SaaS and IT companies operating in India face significant transfer pricing compliance obligations for their cross-border service arrangements. The safe harbour rules under the Direct Tax Code (DTC) 2025 provide a valuable compliance simplification mechanism for eligible IT services providers. This guide analyses the safe harbour margins and provides practical guidance for SaaS and IT companies.
The Safe Harbour Framework for IT 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. The word "shall" makes acceptance mandatory — income-tax authorities have no discretion to recompute the ALP or income once the conditions are met.
Eligible IT Services for Safe Harbour
Rule 88 — Eligible International Transactions
Rule 88 specifies that provision of information technology services consisting of any one or more of the following is an eligible international transaction for safe harbour:
- Software development services
- Information technology enabled services
- Knowledge process outsourcing services
- Contract research and development services wholly or partly relating to software development, with insignificant risk
Rule 86(a) — Information Technology Services
"Information technology services" means the following:
- Software development services
- Information technology enabled services
- Knowledge process outsourcing services
- Contract research and development services wholly or partly relating to software development, with insignificant risk
Rule 86(r) — Software Development Services
"Software development services" mean:
- Business application software and information system development using known methods and existing software tools
- Ancillary or support services for existing systems
- Converting or translating computer languages
- Adding user functionality to application programmes
- Debugging of systems
- Adaptation of existing software
- Preparation of user documentation
Does not include any research and development services whether or not in the nature of contract research and development services.
Rule 86(h) — Information Technology Enabled Services
"Information technology enabled services" means any of the following business process outsourcing services provided mainly with the assistance or use of information technology:
- Back office operations
- Call centres or contact centre services
- Data processing and data mining
- Insurance claim processing
- Legal databases
- Creation and maintenance of medical transcription excluding medical advice
- Translation services
- Payroll
- Remote maintenance or recovery
- Revenue accounting
- Support centres
- Website services
- Data search integration and analysis
- Remote education excluding education content development
- Clinical database management services excluding clinical trials
Does not include any research and development services whether or not in the nature of contract research and development services.
Rule 86(j) — Knowledge Process Outsourcing Services
"Knowledge process outsourcing services" means any of the following business process outsourcing services provided mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills:
- Geographic information system
- Human resources services
- Engineering and design services
- Animation or content development and management
- Business analytics
- Financial analytics
- Market research
Does not include any research and development services whether or not in the nature of contract research and development services.
Safe Harbour Margin
Rule 89(2) — Safe Harbour Margin
The safe harbour margin for provision of IT services where the aggregate operating revenue of such transaction entered into during the tax year does not exceed a sum of two thousand crore rupees is:
Operating profit margin ≥ 15.5%
Eligibility
The safe harbour margin applies where:
- The assessee is an eligible assessee as defined in Rule 87(1)(a)
- The assessee provides IT services with insignificant risk to a non-resident associated enterprise
- The aggregate operating revenue of such transaction does not exceed ₹2,000 crore
Insignificant Risk
Rule 87(2) provides that for identifying an eligible assessee with insignificant risk, the Director General of Income-tax (Systems) shall have regard to the following factors:
- The foreign principal performs most of the economically significant functions involved
- The capital and funds and other economically significant assets are provided by the foreign principal
- The eligible assessee works under the direct supervision of the foreign principal
- The eligible assessee does not assume or has no economically significant realised risks
- The eligible assessee has no ownership right on any intangible generated
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 SaaS company has:
- Operating revenue from international transactions: ₹200 crore
- Operating expenses: ₹170 crore
- Operating profit: ₹30 crore
- Operating profit margin: 30/170 = 17.65%
Since 17.65% > 15.5%, the company meets the safe harbour margin.
Procedure for Safe Harbour
Rule 91 — Procedure for IT Services
Rule 91 prescribes the procedure for safe harbour for IT services:
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First Year Application: The assessee shall furnish Form No. 49 for the first of the five consecutive tax years for which the option is proposed to be exercised, on or before the due date of furnishing of return of income.
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Five-Year Validity: The option for safe harbour, once exercised validly, shall continue to remain in force for a period of five consecutive tax years.
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Threshold Testing: The threshold of ₹2,000 crore of the aggregate operating revenue shall be tested for the first of the five consecutive tax years.
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Acceptance/Rejection: After verification, the assessee shall be intimated within a period of two months from the end of the month in which the option is exercised.
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Withdrawal: The option shall not remain in force in respect of any tax year, if the assessee withdraws the option by furnishing a declaration. Withdrawal shall not be made after the expiry of six months from the end of the first tax year.
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Subsequent Years: The assessee shall, in respect of each of the four consecutive tax years following the first tax year, furnish a statement providing details of eligible transactions, their quantum and profit margins.
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.
No Tax or Low Tax Country
"No tax or low tax country or territory" means a country or territory in which the maximum rate of income-tax is less than 15%.
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 for SaaS Companies
1. Assess Eligibility
- Determine whether the SaaS company is engaged in providing IT services
- Determine whether the services are provided with insignificant risk
- Determine whether the aggregate operating revenue does not exceed ₹2,000 crore
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. Subsequent Years
- Furnish the statement for each of the four consecutive tax years following the first tax year
- Ensure the statement is filed on or before the due date
5. Consider Withdrawal
- If the SaaS company withdraws the safe harbour option, ensure the withdrawal is within six months from the end of the first tax year
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 SaaS and IT companies. Our direct tax experts help companies 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 SaaS and IT companies 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 safe harbour matters.