Introduction
The Ministry of Finance, through the Central Board of Direct Taxes (‘CBDT’), has amended the applicability of the Safe Harbour Rules (‘SHR’) under r. 10TD of the Income-Tax Rules, 1962 (‘Rules’) qua a new notification[i]. These amendments are deemed to have come into force on 01.04.2024. SHRs are significant tools in reducing disputes by establishing predefined benchmarks, especially in complex industries with cross-border implications. This amendment specifically applies to foreign companies engaged in mining raw diamonds and related activities under the Rules within designated Special Notified Zones (‘SNZs’).
This update highlights the specifics of the notification, analysing its practical implications and assessing its impact on taxpayers in the diamond mining sector. The key amendments in the rules are highlighted below:
Key Amendments
One of the pivotal changes is the extension of SHRs. The existing SHR under r. 10TD are now extended to cover the assessment year (‘AY’) 2024-25, in addition to the earlier applicable years: 2020-21, 2021-22, 2022-23, and 2023-24. This retrospective amendment takes effect from 01.04.2024, ensuring alignment with the financial year (FY) 2023-24. The explanatory memorandum clarifies that no adverse impact arises due to this retrospective effect.
The notification introduces a detailed framework via new rules (10TI, 10TIA, 10TIB, and 10TIC), specifically targeting foreign companies engaged in diamond mining operations. These rules outline conditions, procedures, and restrictions for opting for a safe harbour. The rule-wise summary is explained below:
1. Who is Eligible? (R. 10TI)
Eligible Assessee: A foreign company engaged in diamond mining and selling raw diamonds in India’s SNZs.
Eligible Business: Selling raw diamonds (as per specified conditions) in any SNZs under clause (e) of Explanation 1 to clause (i) of ss. (1) of s. 9 of the Income-tax Act, 1961 (‘Act’)
Definition of Raw Diamonds: Diamonds must meet the following criteria:
a) Uncut, unpolished, unworked, or unassorted.
b) Must not be conflict diamonds (as per the Kimberley Process Certification Scheme).
c) Accompanied by a valid Kimberley Process Certificate issued by the exporting country.
2. Safe Harbour Conditions for Raw Diamond Business (R. 10TIA)
The assessing officer (‘AO’) will accept the profits declared by a foreign company engaged in the sale of raw diamonds if the profits from the eligible business are 4% or more of the gross receipts derived from such sales.
The SHR apply to the profits and gains of a business that is taxable under the category ‘Profits and gains of business or profession.’
Some restrictions are placed on deductions under ss. 30-38 of the Act and set-offs under ss. 70,71 and 72 of the Act and on unabsorbed depreciation.
3. Safe Harbour Rules: Procedure and Conditions (R. 10TIB)
To exercise the option for safe harbour, the Assessee must submit Form 3CEFC to the AO before filing the income tax return for the relevant previous year under s. 139 of the act.
The AO may invalidate the safe harbour option and levy a penalty if:
a) Incorrect facts were provided, or
b) Relevant business facts were concealed.
4. Restrictions on Mutual Agreement Procedure (R. 10TIC)
The notification prohibits invoking double taxation avoidance agreements (DTAA) procedures for eligible businesses under safe harbour.
Conclusion
The CBDT’s amendments of SHR for foreign companies trading raw diamonds in SNZs reflect the government’s efforts to simplify taxation and attract investment. By clearly defining ‘eligible assessee’, ‘eligible business’ and safe harbour thresholds, the amendments aim to be more transparent. This move provides tax certainty, reduces compliance burdens, and minimizes transfer pricing disputes, making India a more appealing hub for diamond trading. The government is creating a simple and business-friendly tax system to boost India’s role in the global diamond market and attract more foreign companies to invest in high-value industries. While this notification simplifies compliance for eligible taxpayers, it also places significant obligations on them to maintain accurate records.
End Note
[i] Notification No. G.S.R. 739(E) dated 29.11.2024.
Authored by Mohammad Sarfaraj Idrisi, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.