While safe harbour rules are typically associated with international transactions, the Income Tax Act, 2025 extends the safe harbour regime to specified domestic transactions in certain sectors. The electricity sector and dairy co-operatives are two key areas where safe harbour rules provide certainty for domestic transfer pricing.
The Regulatory Framework
Eligible Assessee
An eligible assessee for specified domestic transaction safe harbour is a person who has exercised a valid option for application of safe harbour rules and is:
- 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
Eligible Specified Domestic Transaction
The safe harbour applies to:
- Supply of electricity
- Transmission of electricity
- Wheeling of electricity
- Purchase of milk or milk products by a co-operative society from its members
Electricity Sector Safe Harbour
Applicable Transactions
- Supply of electricity
- Transmission of electricity
- Wheeling of electricity
Safe Harbour Condition
The tariff in respect of supply of electricity, transmission of electricity, wheeling of electricity must be determined or the methodology for determination of the tariff must be approved by the Appropriate Commission in accordance with the provisions of the Electricity Act, 2003.
Appropriate Commission
"Appropriate Commission" means the Central Electricity Regulatory Commission, State Electricity Regulatory Commission, or Joint Electricity Regulatory Commission, as applicable.
Rationale
The electricity sector is regulated, with tariffs determined by regulatory commissions. The safe harbour recognises that regulated tariffs are, by definition, arm's length and should not be subject to transfer pricing scrutiny.
Dairy Co-operative Safe Harbour
Applicable Transaction
Purchase of milk or milk products by a co-operative society from its members.
Safe Harbour Condition
The price of milk or milk products is determined at a rate which is fixed on the basis of the quality of milk, namely, fat content and Solid Not Fat (SNF) content of milk.
Additional Conditions
The rate must be:
- Irrespective of the quantity of milk procured
- Irrespective of the percentage of shares held by the members in the co-operative society
- Irrespective of the voting power held by the members in the society
Transparency Requirement
Such rates must be routinely declared by the co-operative society in a transparent manner and are available in public domain.
Rationale
Dairy co-operatives operate on a member-centric model where pricing is determined by quality parameters. The safe harbour recognises that this pricing model is inherently arm's length.
Procedure
Form 49 Filing
The assessee must furnish Form No. 49 to the Assessing Officer on or before the due date for furnishing the return of income for the relevant tax year.
Verification
The Assessing Officer verifies whether:
- The assessee exercising the option is an eligible assessee
- The transaction is an eligible specified domestic transaction
- The tariff or price is in accordance with the safe harbour conditions
Invalid Option
If the Assessing Officer finds that the option is invalid, an order is passed declaring the option invalid after giving a reasonable opportunity of being heard.
Objection
If the assessee objects to the order, objections may be filed with the Principal Commissioner or Commissioner within fifteen days.
Expert Legal Guidance
Understanding the specified domestic transaction safe harbour is essential for electricity companies and dairy co-operatives. Anuj Desai & Associates provides expert advisory services on transfer pricing compliance, helping taxpayers assess eligibility, exercise options, and ensure compliance with all safe harbour conditions.