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Secondary Adjustment – Section 92CE & Rule 10CB

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:

  • Voluntarily made by the taxpayer in the tax return.
  • Made by the tax officer and accepted by the taxpayer.
  • Determined by an Advance Pricing Agreement (APA) entered into by the taxpayer under Section 92CC.
  • Made as per the safe harbour rules under Section 92CB.
  • Resulted from a Mutual Agreement Procedure (MAP) resolution under Section 90 or Section 90A.

However, an exception has been carved out according to which, such secondary adjustments shall not be carried out by the taxpayer if –

  • The amount of the primary adjustment made in the case of a taxpayer in any financial year does not exceed INR 10 million.
  • The primary adjustment is made in respect of the F.Y. 2015-16 or any earlier financial years.

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:

  • For an international transaction denominated in INR – one year marginal cost of fund lending rate of State Bank of India as on 1st of April of the relevant previous year plus 325 basis points.
  • For an international transaction denominated in foreign currency – six month LIBOR as on 30th September of the relevant previous year plus 300 basis points.

Rule 10CB prescribes the time limit for repatriation of primary transfer pricing adjustment is summarized below:

  • Suo-moto adjustment by the taxpayer as per Rule 10CB(1)(i) – Time limit for repatriation as per said Rule is on or before 90 days from due date of filing return of income.
  • Adjustment made by Indian Tax Authority and accepted by the taxpayer as per Rule 10CB(1)(ii) – Time limit for repatriation as per said Rule is on or before 90 days from the date of relevant order.
  • Adjustment pursuant to APA, Safe Harbour or MAP as per Rule 10CB(1)(iii), 10CB(1)(iv) and 10CB(1)(v) – Time limit for repatriation as per said Rule is on or before 90 days from due date of filing return of income.

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.

Categories: Income Tax
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