Rule 86 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 86 gives eighteen definitions, from "accountant" to "software development services", that apply for rule 86 itself and rules 87 to 93. They fix who may certify costs, what counts as a loan, a guarantee, a data centre or an operating expense, and what the operating profit margin is. This article reads the rule as per the Income-tax Rules, 2026 (G.S.R. 198(E), notified on 20 March 2026), read with the amending notifications issued up to 22 September 2026. Later notifications should be checked.
Rule 86 starts "For the purposes of this rule and rules 87 to 93". It names no section of its own; the safe harbour rules are made for section 167 of the Income-tax Act, 2025, which rule 93 and Form 49 name. Operating profit margin is operating profit (operating revenue in excess of operating expense) divided by operating expense, as a percentage. Almost every margin and rate in rule 89 is tested on these definitions.
What the rule is and where it sits
Safe harbour lets an eligible assessee have its declared transfer price on an international transaction accepted, if it fits the margins and conditions the rules print. The sections behind it are explained in our article on sections 167 to 169 on safe harbour rules and advance pricing agreements. Rule 86 is the glossary for the first group of these rules. The other rules of the group are rule 87 and rule 88 on the eligible assessee and eligible transactions, rule 89 on the margins and rates, and rules 90 to 93 on procedure and exclusions. The broader overview of rules 86 to 93 is in this overview of rules 86 to 93.
Rule 86 names no form. If you are working out whether your cross-border transactions can use these rules, our tax planning advisory team can map each transaction against the definitions below.
The eighteen definitions
| Clause | Term | What the rule says (summary) |
|---|---|---|
| (a) | Accountant | An accountant referred to in section 515(3)(b) who fulfils the conditions below; includes a person recognised for cost certification by the government of the country where the associated enterprise is registered or incorporated, or its agency, on the same conditions |
| (b) | Contract research and development services wholly or partly relating to software development | Eight listed activities, (i) to (viii) |
| (c) | Core auto components | Four groups, (i) to (iv) |
| (d) | Corporate guarantee | Explicit guarantee by a company to its wholly owned non-resident subsidiary for borrowing; excludes letter of comfort, implicit guarantee, performance guarantee and similar |
| (e) | Data centre | A dedicated secure space or central location where computing and networking equipment is concentrated for collecting, storing, processing, distributing or giving access to large amounts of data |
| (f) | Data centre services | Services given through a data centre's physical and technology infrastructure, including human resource in India |
| (g) | Generic pharmaceutical drug | A drug comparable to an already approved drug in dosage form, strength, route of administration, quality, performance characteristics and intended use |
| (h) | Information technology enabled services | Fifteen listed business process outsourcing services; excludes research and development services |
| (i) | Intra-group loan | A loan to a non-resident associated enterprise, not advanced by a financial company or an enterprise engaged in lending or borrowing in the normal course; excludes credit lines or facilities with no fixed repayment term |
| (j) | Knowledge process outsourcing services | Seven listed services; excludes research and development services |
| (k) | Low value-adding intra-group services | Support services within a multinational enterprise group that meet six conditions; ten service types are excluded |
| (l) | Non-core auto components | Auto components other than core auto components |
| (m) | No tax or low tax country or territory | A country or territory where the maximum rate of income-tax is less than 15% |
| (n) | Operating expense | Costs of the tax year in relation to the international transaction in normal operations, with listed inclusions and exclusions |
| (o) | Operating revenue | Revenue of the tax year in relation to the international transaction in normal operations, with listed exclusions |
| (p) | Operating profit margin | Operating profit as a percentage of operating expense |
| (q) | Relevant tax year | The tax year for which the option for safe harbour is validly exercised |
| (r) | Software development services | Seven listed activities; excludes research and development services |
The accountant (clause (a))
The accountant is the person who certifies costs, so the conditions are specific. For an accountant practising individually, or a valuer, there must be professional experience of not less than ten years, and annual receipt from the profession, in the year before the year in which cost certification is undertaken, above fifty lakh rupees. For a member or partner of an entity engaged in accountancy or valuation services, that entity's annual receipt in the year before the cost certification must exceed three crore rupees. A foreign-recognised person must meet both of those conditions and, if a member or partner in an entity, the entity or its affiliates must have presence in more than two countries.
