Rule 89 — Safe harbour for eligible international transactions. Made under s.165 of the Income-tax Act, 2025.
Rule 89 gives effect to Section 165 of the Income-tax Act, 2025. A rule cannot go beyond the section it serves: where the two seem to differ, the section governs.
Sub-rule (1) is the promise: the transfer price declared by an eligible assessee for an eligible international transaction for a tax year shall be accepted by the income-tax authorities if the option exercised is not held invalid under rule 90 and the declared price is in accordance with the circumstances specified in sub-rule (2). Both conditions, not one.
Sub-rule (2) carries the Table of circumstances, nine entries.
Entry 1, provision of information technology services: the declared operating profit margin in relation to operating expense incurred is not less than 15.5%, where the aggregate operating revenue of the transaction during the tax year does not exceed two thousand crore rupees.
Entry 2, intra-group loans denominated in Indian Rupees: the declared interest rate is not less than the one-year marginal cost of funds lending rate of State Bank of India as on the 1st April of the relevant tax year, plus 175 basis points for a credit rating between aaa and A or equivalent, 325 basis points for bbb-, bbb or bbb+ or equivalent, 475 basis points for a rating between bb and B or equivalent, 625 basis points for a rating between C and D or equivalent, and 425 basis points where no credit rating of the associated enterprise is available and the loans to all associated enterprises in Indian Rupees do not exceed one hundred crore rupees in the aggregate as on the 31st March of the relevant tax year.
Entry 3, intra-group loans denominated in foreign currency: the declared interest rate is not less than the reference rate of the relevant foreign currency as on the 30th September of the relevant tax year, plus a spread that depends on both the size of the aggregate lending and the rating. Where the aggregate of loans to all associated enterprises does not exceed the equivalent of two hundred and fifty crore rupees as on the 31st March, the spread is 150 basis points for aaa to A- or equivalent, 300 basis points for bbb+, bbb or bbb- or equivalent, and 400 basis points for bb+ down to D or equivalent, or where the rating is not available. Where the aggregate exceeds that figure, the spread is 150 basis points for aaa to A- or equivalent, 300 basis points for bbb+, bbb or bbb- or equivalent, 450 basis points for bb+ to B- or equivalent, and 600 basis points for C+, C, C-, D or equivalent, or where the rating is not available.
Entry 4, providing corporate guarantee: the declared commission or fee is at a rate not less than 1% per annum on the amount guaranteed.
Entry 5, contract research and development services wholly or partly relating to generic pharmaceutical drugs: operating profit margin in relation to operating expense not less than 24%, where the aggregate operating revenue of the transaction does not exceed three hundred crore rupees.
Entry 6, manufacture and export of core auto components: operating profit margin in relation to operating expense not less than 12%. Entry 7, non-core auto components: not less than 8.5%. Entry 9, provision of data centre services: not less than 15%.
Entry 8, receipt of low value-adding intra-group services: the aggregate amount of such services during the tax year, including a mark-up not exceeding 5%, does not exceed ten crore rupees, and an accountant certifies the method of cost pooling, the exclusion of shareholder costs and duplicate costs from the cost pool, and the reasonableness of the allocation keys used by the overseas associated enterprise.
Sub-rule (3) defines the two terms the loan entries depend on. "Reference rate" is, for the US dollar, 6-month Term Secured Overnight Financing Rate increased by 45 basis points; for the Euro, 6-month Euro Inter Bank Offered Rate; for the UK Pound Sterling, 6-month Term Sterling Overnight Index Average increased by 30 basis points; for the Japanese Yen, 6-month Tokyo Term Risk Free Rate increased by 10 basis points; for the Australian dollar, 6-month Bank Bill Swap Rates; and for the Singapore dollar, 6-month Compounded Singapore Overnight Rate Average increased by 45 basis points. "Credit rating" is the rating assigned to the associated enterprise by a credit rating agency registered with the Securities and Exchange Board of India and accredited by the Reserve Bank of India, applicable for the relevant tax year; where there is only one rating that rating is taken, and where there is more than one, the least of them is taken.
