Section 92 of The Income Tax Act 1961, states that any income, expenditure interest & allocation of cost in relation to an international transaction shall be computed based on arm’s length price. International transaction is defined under section 92B of the act, as a transaction between two or more associate enterprises and at least one of such enterprise must be a non-resident.
There may be certain cases where ALP determined by the assessee is inconsistent or there may be other cases which arise the situations of making adjustments in transfer pricing to make it by Arm’s length price. There are two types of adjustments to be made “Primary Adjustments” and “Secondary Adjustments”.
Section 92CE – Secondary Adjustments
“Primary adjustment” to a transfer price means the determination of 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 assessee.
Assume Company A (based in India) sells goods to its associated enterprise, Company B (based in Country Y), at $1,000,000. Tax authorities determine that the arm`s length price for these goods should be $1,200,000. The primary adjustment involves increasing Company A`s income by $200,000 to reflect the arm`s length price. This adjustment results in an additional $200,000 being added to Company A`s taxable income, leading to higher taxes based on the applicable tax rate in India. Thus, the primary adjustment ensures that the transfer price aligns with the arm`s length principle, increasing the total income of Company A by $200,000.
“Secondary adjustment” means an adjustment in the books of accounts of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.
Assume Company A (based in India) sells goods to its associated enterprise, Company B (based in Country Y), at $1,000,000. After a primary adjustment, the tax authorities determine the arm`s length price should be $1,200,000, increasing Company A`s income by $200,000. The secondary adjustment ensures this additional $200,000 is reflected in the books of both companies. Company A will record a receivable of $200,000 from Company B, while Company B will record a payable of $200,000 to Company A. This adjustment aligns the actual allocation of profits and cash balances, ensuring the books of accounts of both companies reflect the arm`s length price, thereby removing any imbalance between Company A`s cash account and its actual profit.
Additionally, the amount of this adjustment shall be repatriated to India. If the $200,000 is not repatriated to India, the excess money with Company B shall be treated as deemed to be a loan to Company B.
Cases where secondary adjustment has to be made:
To align the transfer pricing provisions in India with OECD guidelines and international best practices, Section 92CE mandates secondary adjustments under specific conditions. Secondary adjustments are required when the primary adjustment to the transfer price:
- Suo Motu Adjustment by Assessee: The assessee voluntarily makes a primary adjustment in their return of income.
- Adjustment by Assessing Officer Accepted by Assessee: The adjustment made by the Assessing Officer is accepted by the assessee.
- Advance Pricing Agreement (APA): The adjustment is determined by an APA entered into by the assessee under Section 92CC on or after April 1, 2017.
- Safe Harbour Rules: The adjustment is made according to the safe harbour rules framed under Section 92CB.
- Mutual Agreement Procedure (MAP): The adjustment arises as a result of resolution of an assessment via MAP under an agreement entered into under Section 90 or 90A for avoidance of double taxation.
Exceptions to Secondary Adjustments
Secondary adjustments are not required if:
– The primary adjustment amount does not exceed Rs. 1 crore in any previous year.
– The primary adjustment pertains to Assessment Year (A.Y.) 2016-17 or an earlier assessment year.
Deemed Advance in Case of Non-Repatriation
When a primary adjustment results in an increase in the total income or reduction in the loss of the assessee, the excess money (the difference between the arm`s length price and the transaction price) must be repatriated to India within a prescribed time frame. If this excess money is not repatriated, it will be deemed to be an advance made by the assessee to the associated enterprise. Interest on this deemed advance will be computed as the income of the assessee, in the prescribed manner. This excess money can be repatriated from any associated enterprise of the assessee that is not resident in India.
In essence, secondary adjustments ensure that the actual allocation of profits between the assessee and its associated enterprise is consistent with the arm`s length price determined by the primary adjustment. This process rectifies any imbalance between the cash account and the actual profit of the assessee, ensuring compliance with international transfer pricing standards.
Time Limits for Repatriation
According to Rule 10CB, the time limit for repatriation of excess money or part thereof is ninety days, calculated as follows:
| Condition | Time Limit for Repatriation |
| Suo motu primary adjustment by assessee in return of income | From the due date of filing of return under Section 139(1) |
| Adjustment by Assessing Officer accepted by assessee | From the date of the order of Assessing Officer or appellate authority |
| Primary adjustment determined by APA (entered before due date of filing return) | From the date of filing of return under Section 139(1) |
| Primary adjustment determined by APA (entered after due date of filing return) | From the end of the month in which the APA is entered |
| Option exercised as per safe harbour rules | From the due date of filing of return under Section 139(1) |
| Primary adjustment determined by MAP resolution | From the date of giving effect by the Assessing Officer under Rule 44H |
Interest on Excess Money Not Repatriated
If the excess money is not repatriated within the prescribed time limit, interest income will be computed as follows:
| Currency Denomination | Interest Rate |
| Indian Rupee | One year marginal cost of fund lending rate of State Bank of India as on 1st April of the relevant previous year plus 325 basis points |
| Foreign Currency | Six month London Interbank Offered Rate (LIBOR) as on 30th September of the relevant previous year plus 300 basis points |
The interest on the excess money not repatriated will be chargeable from specific dates depending on the nature of the primary adjustment:
| Condition | Start Date for Interest Calculation |
| Suo motu primary adjustment, APA before due date, safe harbour rules | From the due date of filing of return under Section 139(1) |
| Adjustment by Assessing Officer accepted by assessee | From the date of the order of Assessing Officer or appellate authority |
| APA entered after due date of filing return | From the end of the month in which the APA is entered |
| MAP resolution | From the date of giving effect by the Assessing Officer under Rule 44H |
Option to Pay Additional Income Tax
In cases where the excess money or part thereof has not been repatriated within the prescribed time, the assessee has the option to pay additional income tax. The additional income tax rate is calculated at 18%, plus a surcharge of 12%, and cess of 4% on such excess money or part thereof. If the assessee opts to pay this additional income tax, they will not be required to make a secondary adjustment or compute interest from the date of payment of such tax. However, interest must still be computed up to the date of payment of the additional tax. The additional income tax paid by the assessee will be treated as the final payment of tax in respect of the excess money or part thereof not repatriated, and no further credit will be allowed to the assessee or any other person for the amount of additional income tax paid. Additionally, no deduction will be allowed under any other provision of the Act for the amount on which such additional income tax has been paid.
Conclusion
In summary, secondary adjustments mandated by Section 92CE of the Income Tax Act are essential for aligning transfer pricing practices with international standards. These adjustments ensure that the allocation of profits between the assessee and associated enterprises reflects the arm`s length price determined by primary adjustments. The regulations outline specific scenarios necessitating secondary adjustments and exceptions for smaller adjustments and certain assessment years. Clear timelines for repatriation of excess funds and specified interest rates for non-repatriated amounts are provided, with taxpayers having the option to pay additional income tax at a prescribed rate to avoid secondary adjustments and associated interest. Adherence to these regulations is crucial for mitigating penalties and ensuring compliance, promoting transparency and fairness in international transactions.
