Transfer pricing provisions seek to ensure that there is fair and equitable allocation of taxable profits amongst the tax jurisdictions. In cases where the underlying transaction is held not to be at arm’s length, a primary adjustment is made to align the transfer price with the arm’s length price (ALP) which is known as primary adjustment. However, it does not address the additional cash benefit which accumulates from the non-arm’s length pricing of the underlying primary transaction (i.e. the other AE has effectively retained such excess/differential funds).
On 31 March 2017, India’s Finance Bill, 2017, presented before the Indian Parliament on 1 February 2017, received Presidential assent and was enacted with effect from 1 April 2017. From a transfer pricing (TP) perspective, the two key changes relate to the introduction of a secondary adjustment provision and an interest limitation rule.
The provisions relating to “secondary adjustments” are primarily intended to ensure that profit allocations between the AEs are consistent with the primary TP adjustment. A “secondary adjustment” has been defined to mean an adjustment in the books of accounts of the taxpayer and its AE to reflect that the actual allocation of profits between the taxpayer and its AE are consistent with the transfer price determined as a result of primary adjustment. The primary adjustment is defined to mean the determination of the transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the taxpayer. A primary adjustment to the transfer price occurs in one of the following circumstances:
However, an exception has been carved out according to which, such secondary adjustments shall not be carried out by the taxpayer if –
The provisions on secondary adjustment seek to target such cash/fund benefit by seeking repatriation of such excess funds lying with the Associated Enterprise. Any funds not repatriated by the Associated Enterprise will be termed as an “advance” given by the Assessee to the Associated Enterprise and notional interest rate, as prescribed, will be added to the Total income of the Assessee by way of a secondary adjustment.
The CBDT, vide Notification no. 52/2017 dated 15 June 2017 prescribed the rate and manner of computing interest, etc. The interest rate will be as follows:
Rule 10CB prescribes the time limit for repatriation of primary transfer pricing adjustment is summarized below:
Overall, the taxpayers need to be more cautious while pricing their intra-group dealings to ensure they are appropriately priced to reflect arm’s length scenario, as failure to do so may entail secondary adjustment in the form of deemed interest, and as discussed above, may also result in double taxation.