Sub-rule (4) applies sub-rules (1) and (2) for a block period of three tax years commencing from the tax year 2026-2027, continuing for subsequent block periods unless modified. Sub-rule (5) bars any comparability adjustment and any allowance under section 165(3)(a)(ii) to a transfer price accepted under sub-rules (1) and (2). Sub-rule (6) preserves sections 171 and 172 for an international transaction irrespective of the assessee's exercise of the safe harbour option.
Transfer pricing determination under section 165 is expensive for both sides and its outcome is uncertain in advance. The safe harbour offers a bargain: declare a margin, rate or fee at or above a stated floor in a listed transaction, and the authorities accept the declared price without benchmarking. The Table's floors and the revenue caps are the price of that certainty, and sub-rule (5) completes the bargain by shutting out the adjustments that would otherwise follow.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Operating profit margin floor for provision of information technology services | Not less than 15.5% of operating expense incurred | Aggregate operating revenue of the transaction during the tax year does not exceed two thousand crore rupees | Sub-rule (2), Table Sl. No. 1 |
| Revenue cap for the information technology services safe harbour | Two thousand crore rupees | Aggregate operating revenue of the eligible transaction entered into during the tax year | Sub-rule (2), Table Sl. No. 1 |
| Spread over sbi one-year mclr for a rupee intra-group loan, aaa to A rating | 175 basis points | Added to the one-year marginal cost of funds lending rate of State Bank of India as on the 1st April of the relevant tax year; credit rating of the associated enterprise between aaa to A or equivalent | Sub-rule (2), Table Sl. No. 2(i) |
| Spread for a rupee intra-group loan, bbb- to bbb+ rating | 325 basis points | Over the sbi one-year mclr as on 1st April of the relevant tax year | Sub-rule (2), Table Sl. No. 2(ii) |
| Spread for a rupee intra-group loan, bb to B rating | 475 basis points | Over the sbi one-year mclr as on 1st April of the relevant tax year | Sub-rule (2), Table Sl. No. 2(iii) |
| Spread for a rupee intra-group loan, C to D rating | 625 basis points | Over the sbi one-year mclr as on 1st April of the relevant tax year | Sub-rule (2), Table Sl. No. 2(iv) |
| Spread for a rupee intra-group loan where no credit rating is available | 425 basis points | Only where the loan advanced to the associated enterprise, including loans to all associated enterprises in Indian Rupees, does not exceed one hundred crore rupees in the aggregate as on the 31st March of the relevant tax year | Sub-rule (2), Table Sl. No. 2(v) |
| Size threshold that switches the foreign currency loan spread scale | Two hundred and fifty crore rupees equivalent | Aggregate of loans to all associated enterprises as on the 31st March of the relevant tax year | Sub-rule (2), Table Sl. No. 3(a) and (b) |
| Spread over the reference rate for a foreign currency loan, aaa to A- rating | 150 basis points | Over the reference rate of the relevant foreign currency as on the 30th September of the relevant tax year; same spread whether or not the aggregate exceeds two hundred and fifty crore rupees | Sub-rule (2), Table Sl. No. 3(a)(i) and 3(b)(i) |
| Spread over the reference rate for a foreign currency loan, bbb+ to bbb- rating | 300 basis points | Over the reference rate as on the 30th September of the relevant tax year; same spread on both sides of the two hundred and fifty crore rupee threshold | Sub-rule (2), Table Sl. No. 3(a)(ii) and 3(b)(ii) |
| Spread for a foreign currency loan within the two hundred and fifty crore rupee limit, bb+ down to D or unrated | 400 basis points | Aggregate lending does not exceed two hundred and fifty crore rupees equivalent as on 31st March; covers bb+, bb, bb-, B+, B, B-, C+, C, C-, D or equivalent, or where the rating is not available | Sub-rule (2), Table Sl. No. 3(a)(iii) |
| Spread for a foreign currency loan above the limit, bb+ to B- rating | 450 basis points | Aggregate lending exceeds two hundred and fifty crore rupees equivalent as on 31st March | Sub-rule (2), Table Sl. No. 3(b)(iii) |
| Spread for a foreign currency loan above the limit, C+ to D or unrated | 600 basis points | Aggregate lending exceeds two hundred and fifty crore rupees equivalent as on 31st March; also applies where the credit rating is not available | Sub-rule (2), Table Sl. No. 3(b)(iv) |
| Commission or fee floor for providing a corporate guarantee | Not less than 1% per annum on the amount guaranteed | Declared in relation to the eligible international transaction entered into during the tax year | Sub-rule (2), Table Sl. No. 4 |
