CBDT Notifies Rule 10CB for Secondary Adjustments under Section 92CE of IT Act, 1961.

The Finance Act, 2017 inserted section 92CE in the Income-tax Act, 1961 with effect from 1st April, 2018 to provide for secondary adjustment by attributing income to the excess money lying in the hands of the associated enterprise, in order to make the actual allocation of funds consistent with that of the primary transfer pricing adjustment. The provision shall apply to primary adjustments exceeding Rupees One Crore made in respect of Assessment Year 2017-18 onwards.

Rule 10CB for operationalising the provisions of secondary adjustment was notified by the Central Board of Direct Taxes on 15th June, 2017. It prescribes the time limit for repatriation of excess money and the rate of interest to be applied for computing the income in case of failure to repatriate the excess money within the prescribed time limit. Separate rates of interest have been provided for international transactions denominated in Indian currency and in foreign currency. The rates of interest are applicable on an annual basis.

The time limit of 90 days for repatriation of excess money shall begin only when the primary adjustments exceeding Rupees One Crore made in respect of Assessment Year 2017-18 or later, attains finality. Where the transfer pricing order is appealed against by the taxpayer, the time limit for repatriation shall commence only after the appeal is finalised by the appellate authority.

Fatema Hunaid, Partner, Grant Thornton India LLP said on CBDT’s notification of the secondary adjustment rule in transfer pricing that “The tax and regulatory landscape is evolving at a rapid pace for the multinational enterprises, which has in turn increased the ever growing need to review their global structures and operations holistically. Globally coordinated regulatory efforts implementing BEPS action plans like signing of the Multilateral Instrument, introduction of GAAR, thin capitalisation preventing rule etc are stepping up the pressure on MNCs to converge their location of revenue and profit with the location of the underlying substance. The concept of Secondary adjustment was introduced in the Transfer pricing regulations recently to align cash flows and cash profit with the tax profit. It will no longer be possible for MNCs to just discharge the income-tax due on higher income assessed by tax authorities without accounting for the additional income in their books of account and will need to repatriate the cash to India.  The Revenue have released rules operationalising the secondary adjustment by prescribing the applicable interest rate on such on such non repatriated additional income consequent to a TP adjustment.  A credit period of 90 days is also prescribed but conspicuous by their absence is the  ‘computation methodology’.  Secondary adjustment rules is a wakeup call to MNCs to evaluate the consequences of TP adjustment (shortfall between the transfer price and the arm’s length price) which will have a significant multiplier effect  by way of notional interest and tax thereon until the date such cash is repatriated.  The impact is all encompassing and a coordinated and convergent view by MNCs of their taxes, accounting and fund flow is the need of the hour.”

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MINISTRY OF FINANCE

(Department of Revenue)

(CENTRAL BOARD OF DIRECT TAXES)

NOTIFICATION

New Delhi, the 15th June, 2017

G.S.R. 590(E).-In exercise of the powers conferred by sub-section (2) to section 92CE and section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes, hereby, makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1. (1) These rules may be called the Income-tax (15th Amendment) Rules, 2017.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Income-tax Rules, 1962, after rule 10CA, the following rule shall be inserted, namely:

‘10CB. Computation of interest income pursuant to secondary adjustments.— (1) For the purposes of sub- section (2) of section 92CE of the Act, the time limit for repatriation of excess money shall be on or before ninety days ,

(i) from the due date of filing of return under sub-section (1) of section 139 of the Act where primary adjustments to transfer price has been made suo-moto by the assessee in his return of income;

(ii) from the date of the order of Assessing Officer or the appellate authority, as the case may be, if the primary adjustments to transfer price as determined in the aforesaid order has been accepted by the assessee;

(iii) from the due date of filing of return under sub-section (1) of section 139 of the Act in the case of agreement for advance pricing entered into by the assessee under section 92CD ;

(iv) from the due date of filing of return under sub-section (1) section 139 of the Act in the case of option exercised by the assessee as per the safe harbour rules under section 92CB;or

(v) from the due date of filing of return under sub-section (1) section 139 of the Act in the case of an agreement made under the mutual agreement procedure under a Double Taxation Avoidance Agreement entered into under section 90 or 90A;

(2) The imputed per annum interest income on excess money which is not repatriated within the time limit as per sub-section (1) of section 92CE of the Act shall be computed,

(i) at the one year marginal cost of fund lending rate of State Bank of India as on 1st of April of the relevant previous year plus three hundred twenty five basis points in the cases where the international transaction is denominated in Indian rupee; or

(ii) at six month London Inter bank Offered Rate as on 30th September of the relevant previous year plus three hundred basis points in the cases where the international transaction is denominated in foreign currency.

Explanation- For the purposes of this rule “International transaction” shall have the meaning assigned to it in section 92B of the Act.’

[Notification No. 52/2017, F.No.370142/12/2017 -TPL]

PITAMBAR DAS, Director (Tax Policy And Legislation)

Note: The principal rules were published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii) vide notification number S.O. 969 (E), dated the 26th March, 1962 and last amended by the Income-tax (14th Amendment) Rules, 2017, vide notification number G.S.R 569(E), dated the 9th June, 2017.

Explanatory Memorandum
Notification No. 52/2017, dated 15th June, ,2017

In order to make the actual allocation of funds consistent with that of the primary transfer pricing adjustment, Finance Act, 2017 inserted Section 92CE in the Income-tax Act, 1961 with effect from 1st day of April, 2018 to provide for secondary adjustment by attributing income to the excess money lying in the hands of the associated enterprise. The provision shall be applicable to primary adjustments exceeding one crore rupees made in respect of the assessment year 2017-18 and on wards.

The said rule prescribes the time limit of repatriation of excess money and the rate at which the interest income shall be computed in the case of failure to repatriate the excess money within the prescribed time limit. In order to provide for an uniform treatment in respect of various types /situations of primary adjustments as referred to in sub-section(1) of section 92CE, it prescribes for a time limit of 90 days for repatriation of excess money .

With regard to the rate of interest to be computed in the case of failure to repatriate the excess money within the prescribed time limit, it provides for separate interest rates for international transactions denominated in Indian rupee and those denominated in foreign currency. The rate of interest is applicable on annual basis.

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