Transfer Pricing Safe Harbour and APA India 2025: Rates, Procedure and Secondary Adjustment Explained

Imagine you run a software development company in India that exports services to your US parent. Every year, your margins are scrutinised. The tax department questions your benchmarks. You spend months defending your method.

Now imagine two alternatives:

These are not theoretical. They are live options under the Income Tax Act 2025 and the Income Tax Rules 2026.

What Is a Safe Harbour?

Section 167(3) defines safe harbour as circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee. The word ‘shall’ is significant – it is not discretionary. If you meet the safe harbour conditions, the tax authority has no choice but to accept your price.

Who Is an Eligible Assessee?

Rule 86(a) defines an ‘eligible assessee’ as a person who:

• Has entered into an eligible international transaction
• Is not under transfer pricing audit for that transaction in any earlier year (unless the previous audit accepted the price)
• Has not received any adverse ruling in connection with the transaction

What Is an Eligible International Transaction? (Rule 88)

1. Provision of IT services (software development, ITES, knowledge process outsourcing, contract R&D relating to software)
2. Advancing intra-group loans
3. Providing corporate guarantees (up to Rs. 100 crore, or above Rs. 100 crore if the AE has adequate-to-highest safety credit rating from a SEBI-registered agency)
4. Contract R&D 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

The following margins apply for the block period of three tax years commencing from 2026-27 (Rule 89(4)):

Reference Rate for Foreign Currency Loans (Rule 89(3))

Key Features of the Safe Harbour Framework

For All Transactions Except IT Services (Rule 90)

1. File Form 49 with the Assessing Officer on or before the due date for filing the return of income under Section 263(1)(c).
2. File the return of income on or before the Form 49 filing date.
3. The AO verifies eligibility and either accepts or questions the option.
4. If the AO doubts eligibility, the matter is referred to the TPO within two months from the end of the month of receiving Form 49.
5. The TPO passes an order within two months of receiving the reference.
6. The assessee can object to a TPO rejection by filing an objection with the Commissioner within 15 days of the TPO order.
7. The Commissioner passes an order within two months of receiving the objection.
8. If no reference or order is passed within these time limits, the safe harbour option is treated as automatically valid.

For IT Services Specifically (Rule 91)

1. File Form 49 electronically with the Director General of Income-Tax (Systems) on or before the return filing due date for the first of the five consecutive years.
2. Verification is done electronically within two months.
3. The assessee is notified of acceptance or rejection. Rejection must be accompanied by reasons.
4. If accepted, the assessee files the return in accordance with safe harbour provisions for each of the five years.
5. For years 2 through 5, the assessee files a statement (not a fresh Form 49) on or before the return due date.
6. The Rs. 2,000 crore revenue threshold is tested only in year 1 of the five-year period.

What Is an APA?

An Advance Pricing Agreement is a written agreement between the taxpayer and the CBDT (with Central Government approval) that pre-determines the ALP for future international transactions, or specifies the method for computing it, before the transactions happen.

Section 168(4): up to five consecutive tax years as specified in the agreement. Section 168(9) – Rollback: up to four preceding tax years. Combined, an APA effectively covers nine years.

Binding Nature: Section 168(5)

Once entered, the APA binds the person who signed it and all income-tax authorities subordinate to the Principal Commissioner or Commissioner. The tax department cannot challenge the ALP or method covered by the APA.

When Does the APA Cease to Bind? Section 168(6)

The APA is not binding if there is a change in law or facts having a bearing on it – for instance, if the Indian entity restructures its business model significantly, or Parliament amends a relevant provision.

APA Declared Void: Sections 168(7) and (8)

If the CBDT finds that the APA was obtained through fraud or misrepresentation of facts, it can declare the APA void ab initio by an order. Consequences:

• All TP provisions apply retrospectively for all years covered by the APA
• The period from the APA date to the void order date is excluded when computing any limitation period
• If the remaining limitation period after this exclusion is less than 60 days, it is extended to 60 days

Effect of APA on Returns and Assessments: Section 169

Where income is modified as a result of an APA, the person shall (or the associated enterprise may) furnish a return or modified return in accordance with the APA. The time limit is three months from the end of the month in which the APA was entered.

If assessment is already complete: the AO passes a fresh order within one year from the end of the financial year in which the modified return was furnished. If assessment is pending: the AO completes it as per the APA; the limitation period is extended by 12 months.

Why Secondary Adjustment Exists

A primary adjustment increases an Indian company’s taxable income. But it only taxes a notional extra income – the money itself remains sitting abroad with the foreign AE. The Indian entity has effectively given an interest-free loan to its foreign AE. Secondary adjustment corrects this. It treats the excess money as a deemed advance given by the Indian entity to its AE, and imputes interest on it.

When Does Secondary Adjustment Apply? Section 170(1)

Threshold: the primary adjustment must be Rs. 1 crore or more.

The Repatriation Deadline: Rule 83(1)

The deadline is 90 days from the relevant trigger date. The trigger date varies depending on how the primary adjustment arose:

Interest Rate on the Deemed Advance: Rule 83(2)

• For INR transactions: SBI 1-year MCLR (as on 1 April of the relevant year) plus 325 basis points
• For foreign currency transactions: Reference rate of the relevant foreign currency (as on 30 September of the relevant year) plus 300 basis points

The Alternative: Pay 18% Tax Instead (Section 170(5))

The assessee can choose to pay additional income tax at 18% on the unrepatriated excess money instead of repatriating it. Once this tax is paid: it is treated as the final payment on that excess money; no further credit can be claimed by anyone; no secondary adjustment under Section 170(1) needs to be made; and no interest under Section 170(4) is charged from the date of payment.

Disclaimer: For informational and educational purposes only. Based on the Income Tax Act 2025 (30 of 2025), Income Tax Rules 2026, and provisions as amended by the Finance Act 2026, current as of June 2026. Does not constitute legal or tax advice.