The safe harbour regime under the Income Tax Act, 2025 provides significant benefits for eligible taxpayers. However, these benefits are not available for transactions with entities located in certain jurisdictions. Understanding the exclusions is essential for taxpayers to avoid unexpected compliance issues.
The Regulatory Framework
Safe harbour rules do not apply in respect of eligible international transactions entered into with an associated enterprise located in:
- Any country or territory notified under Section 176
- A no-tax or low-tax country or territory
Notified Jurisdictional Areas
Section 176 Notifications
The Central Government may, by notification, specify any country or territory outside India as a notified jurisdictional area in relation to transactions entered into by any assessee, having regard to the lack of effective exchange of information with such jurisdiction.
Consequences of Notification
When a jurisdiction is notified:
- All parties to the transaction are deemed to be associated enterprises
- Any transaction is deemed to be an international transaction
- No deduction is allowed for payments to financial institutions in notified jurisdictions unless authorisation is furnished
- Tax deduction at source applies at the highest rate (up to 30%)
Safe Harbour Exclusion
Safe harbour rules do not apply to transactions with associated enterprises in notified jurisdictional areas. This exclusion ensures that the simplified safe harbour regime is not used to facilitate tax avoidance through jurisdictions with poor information exchange.
No-Tax or Low-Tax Jurisdictions
Definition
A no-tax or low-tax country or territory is one in which the maximum rate of income-tax is less than 15%.
Safe Harbour Exclusion
Safe harbour rules do not apply to transactions with associated enterprises in no-tax or low-tax jurisdictions. This exclusion prevents taxpayers from using the safe harbour to shift profits to low-tax jurisdictions.
Practical Implications
If an associated enterprise is located in a jurisdiction with a corporate tax rate of less than 15%, the safe harbour cannot be used for transactions with that entity.
Identifying Excluded Jurisdictions
Official Lists
Taxpayers should refer to:
- Official notifications issued under Section 176
- The list of no-tax or low-tax jurisdictions maintained by the CBDT
Self-Assessment
Taxpayers must self-assess whether their associated enterprise is located in an excluded jurisdiction. This requires:
- Understanding the tax rates in the jurisdiction
- Monitoring changes in tax rates
- Maintaining documentation of the assessment
Consequences of Non-Compliance
If Safe Harbour is Claimed Despite Exclusion
If a taxpayer claims safe harbour benefits for a transaction with an excluded jurisdiction:
- The safe harbour will not apply
- The transaction will be subject to regular transfer pricing scrutiny
- Penalties may be imposed for incorrect claims
Documentation Requirements
Taxpayers should maintain documentation:
- Confirming the tax rate in the jurisdiction
- Confirming whether the jurisdiction is notified under Section 176
- Supporting the claim for safe harbour (if applicable)
Practical Considerations
For Taxpayers with Global Operations
- Identify all associated enterprises and their jurisdictions
- Assess whether any are in excluded jurisdictions
- Plan transfer pricing strategies accordingly
For Tax Practitioners
- Advise clients on safe harbour eligibility
- Help clients assess jurisdiction status
- Assist with documentation
Expert Legal Guidance
Understanding safe harbour exclusions is essential for taxpayers with international transactions. Anuj Desai & Associates provides expert advisory services on transfer pricing compliance, helping taxpayers assess jurisdiction status, maintain documentation, and ensure compliance with safe harbour conditions.