The data centre services sector has emerged as a critical component of the digital economy. Recognising this, the Income Tax Act, 2025 introduces a dedicated safe harbour for data centre services, with a prescribed operating margin of 15%. Understanding this new provision is essential for data centre operators with international transactions.
The Regulatory Framework
Rule 89 of the Income Tax Rules, 2026 prescribes a safe harbour for provision of data centre services. The operating profit margin declared by the eligible assessee from the eligible international transaction in relation to operating expense must be not less than 15%.
What Are Data Centre Services?
Data centre services means the services provided by a data centre through the use of physical infrastructure including:
- Land, buildings, mechanical electrical power equipment, cooling systems
- Security and information technology infrastructure
- Servers, computers, storage systems, operating systems
- Security solutions, network and associated software platforms
- Networking and other equipment
- Human resource in India
Data Centre Definition
A data centre is a dedicated secure space within a building or centralised location, where computing and networking equipment is concentrated for the purpose of:
- Collecting, storing, processing, distributing
- OR allowing access to large amounts of data
Eligibility Conditions
Eligible Assessee
The safe harbour applies to a person who has exercised a valid option for application of safe harbour rules and has provided data centre services to a foreign company.
Eligible International Transaction
The safe harbour applies to provision of data centre services.
Insignificant Risk
To avail the safe harbour, the assessee must operate with insignificant risk. The foreign company must:
- Not own or operate any of the physical infrastructure or any resources of the specified data centre
- Have all sales to users located in India made through a reseller entity being an Indian company
The 15% Margin
What It Means
The operating profit margin of 15% is the minimum margin that must be declared by the eligible assessee from the eligible international transaction in relation to operating expense incurred. If the declared margin is 15% or higher, the transfer price will be accepted without further scrutiny.
Comparison with IT Services
The data centre safe harbour margin of 15% is slightly lower than the unified IT services margin of 15.5%. This reflects the different cost structures and value-add in data centre operations compared to IT services.
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
- Infrastructure costs
- Power and cooling costs
- Maintenance and security costs
- 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
Tax Holiday and Safe Harbour Interaction
The data centre safe harbour interacts with the tax holiday provisions under Section 147. Deduction under Section 147 shall be available to a Unit in the International Financial Services Centre subject to fulfilment of the conditions contained in that section.
Certification Requirements
The safe harbour requires certification by an accountant confirming:
- The operating profit margin declared is not less than 15%
- The insignificant risk conditions are satisfied
- The services qualify as data centre services
Expert Legal Guidance
Understanding the data centre services safe harbour is essential for data centre operators with international transactions. Anuj Desai & Associates provides expert advisory services on transfer pricing compliance, helping taxpayers assess eligibility, calculate operating margins, and ensure compliance with all safe harbour conditions.