Data centre services are a growing sector in India, with significant opportunities for investment and service provision. The Direct Tax Code (DTC) 2025 provides a safe harbour for provision of data centre services, with a prescribed operating profit margin of 15%. This guide analyses the data centre services safe harbour and provides structuring strategies.
The Safe Harbour Framework for Data Centre Services
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.
Data Centre Services Safe Harbour
Rule 88 — Eligible International Transactions
Rule 88 specifies that provision of data centre services is an eligible international transaction for safe harbour. The safe harbour for data centre services is applicable irrespective of the revenue threshold.
Rule 86(f) — Definition of 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 equipments, cooling system
- Security and information technology infrastructure including servers, computers, storage systems, operating systems, security solutions, network and associated software platforms, networking and other equipment
- Human resource in India
Rule 86(e) — Definition of Data Centre
A "data centre" means 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.
Rule 89(2) — Safe Harbour Margin
Rule 89(2) (Table: Sl. No. 9) provides the safe harbour margin for provision of data centre services:
Operating profit margin ≥ 15%
Eligibility Conditions
1. Eligible Assessee
Rule 87(1)(g) provides that the eligible assessee includes a person who has provided data centre services to a foreign company.
2. Data Centre Services
The assessee must be providing data centre services as defined in Rule 86(f).
3. Applicable Threshold
Unlike IT services, there is no revenue threshold for data centre services safe harbour — it applies regardless of the operating revenue.
Calculating Operating Profit Margin
Operating Revenue
Rule 86(o) defines "operating revenue" as the revenue earned by the assessee in the tax year in relation to the international transaction during the course of its normal operations, but does not include:
- Interest income
- Income arising on account of foreign currency fluctuations
- Income on transfer of assets or investments
- Refunds relating to income-tax
- Provisions written back
- Extraordinary incomes
- Other incomes not relating to normal operations
Operating Expense
Rule 86(n) defines "operating expense" as the costs incurred in the tax year by the assessee in relation to the international transaction during the course of its normal operations, but does not include:
- Interest expense
- Provision for unascertained liabilities
- Pre-operating expenses
- Loss arising on account of foreign currency fluctuations
- Extraordinary expenses
- Loss on transfer of assets or investments
- Expense on account of income-tax
- Other expenses not relating to normal operations
Operating Profit Margin
Operating profit margin is the ratio of operating profit (operating revenue in excess of operating expense) to operating expense, expressed in terms of percentage.
Illustration
If a data centre service provider has:
- Operating revenue from international transactions: ₹100 crore
- Operating expenses: ₹85 crore
- Operating profit: ₹15 crore
- Operating profit margin: 15/85 = 17.65%
Since 17.65% > 15%, the provider meets the safe harbour margin.
Structuring Strategies for Data Centre Services
1. Service Provider Structure
- Establish an Indian entity to provide data centre services
- Ensure the Indian entity has adequate substance (office, employees, equipment)
- Ensure the Indian entity bears the risks associated with data centre operations
2. Contractual Arrangements
- Enter into a service agreement with the foreign company
- Clearly define the scope of services
- Ensure the service fee is at arm's length
3. Cost Management
- Manage operating expenses to ensure the 15% margin is met
- Identify and allocate costs appropriately
- Consider cost-sharing arrangements
4. Documentation
- Maintain documentation as required under Section 171
- Document the commercial rationale for the structure
- Document the transfer pricing analysis
5. Safe Harbour Exercise
- 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
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
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 data centre service provider is eligible for safe harbour
- Determine whether the services qualify as data centre services
- Ensure the services are provided to a foreign company
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 15% 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 data centre services safe harbour. Our direct tax experts help data centre service providers 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 data centre services safe harbour or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex data centre services 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
- Option Exercise: Assistance with Form No. 49 filing
- Documentation: Assistance with transfer pricing documentation
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your data centre services matters.