CBDT notifies revised definition of the terms ‘intra group loan’ & ‘operating expenses/income’ and amends ALP determination rule 10TD to streamline certain transfer pricing issues, vide Income Tax (29th Amendment) Rules, 2023 (Notification 104/2023).
Let’s take a closer look at the key changes in the Safe Harbour Rules for international transactions, i.e. amendments in rules 10TA and 10TD including insertion of explanation in sub-rule (2A) of rule 10TD:
1. Revised Scope of ‘Intra-group Loans’ under Rule 10TA
The definition of “intra-group loan” under Rule 10TA has been revised effective from 19/12/2023. It now means a loan advanced to an associated enterprise being a non-resident, where the loan:
a) Is not advanced by a financial company, bank, financial institution or an enterprise engaged in lending/borrowing in the normal course of business.
b) Does not include credit lines or any other loan facility without a fixed repayment term.
The Safe Harbour Rules have been expanded to include loans to non-wholly owned non-resident AEs as against existing restrictions of loans given to non-resident wholly-owned subsidiaries only. Also the rules related to the prescribed safe harbour interest rates for rupee and foreign currency loans have been aligned.
2. Changes in Rule 10TD for ALP Determination
Rule 10TD has been amended effective from 01/04/2024 to revise the basis for determining arm’s length price for certain transactions:
a) For advancing intra-group loans denominated in foreign currency, the interest rate should not be less than the specified reference rate plus a markup based on the borrower’s credit rating and the total loan amount advanced.
b) The reference rates have been specified for various currencies like USD SOFR, Euro EURIBOR, GBP SONIA, JPY TORF, AUD BBSW, and SGD SORA.
c) The credit rating criteria have been streamlined by allowing credit ratings from SEBI registered and RBI accredited rating agencies, in addition to CRISIL, to broaden the scope.
3. Revised Definition of Operating Revenue/Expenses
The definition of operating revenue/expenses under Rule 10TA has been amended effective from 19/12/2023 to exclude income/loss on transfer of assets or investments other than depreciable assets.
Previously, any gains or losses from the transfer (sale, disposal, etc.) of assets, whether depreciable or non-depreciable, were excluded from operating expenses or revenues.
Now, there has been a change in treatment. For depreciable assets where depreciation was included as an operating expense, any gains or losses on the transfer of those assets will be included in operating expenses or revenues, respectively.
In other words, for certain depreciable assets, the gains/losses on their transfer are now being categorized as operating items rather than being excluded from operating expenses/revenues.
Conclusion
These amendments seem focused on strengthening the transfer pricing regulations, especially concerning intra-group financing transactions. The revised methodology and reference rates are expected to bring more clarity and enforceability in determining arm’s length pricing for such loans. Overall, it aims to curb tax leakages and ensure greater compliance with transfer pricing norms.
Taxpayers engaged in intra-group financing or similar transactions would need to evaluate the impact of these changes and realign their policies accordingly. As always, a holistic transfer pricing study with detailed economic analysis would be crucial to mitigate potential tax risks.
CBDT Income Tax Notification 104/2023 dated 19/12/2023: Rules 10TA, 10TD amended to Streamline ALP Determination/Safe Harbour Rules