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CBDT amends the Safe Harbour Provisions

Introduction

The Central Board of Direct Taxes (‘CBDT’) has notified the Income-tax (Twenty-Ninth Amendment) Rules, 2023[i] (‘amendments’) to amend the Safe Harbour Rules and address the ambiguities on the tax treatment of loans extended to associated enterprises. The amendments will come into force from 01.04.2024 and provide greater clarity regarding the chargeability of interest rates on ‘intra group loans’ provided to associated non-resident enterprises.


New Definition of Intra Group Loans

The amendments under r. 10TA(f) of the Income Tax Rules, 1961 (‘IT Rules’) have substituted the definition of ‘intra-group loan’ to include loans granted to associated enterprises in any denomination. Previously, only loans granted to wholly owned subsidiaries in Indian Rupees were included in the definition of intra-group loans. The amended definition defines an intra-group loan as loans advanced to an associated enterprise being a non-resident. However, the above definition excludes loans advanced by banks, financial companies, or institutions engaged in lending or borrowing in the ordinary course of their business. It also excludes credit lines or loans extended without any fixed term of repayment.


Omission of CRISIL as a Rating Agency

The amendments have omitted CRISIL[ii] as the designated credit rating agency for the credit rating of an entity in receipt of a loan i.e. the associated enterprise. The amendments define credit rating for the purpose of interest rate determination as a rating assigned to the associated enterprise by a Securities and Exchange Board of India (‘SEBI’) registered and Reserve Bank of India (‘RBI’) accredited credit rating agency for the relevant previous year. Where the associated enterprise has only one credit rating then such credit rating shall be taken as credit rating while when there is more than one such credit rating, the least of such rating shall be taken as its credit rating.


Rate of Interest

The amendments have amended sl. no. 5 in the table of r. 10TD(2A), to include the reference rate of relevant foreign currency instead of the London Inter Bank Offer Rate (‘LIBOR’) of the relevant foreign currency for determination of rate of interest. As per the amendments, the interest rate in relation to eligible international transactions should not be less than the reference rate of the relevant foreign currency as on 30th September of the relevant financial year. The amendments have set the threshold of Rs. 250 crores for the determination of interest rates. Further, the amendments have laid down the parameters for the determination of reference rates.


Analysis

The amendments have addressed the ambiguities regarding the tax treatment of interest on intra-state loans granted to associated enterprises and denominated in foreign currencies. Such a move is expected to reduce the number of protracted litigations which have been arising due to ambiguities around the same. It is anticipated that given the relaxation around safe harbour under the amendments, we may witness an increased number of taxpayers opting for safe harbour provisions. Furthermore, it is expected that such a move would catalyse in improving ease of doing business in India.


End Notes

[i] Vide Notification No. G. S. R. 900(E) dated 19.12.2023.

[ii] Credit Rating Information Services of India Limited: a global analytical company that provides ratings, research, risk and advisory services to various companies and financial institutions. It was the 1st credit rating agency established in India in 1987 and is a subsidiary of S&P Global.


Authored by Huzaifa Salim, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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