| Operating profit margin floor for contract research and development relating to generic pharmaceutical drugs | Not less than 24% of operating expense incurred | Aggregate operating revenue of the transaction does not exceed three hundred crore rupees | Sub-rule (2), Table Sl. No. 5 |
| Operating profit margin floor for manufacture and export of core auto components | Not less than 12% of operating expense | No revenue cap is stated for this entry | Sub-rule (2), Table Sl. No. 6 |
| Operating profit margin floor for manufacture and export of non-core auto components | Not less than 8.5% of operating expense | No revenue cap is stated for this entry | Sub-rule (2), Table Sl. No. 7 |
| Mark-up ceiling and value cap for receipt of low value-adding intra-group services | Mark-up not exceeding 5%; aggregate not exceeding ten crore rupees | During the tax year, and with an accountant's certificate on cost pooling, exclusion of shareholder and duplicate costs, and reasonableness of allocation keys | Sub-rule (2), Table Sl. No. 8 |
| Operating profit margin floor for provision of data centre services | Not less than 15% of operating expense | No revenue cap is stated for this entry | Sub-rule (2), Table Sl. No. 9 |
| Additions built into the reference rate for a foreign currency loan | US dollar sofr plus 45 basis points; UK Pound Sterling sonia plus 30 basis points; Japanese Yen torf plus 10 basis points; Singapore dollar sora plus 45 basis points | 6-month tenor in each case; the Euro euribor and the Australian dollar bbsw carry no stated addition | Sub-rule (3)(a) |
| Block period for which the safe harbour applies | Three tax years commencing from the tax year 2026-2027 | Continues to apply for subsequent block periods unless modified | Sub-rule (4) |
Every margin, rate and fee in the Table is a floor, not a target and not a deemed arm's length figure — the entry is satisfied by declaring not less than the stated figure, and declaring more is equally safe. The revenue caps work the other way: exceed two thousand crore rupees of operating revenue in the information technology entry, or three hundred crore rupees in the generic pharmaceutical research entry, and the safe harbour is simply unavailable for that transaction, whatever the margin. In the loan entries the spread is added to a rate fixed on a stated date — 1st April for the rupee mclr, 30th September for the foreign currency reference rate — so the rate does not float with the loan. Two of the entries turn on aggregate lending to all associated enterprises, not the single loan, and where an associated enterprise carries more than one credit rating the least of them is taken under sub-rule (3)(b)(ii). The strongest consequence is in sub-rule (5): once the price is accepted, no comparability adjustment and no allowance under section 165(3)(a)(ii) may be made — the taxpayer forgoes the adjustment as well as escaping it. Sub-rule (6) is the limit of the bargain: sections 171 and 172 continue to apply whether or not the option is exercised.
An eligible assessee provides information technology services to its associated enterprise with aggregate operating revenue of Rs 1,400 crore for the tax year, and declares an operating profit margin of 16% of operating expense. Revenue is within the two thousand crore rupee cap and the margin is above the 15.5% floor, so on a valid option under rule 90 the declared price must be accepted. The same group also lends Rs 80 crore to an unrated associated enterprise in rupees; because the aggregate rupee lending is within one hundred crore rupees as on 31st March, entry 2(v) allows the unrated spread of 425 basis points over the sbi one-year mclr as on 1st April. Had the group's rupee lending stood at Rs 130 crore, entry 2(v) would not be available at all and no other clause of entry 2 fits an unrated borrower.
An eligible assessee meets it when exercising the safe harbour option and in the transfer pricing documentation that shows the declared margin or rate against the Table entry. It surfaces again if the option is held invalid under rule 90, at which point the ordinary determination under section 165 resumes.
the option exercised by the said assessee is not held to be invalid under rule 90
The commission or fee declared in relation to the eligible international transaction entered into during the tax year is at the rate not less than 1% per annum on the amount guaranteed.
No comparability adjustment and allowance under section 165(3)(a)(ii) shall be made to the transfer price declared by the eligible assessee and accepted under sub-rules (1) and (2).