Safe Harbour Rules and AIF-Linked Service Companies — Do They Apply to Fund Managers?

The safe harbour rules under the Direct Tax Code (DTC) 2025 provide a valuable compliance simplification mechanism for eligible taxpayers. However, for AIF-linked service companies and fund managers, the applicability of these rules is limited and subject to specific conditions. This guide analyses the safe harbour framework and its relevance to fund management activities.

The Safe Harbour Framework Under the DTC

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.

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.

The Safe Harbour Framework Under Rules 86–102

The safe harbour framework under the Income-tax Rules, 2026 covers three distinct streams:

1. Stream 1 — Safe Harbour for International Transactions (Rules 86–93)
2. Stream 2 — Safe Harbour for Specified Domestic Transactions (Rules 94–98)
3. Stream 3 — Safe Harbour for Income Attribution — Business & Profession (Rules 99–102)

Eligible International Transactions for Safe Harbour

Rule 88 — Eligible International Transactions

Rule 88 specifies the eligible international transactions for safe harbour:

1. Provision of information technology services consisting of:

   • Software development services
   • Information technology enabled services
   • Knowledge process outsourcing services
   • Contract research and development services wholly or partly relating to software development

2. Advancing of intra-group loans

3. Provision of corporate guarantees

4. Provision of contract research and development services relating to generic pharmaceutical drugs

5. Manufacture and export of core auto components

6. Manufacture and export of non-core auto components

7. Receipt of low value-adding intra-group services

8. Provision of data centre services

Safe Harbour Margins

Rule 89(2) prescribes the following safe harbour margins:

Do Safe Harbour Rules Apply to AIF Managers?

The Short Answer — Generally No

AIF management fee arrangements are not explicitly covered by the safe harbour rules. The safe harbour framework primarily covers IT services, manufacturing, loans, guarantees, R&D, and data centre services. Fund management services do not fall within any of these categories.

Potential Exceptions

Low Value-Adding Intra-Group Services

Rule 86(k) defines "low value-adding intra-group services" as services that:

• Are in the nature of support services
• Are not part of the core business of the multinational enterprise group
• Are not in the nature of shareholder services or duplicate services
• Neither require the use of unique and valuable intangibles nor lead to the creation of unique and valuable intangibles
• Neither involve the assumption nor control of significant risk
• Do not have reliable external comparable services

However, the definition excludes:

• Research and development services
• Manufacturing and production services
• Information technology (software development) services
• Knowledge process outsourcing services
• Business process outsourcing services
• Sales, marketing and distribution activities
• Financial transactions

AIF management fees typically involve:

• Core business activities (investment management, research, advisory)
• Unique intangibles (brand, reputation, investment expertise)
• Significant risks (investment risk, market risk)

Therefore, AIF management fees would not qualify as low value-adding intra-group services.

IT Services Safe Harbour

If an AIF manager also provides IT services (e.g., software development, IT-enabled services) to its associated enterprises, those specific services may qualify for the safe harbour rules. However, the management fees themselves would not be covered.

Conditions for Safe Harbour

Even if an AIF manager's services could potentially fall within a covered category, the safe harbour rules require:

1. Valid Option: The assessee must exercise a valid option for application of safe harbour rules
2. Eligible Assessee: The assessee must be an eligible assessee
3. Eligible International Transaction: The transaction must be an eligible international transaction
4. Compliance with Prescribed Margins: The declared operating profit margin must meet the prescribed threshold

Safe Harbour for Specified Domestic Transactions

Rule 95 — Eligible Assessee

The safe harbour for specified domestic transactions applies to:

• A Government company engaged in the business of generation, supply, transmission or distribution of electricity
• A co-operative society engaged in the business of procuring and marketing milk and milk products

AIF managers are not covered by this safe harbour.

Rule 96 — Eligible Specified Domestic Transaction

The eligible specified domestic transactions are:

• Supply of electricity
• Transmission of electricity
• Wheeling of electricity
• Purchase of milk or milk products by a co-operative society from its members

AIF-related transactions are not covered.

Safe Harbour for Income Attribution

Rule 99 — Eligible Business

The safe harbour for income attribution applies to:

• A foreign company engaged in the business of diamond mining
• A foreign company which stores components in a warehouse in a custom bonded area for providing them to a contract manufacturer

AIF managers are not covered by this safe harbour.

What This Means for AIF Managers

No Safe Harbour Relief

AIF managers must typically undertake a full transfer pricing study and documentation exercise for their cross-border fee arrangements. There is no safe harbour shortcut.

Documentation Obligations Continue

Section 171 documentation requirements apply irrespective of whether the assessee exercises an option for safe harbour. This means AIF managers must maintain contemporaneous transfer pricing documentation even if they explore safe harbour for other transactions.

Audit Risk

Without safe harbour protection, AIF managers face a higher risk of transfer pricing audits and adjustments.

Practical Compliance Strategies

1. Full Transfer Pricing Study

Conduct a comprehensive transfer pricing study documenting:

• Functional analysis
• Asset analysis
• Risk analysis
• Comparability analysis
• Method selection and application

2. Benchmarking

Identify reliable comparables for AIF management fees:

• Industry surveys (e.g., Preqin, Hedge Fund Research)
• Publicly available data on fund management fees
• Third-party fee arrangements

3. Documentation

Maintain robust documentation as required under Section 171:

• Description of the ownership structure
• Profile of the multinational group
• Description of the business and industry
• Nature and terms of the international transaction
• Functional analysis
• Method selection and application

4. Advance Pricing Agreement

Consider an APA under Sections 168–169 for certainty on the arm's length price of management fees.

5. Consider Restructuring

If safe harbour is a priority, consider restructuring services to fall within covered categories (e.g., IT services, data centre services). However, this must be done with genuine commercial substance to avoid GAAR challenges.

Expert Legal Guidance

Anuj Desai & Associates provides comprehensive legal advisory services on safe harbour rules and transfer pricing for AIF managers. Our direct tax experts help fund managers evaluate safe harbour eligibility, develop compliant TP documentation, and navigate the regulatory framework. We assist in structure review, documentation preparation, and representation before income-tax authorities.

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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.

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Need Expert Legal Guidance?

Navigating the complex safe harbour and transfer pricing framework for AIF managers requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:

• Safe Harbour Assessment: Evaluation of safe harbour eligibility
• TP Study Preparation: Assistance with transfer pricing documentation
• Benchmarking: Guidance on comparable selection and analysis
• APA: Assistance with advance pricing agreements

Contact us for expert legal guidance on your safe harbour and transfer pricing matters.

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