Summary: A secondary adjustment in transfer pricing can create additional tax exposure after a primary adjustment has increased an Indian taxpayer’s income or reduced its losses. Under Section 92CE of the Income-tax Act, 1961, where the prescribed conditions are satisfied, excess money arising from a primary adjustment must be repatriated from the associated enterprise within the applicable period. If it is not repatriated, the amount may be treated as a deemed advance, giving rise to imputed interest income. The provision applies to specified categories of primary adjustments, including voluntary adjustments, accepted assessments, Advance Pricing Agreements, Mutual Agreement Procedure outcomes and safe harbour arrangements, subject to statutory conditions and thresholds. Rule 10CB provides the framework for determining repatriation deadlines and applicable interest rates. The law also provides an alternative involving additional income tax at 18%, together with applicable surcharge and cess, on unrepatriated excess money. The corresponding secondary adjustment provision under the Income-tax Act, 2025 is Section 170. For multinational groups, the practical issues include identifying the applicable deadline, coordinating cross-border remittances, documenting intercompany balances, evaluating the tax treatment of deemed advances and comparing the costs of repatriation, continuing interest exposure and the one-time tax option. Effective planning requires considering these consequences before finalising the primary adjustment.
Introduction
Most transfer pricing discussion stops at the primary adjustment: the tax officer or the taxpayer changes the price of an international transaction to an arm’s length figure, and extra income is taxed. For Indian companies with foreign group entities, there is a second step that is often missed. It is called the secondary adjustment, and it can create an interest cost long after the assessment is over.
What the provision does
Section 92CE of the Income-tax Act, 1961 applies where a primary adjustment leads to a difference between the actual price and the arm’s length price. The difference is treated as excess money lying with the associated enterprise. The foreign group entity is expected to bring that money back to India. If it does not, the amount is treated as an advance given by the Indian company, and interest is imputed on it. The provisions of the new Income-tax Act, 2025 carry the same concept under corresponding sections, so check section numbers against the law applicable to your year.
When it applies
The primary adjustment was made suo motu by the taxpayer in the return, was accepted by the assessing officer, was determined by an advance pricing agreement, or arose from a mutual agreement procedure or a safe harbour.
The adjustment is above the monetary threshold, which has been one crore rupees.
The transaction is with an associated enterprise that is a non-resident, or a resident in certain cases.
Repatriation, or an advance with interest
The excess money has to be received in India within the period prescribed Under Rule 10CB of the Income-tax Rules, the excess money must be received in India within 90 days. The 90 days start from a different date depending on how the primary adjustment arose:
Adjustment made by you in the return: 90 days from the due date of filing the return.
Adjustment made by the assessing officer or tribunal and accepted by you: 90 days from the date of the order.
Advance pricing agreement or mutual agreement procedure: 90 days from the date the agreed outcome is given effect, which is the date of the APA or of the order giving effect to the MAP result.
Safe harbour: 90 days from the due date of the return.
If the money isn’t received within 90 days, it is treated as an advance to the foreign entity and interest is imputed on it. Normally on a rupee-denominated transaction the rate is the SBI one-year marginal cost of funds lending rate plus 3.25 per cent. For a foreign-currency transaction it is the six-month LIBOR plus 3 per cent or as prescribed from time to time.
The one-time alternative under section 92CE(2A) is additional income tax at 18 per cent on the excess money, with surcharge and cess on top. Which runs from the due date of the return or the date of the order. If the money comes in on time, there is no deemed advance. If it does not, the Indian company can either keep the deemed advance in its books and pay tax on the interest, or choose to pay a one-time additional income tax on the excess money and be free of further interest. The rate of interest depends on whether the money is in rupees or a foreign currency, and the benchmark rates have changed over the years, so use the present rule.
Common mistakes
Treating the adjustment as a one-year event, with no tracking of the 90-day or other repatriation window.
Showing the receipt as a loan or a capital contribution when it should be shown as repatriation of excess money.
Ignoring the effect on the return of the foreign entity, where the repatriation may be seen as a refund of price and not a loan.
A practical approach
Before any suo motu adjustment is made in a return, decide how the money will be recovered, and tell the foreign entity early. Record the receipt with a clear reference to the adjustment. Where the group does not want the cash to move, calculate the cost of the one-time tax against the interest cost over the expected holding period and choose deliberately.
Author
N. Sudheer, M.Com., FCS, LL.B., Partner at A2 Consultants, Hyderabad.
