What is safe harbour?
Safe harbour rules refers to transfer pricing rules defined in Section 92CB that permits the tax authorities to accept a taxpayer’s declared transfer price for international transactions with related parties without detailed scrutiny, provided the transactions meet specific criteria. This arrangement provided certainty to tax-payers and reduces litigation.
Detailed explanation: In transactions between related entities of MNCs, the entitiy must prove to the IT department that transactions with related parties are set at prices that are at “arm’s length.” But in practice, this area often leads to disputes with tax authorities. This is exactly where safe harbour rules comes into play.
Safe harbour rules provided pre‑defined margin for companies falling with certain threshold. If a company’s declared margin matches or exceeds the prescribed safe harbour margin, the transaction is deemed to be at arm’s length and the tax authorities automatically accept it- no transfer pricing audit, no litigation, no questioning of comparables or methodology whatsoever.
Safe harbour is optional. Once a company opts for safe harbour regime, it can continue under it for up to 5 consecutive years, at the company’s discretion. Entity can choose to stay in for the 5 years or exit after a year. Whatever the choice is, the benefit applies only for the relevant year(s) in which the company has opted in.
Note that, once opted in, they must apply the rules consistently to all covered transactions for that year. Other transactions that fall outside the scope of safe harbour shall follow normal TP rules.
So, what are Key Amendments Announced in 2026 wrt Safe harbour rules?
Government has announced key amendments to the Transfer Pricing Safe Harbour Rules, with aim to simplify compliance, reduce litigation and to boost India's global IT and data center business. The changes are detailed as follows:
With respect to IT Businesses:
- Consolidation of Service categories:
- Revised Threshold Limit:
- Automated Approval:
- Validity:
Previously, there were Separate margins for IT services, ITeS, KPO, and contract R&D service and the acceptable margin set under the rules varied from 17% to 24%. This amendment merges the 4 services into one umbrella category 'IT services' and a single safe harbour margin rate of 15.5% of operating expenses, is fixed as margin for that category.
The maximum value of international transactions with Associated enterprises in a financial year, to be eligible for simplified safe harbour rules is increased from ₹300 crore to ₹2,000 crore. Note that the Domestic/internal transactions are excluded from this limit. The higher threshold allows even mid-sized and large IT companies to opt for this, thereby paving way for minimising transfer pricing litigations.
The approval is now automated, meaning the Safe harbour requests shall be approved through an automated, rule-driven process without needing an officer to examine them, provided the company meets the new threshold and margin criteria.
Rule 91 specifically retains a longer safe harbour period/window of 5 years for IT services. Meaning, entities opting for IT services safe harbour regime CAN continue under it (at the company’s choice) for up to 5 consecutive years, thereby providing long-term relief. They can choose to stay in or even exit after a year, in which case the benefit applies only for the chosen period.
New Safe Harbour Rules for Data Centres:
A new safe harbour scheme dedicated to Resident Data centers engaged in providing 'physical infrastructure-based' data center services to related foreign company engaged in providing global cloud services, has been introduced. 15% on operating cost shall be considered as acceptable safe harbour margin for such services.
What do you mean by Infrastructure-based services? Refers to provision of foundational/Key physical infrastructure, necessary to operate IT hardware securely and reliably. Includes provision of secure space, power supply and management, cooling Systems, physical security, environmental controls & monitoring.
Exclusions: Rules explicitly states that "data hosting services" are not covered under this category.
Warehousing
A safe harbour profit margin at 2% of invoice value of goods stored is introduced for Non-residents engaged in the business of providing service of Storing/ Warehousing Imported components of its clients in a bonded warehouse in India.
Note that, this is in contrast with IT services safe harbour, where the margin is 15.5% of operating expenses, not invoice value.
If the declared margin meets or exceeds the 2% of invoice value of goods stored, transaction is automatically deemed to be at arm’s length and tax authorities will accept the pricing without further scrutiny.
Block Period Revision:
One of the key change is with respect to the block period ie Reduction in duration for most categories. Previously, safe harbour rules generally applied for a 5‑year block period, giving taxpayers a longer window of certainty. From the 2026‑27 tax year onward, this has been revised as follows:
- IT services (Rule 91):
Retain a mandatory 5‑year block period. This reflects the government’s intention to provide longer certainty period for IT sector which is one of the India’s largest revenue earning segment.
Probably, the consolidation of IT, ITeS, KPO, and software R&D into one “IT services” bucket might have also been done with this objective of making administration easier ie longer block period for the whole block is feasible.
- All other categories including new ones like Data Centres and Warehousing) are now limited to a 3‑year block period, to allow more frequent recalibration of margins and thresholds.
Withdrawal restrictions:
Previously, there was no explicit withdrawal restriction in the safe harbour framework. Taxpayers could opt in or opt out of safe harbour without a formal bar on re‑entry.
The 2026 amendments introduced a new restriction: once a taxpayer withdraws, they cannot re‑enter for the remaining block period (5 years for IT services, 3 years for other categories).
Fast‑track APAs:
For Companies not opting for safe harbour, the alternative route is the Advance Pricing Agreement (APA) program. These are Unilateral agreements entered between the taxpayer and the Indian tax authority (CBDT). Since they are unilateral, they don’t bind foreign tax authorities where the related party is located.
The 2026 amendment specifically introduced a fast‑track mechanism limited to IT companies (those not opting for safe harbour), mandating a statutory deadline of maximum 2 years, for finalising the APAs. That’s the special carve‑out. Previously, APAs often took 3–4 years or more to conclude, with no guaranteed timeline.