India’s IT and IT-enabled services sector is now close to full transfer pricing certainty. Only about 100 companies remain outside the expanded safe harbour framework, and a majority of these are already covered under advance pricing agreements. This was stated by Ravi Agrawal, chairman of the Central Board of Direct Taxes, in an interaction with Moneycontrol.
Out of the roughly 100 companies outside the safe harbour, nearly 60 already have APAs in place. The remaining firms can opt for the APA route, which the tax administration has committed to conclude within a period of two years. When read together, these measures ensure that almost the entire IT and digital services sector has access to a defined tax certainty mechanism.
What an Advance Pricing Agreement Provides
An advance pricing agreement is a pre-approved arrangement between a taxpayer and the income tax authorities that determines the transfer pricing methodology for transactions between associated enterprises for a specified period.
APAs offer upfront clarity on profit attribution, reduce exposure to transfer pricing disputes and help companies avoid prolonged litigation. From the administration’s perspective, they provide revenue predictability and significantly reduce audit and dispute resolution efforts.
In the IT and IT-enabled services sector, where services are frequently rendered to overseas group entities, APAs play a crucial role in addressing recurring disputes on margins and profit allocation.
Effect of Expanded Safe Harbour Rules
The sharp reduction in the number of companies exposed to transfer pricing scrutiny follows changes announced in the Union Budget. The safe harbour framework was expanded by increasing the turnover threshold to Rs 2,000 crore and prescribing a uniform operating margin of 15.5 percent for IT, IT-enabled services and knowledge process outsourcing entities.
With these changes, only a limited set of companies now fall outside the safe harbour. According to the CBDT chairman, once the revised framework is applied, the universe of uncovered companies is restricted to around 100.
APA Route Reinforced with Time-Bound Commitment
For companies that do not fall under the safe harbour or do not currently have APAs, the APA route remains fully available. Importantly, the tax administration has now given a clear assurance that APAs for IT, IT-enabled services and allied sectors will be completed within two years.
Historically, the time taken to finalise APAs was a key concern for taxpayers. The two-year commitment directly addresses this issue and strengthens confidence in the APA mechanism as a practical route to certainty.
Companies covered under the safe harbour may still opt for APAs if they prefer a customised approach, and that option continues to remain open.
No IT Company Left Without a Certainty Option
When the expanded safe harbour framework and the APA mechanism are viewed together, there is effectively no company in the IT, IT-enabled services or KPO space without access to a tax certainty pathway.
The stated policy intent is to ensure that every company in the sector can operate with predictable tax outcomes, either through safe harbour margins or through an agreed transfer pricing methodology under an APA.
Clarity on Data Centre Taxation
The Union Budget has also clarified the taxation framework applicable to data centres, addressing concerns around permanent establishment exposure for foreign companies whose applications are hosted in India.
As explained by the CBDT chairman, data centres earn income from providing infrastructure services such as space, power and cooling. They do not provide software or cloud services and have no visibility into the applications hosted. Accordingly, they will continue to be taxed only on the services they provide.
The clarification does not alter the tax position of Indian data centre entities and ensures that foreign companies are not taxed on global income merely because applications are hosted in Indian facilities operated by group entities. The provision applies prospectively and is intended to provide long-term certainty for data centre investments, which typically involve high capital costs and long gestation periods.
Direct Tax Targets for Financial Year 2026-27
Agrawal also clarified that the direct tax collection targets for the financial year 2026-27 were not framed by factoring in any gains from the recently announced US trade deal. The targets should therefore not be viewed as conservative.
The Union Budget for financial year 2026-27 has set the direct tax collection target at Rs 26.97 lakh crore. In the current financial year so far, net tax collections stand at about Rs 18.52 lakh crore, comprising corporate income tax of around Rs 8.63 lakh crore, non-corporate tax of roughly Rs 9.4 lakh crore and securities transaction tax collections of about Rs 44,871 crore.
Any upside from higher nominal growth would naturally reflect in collections, but the immediate focus remains on meeting the stated targets.
Implementation and Residual Risks
Despite improved tax certainty through expanded safe harbour rules and time-bound APAs, some concerns remain. Firms outside the safe harbour may face interim uncertainty until APAs are finalised, and the two-year commitment will test administrative capacity if application volumes rise. Uniform safe harbour margins may not suit all business models, leading some companies to opt for APAs despite higher compliance costs. In addition, the framework largely applies prospectively, leaving legacy disputes unresolved. The overall success will depend on timely APA execution, consistent application and adequate administrative resources.
Conclusion
With the expansion of safe harbour rules and a clear, time-bound commitment to conclude APAs, India’s IT and IT-enabled services sector now operates within a largely predictable and dispute-minimised transfer pricing environment. The approach reflects a deliberate policy shift towards certainty, reduced litigation and sustained support for long-term investment in the technology and digital infrastructure ecosystem.
Source: Adapted from MoneyControl