The business definitions in clauses (b) to (j)
- Core auto components (c): engine and engine parts, transmission and steering parts, suspension and braking parts, and lithium-ion batteries for use in electric or hybrid electric vehicles. Everything else is non-core under clause (l).
- Information technology enabled services (h): fifteen business process outsourcing services, among them back office operations, call centres, data processing, payroll, revenue accounting and website services.
- Knowledge process outsourcing services (j): geographic information system, human resources services, engineering and design services, animation or content development, business analytics, financial analytics and market research.
Research and development services, whether or not contract research and development, are outside information technology enabled services, knowledge process outsourcing services and software development services alike.
Low value-adding intra-group services (clause (k))
The services are performed by members of a multinational enterprise group for other members. They must be support services outside the group's core business, not shareholder or duplicate services, neither use nor create unique and valuable intangibles, involve no assumption or control of significant risk, and have no reliable external comparable services for the arm's length price. Ten service types are excluded, including research and development, manufacturing, software development, knowledge process outsourcing, business process outsourcing, sales and marketing, financial transactions, natural resources and insurance.
Operating expense, operating revenue and margin (clauses (n) to (p))
| Item | Includes | Does not include |
|---|---|---|
| Operating expense | Costs of the tax year in relation to the international transaction in normal operations, including stock-based compensation costs; reimbursements to, and recoveries from, associated enterprises at cost; depreciation and amortisation on assets used | Interest expense; provision for unascertained liabilities; pre-operating expenses; loss from foreign currency fluctuations; extraordinary expenses; loss on transfer of assets or investments (other than assets on which depreciation is in operating expense); income-tax expense; other expenses not relating to normal operations |
| Operating revenue | Revenue of the tax year in relation to the international transaction in normal operations, including costs of stock-based compensation as above | Interest income; income from foreign currency fluctuations; income on transfer of assets or investments (other than assets on which depreciation is in operating expense); income-tax refunds; provisions written back; extraordinary incomes; other incomes not relating to normal operations |
Operating profit margin, in relation to operating expense, is the ratio of operating profit (operating revenue in excess of operating expense) to operating expense, as a percentage.
Example. Orchid Software Services Private Limited (invented) provides a service to its associated enterprise. In a tax year its operating revenue on the transaction is Rs. 120 and its operating expense, excluding interest and foreign currency loss, is Rs. 100. Operating profit is Rs. 20, so the operating profit margin on operating expense is 20 per cent. The figures are invented to show the arithmetic; rule 86 itself prints no margin.
Who is affected
Assessees considering safe harbour for an international transaction, the accountants who certify costs, and the officers who verify the option. The definitions decide, for example, whether a loan is an intra-group loan or a service is a low value-adding service.
Need help with safe harbour?
Where a transaction sits near a definition, such as a loan with no fixed term or a service that touches software development, the classification can change the outcome. Our tax planning advisory team can review the classification before an option is exercised.
Key takeaways
- Rule 86 is a glossary for itself and rules 87 to 93; it prints no margin or rate.
- The rule names no section; the safe harbour rules are made under section 167 (named in rule 93 and Form 49).
- An accountant needs ten years' experience and receipts above fifty lakh rupees if practising individually, or an entity with receipts above three crore rupees.
- Corporate guarantee means explicit guarantee to a wholly owned non-resident subsidiary; letters of comfort and implicit or performance guarantees are out.
- Operating profit margin is operating profit divided by operating expense, as a percentage, on listed inclusions and exclusions.
- A no tax or low tax country is one where the maximum rate of income-tax is less than 15%.
Read next
- Rules 94 to 98: safe harbour for specified domestic transactions
- Rules 87 and 88: eligible assessee and eligible international transactions
- Rule 89: safe harbour margins and rates
- Form 49: application for opting for safe harbour
Disclaimer: Based on the Income-tax Rules, 2026 (G.S.R. 198(E), notified on 20 March 2026), read with the amending notifications issued up to 22 September 2026, as consulted on 2 October 2026. It explains the words of the rules and forms only; later notifications, the forms and utilities on the e-filing portal, circulars and the way the tax authorities apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.