sales requirement must be met.
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 furnishing of 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
- Objection: If the assessee objects to the order, he may file his objections with the Commissioner
Validity Period
The safe harbour regime applies in three-year blocks from FY 2026-27.
Exclusions
Rule 92 — Non-Application
Nothing contained in the safe harbour rules shall apply in respect of eligible international transactions entered into with an associated enterprise located in any country or territory notified under Section 176, or in a no tax or low tax country or territory.
Rule 93 — Mutual Agreement Procedure Not to Apply
Where transfer price in relation to an eligible international transaction is accepted under Section 167, the assessee shall not be entitled to invoke mutual agreement procedure under an agreement for avoidance of double taxation.
Practical Compliance
1. Assess Eligibility
- Determine whether the auto components manufactured are core or non-core
- Determine whether 90%+ of turnover is OEM sales
- Ensure the assessee is an eligible assessee
2. Exercise 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
3. Maintain Documentation
- Even with safe harbour, documentation under Section 171 must be maintained
- Ensure the documentation is complete and accurate
4. Monitor Compliance
- Monitor operating profit margin to ensure it meets the prescribed threshold
- Adjust pricing if necessary
- Maintain proper records
Consequences of Non-Compliance
Invalid Option
If the option is declared 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 safe harbour rules for auto components manufacturers. Our direct tax experts help manufacturers understand the safe harbour conditions, exercise options, 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 safe harbour rules or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex safe harbour framework for auto components manufacturers requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- Eligibility Assessment: Evaluation of safe harbour eligibility
- Option Exercise: Assistance with Form No. 49 filing
- Documentation: Assistance with transfer pricing documentation
- Representation: Representation before Transfer Pricing Officers
Contact us for expert legal guidance on your safe harbour matters.