Rule 87: Eligible assessee for international safe harbour
Rule 87 identifies the persons who can enter the international safe-harbour framework after exercising a valid option. Eligibility depends on the actual activity and, for specified service categories, the insignificant-risk facts demonstrated by both contracts and conduct.
Official notified Income-tax Rules, 2026Need advice on Rule 87?
This article is for general information. Read the official Rules and applicable Act amendments, including the Taxation and Other Laws (Amendment) Act, 2026. If you need professional advice for your situation, contact Bizeneed.
On this page
- Bare law
- Start with a valid option and an eligible activity
- Insignificant risk for the listed IT services
- Review pharmaceutical R&D on its own facts
- Auto-component eligibility includes the OEM threshold
- Use actual conduct to support the classification
- Key takeaways
- Practical checklist
- FAQs
- Glossary
- Official sources
Bare law
Rule 87 - Eligible assessee for safe harbour rules for international transactions
(1) Subject to the provisions of sub-rules (2) and (3), the ―eligible assessee‖ means a person who has exercised a valid option for application of safe harbour rules in accordance with rule 90, and— (a) is engaged in providing information technology services consisting of any one or more of the following: — (i) software development services; or (ii) information technology enabled services; or (iii) knowledge process outsourcing services; or (iv) contract research and development services wholly or partly relating to software development, with insignificant risk, to a non-resident associated enterprise (hereinafter referred to as foreign principal); or (b) has made any intra-group loan; or (c) has provided a corporate guarantee; or (d) is engaged in providing contract research and development services wholly or partly relating to generic pharmaceutical drugs, with insignificant risk, to a foreign principal; or (e) is engaged in the manufacture and export of core or non-core auto components and where 90% or more of total turnover during the relevant tax year is in the nature of original equipment manufacturer sales; or (f) is in receipt of low value-adding intra-group services from one or more members of its group; or (g) has provided data centre services to a foreign company.
(2) For the purposes of identifying an eligible assessee, with insignificant risk, referred to in sub-rule (1)(a), the Director General of Income-tax (Systems) shall have regard to the following factors: — (a) the foreign principal performs most of the economically significant functions involved, including the critical functions, such as, — (i) conceptualisation; (ii) design of the product; and (iii) providing the strategic direction and framework, either through its own employees or through its other associated enterprises, while the eligible assessee carries out the work assigned to it by the foreign principal; (b) the capital and funds and other economically significant assets including the intangibles required, are provided by the foreign principal or its other associated enterprises, and the eligible assessee is only provided a remuneration for the work carried out by it; (c) the eligible assessee works under the direct supervision of the foreign principal or its associated enterprise which not only has the capability to control or supervise but also actually controls or supervises research or product development or the activities carried out through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis; (d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant; (e) the eligible assessee has no ownership right, legal or economic, on any intangible generated or on the outcome of any intangible generated or arising during the course of rendering of services or on the outcome of the research, which vests with the foreign principal as evident from the contract and the conduct of the parties.
(3) For the purpose of identifying an eligible assessee, with insignificant risk, referred to in sub-rule (1)(d), the Director General of Income-tax (Systems) or the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have regard to the following factors: — (a) the foreign principal performs most of the economically significant functions involved in research or product development cycle, including the critical functions such as; (i) conceptualisation; (ii) design of the product; and (iii) providing the strategic direction and framework, either through its own employees or through its other associated enterprises while the eligible assessee carries out the work assigned to it by the foreign principal; (b) the foreign principal or its other associated enterprises provides, — (i) the funds or capital; (ii) other economically significant assets including intangibles required for research or product development; and (iii) a remuneration to the eligible assessee for the work carried out by it; (c) the eligible assessee works under the direct supervision of the foreign principal or its other associated enterprise which has not only the capability to control or supervise but also actually controls or supervises research or product development, through its strategic decisions to perform core functions as well as by monitoring activities on a regular basis; (d) the eligible assessee does not assume or has no economically significant realised risks, and if a contract shows that the foreign principal is obligated to control the risk but the conduct shows that the eligible assessee is doing so, the contractual terms shall not be the final determinant; (e) the eligible assessee has no ownership right, legal or economic, on the outcome of the research which vests with the foreign principal and which is evident from the contract as well as the conduct of the parties.
Rule breakdown
Start with a valid option and an eligible activity
The listed categories include specified IT services, intra-group loans, corporate guarantees, generic-pharmaceutical contract R&D, qualifying auto-component manufacture and export, low value-adding group-service receipts and data-centre services to a foreign company.
The rule’s definitions and following transaction conditions still matter. Being in one industry does not automatically validate all transactions or replace the required option.
Insignificant risk for the listed IT services
The foreign principal performs the economically significant and critical functions, supplies the significant capital, funds and assets, and actually supervises the Indian provider’s activities. The provider carries out assigned work for remuneration.
The analysis also considers economically significant realised risks and ownership of generated intangibles. A contract allocating risk abroad is not decisive if actual conduct shows the Indian entity controlling it.
Review pharmaceutical R&D on its own facts
Sub-rule (3) separately sets the factors for generic-pharmaceutical contract R&D. It examines the foreign principal’s significant research functions, funding and assets, actual supervision, risks and ownership of the research outcome.
Keep evidence of strategic decisions, project monitoring, resources and ownership. A service agreement alone does not prove the full factual profile.
Auto-component eligibility includes the OEM threshold
For manufacture and export of core or non-core auto components, at least 90% of total turnover during the relevant tax year must be original-equipment-manufacturer sales.
Illustration: OEM sales of ₹90 crore out of ₹100 crore meet this particular percentage test. Other eligibility, transaction, margin and option conditions must also be checked.
Use actual conduct to support the classification
Collect decision records, reporting lines, project plans, budgets, risk-control evidence and intellectual-property terms. Check whether the parties acted as those documents describe.
Reassess if business functions, ownership of intangibles or risk control changes. A previously accepted description may no longer reflect the current year.
Key takeaways
Valid option required
The activity classification is not a substitute for the option.
Conduct matters
Actual control can outweigh a contractual risk label.
OEM sales at least 90%
The specific auto-component condition uses total turnover.
R&D has a factual test
Review functions, resources, supervision, risks and ownership.
Practical checklist
- Check the exact eligible-activity category.
- Document foreign-principal functions and actual supervision.
- Reconcile OEM sales to total turnover where applicable.
Avoid
- Do not rely solely on a low-risk label in an agreement.
- Do not assume eligibility removes the need for a valid option.
FAQs
Is an agreement saying the foreign principal bears all risk sufficient?
No. The rule expressly considers actual conduct and says contractual terms are not the final determinant where conduct differs.
Does the auto-component condition require more than 90% OEM sales?
It states 90% or more of total turnover during the relevant tax year.
Are data-centre services included?
Sub-rule (1)(g) includes a person providing data-centre services to a foreign company, subject to the wider framework.
Glossary
- Foreign principal
- The non-resident associated enterprise described in the specified service category.
- OEM sales
- Original-equipment-manufacturer sales used in the rule’s auto-component eligibility threshold.