Secondary Adjustment – transfer pricing
- As per the OECD’s TP guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines), secondary adjustment may take the form of constructive dividends, constructive equity, or constructive loans.
- The provisions of secondary adjustment are internationally recognized and are already part of the TP rules of many leading economies in the world., though the approach by various countries vary.
- India’s secondary adjustment provisions are enshrined in section 94CE of the Act. India had initially taken a position to treat secondary adjustment as constructive loan and thereby imputing interest on the outstanding amount.
- However, budget 2019 has relaxed the norms for one-time settlement of secondary adjustment treated as advance, which is akin to treating the secondary adjustment as dividend.
- In the following section we shall look into the meaning and treatment of various terms related to secondary adjustment
Meaning of primary and secondary adjustment
Circumstances when secondary adjustment has to be made
- Excess money means the difference between the ALP determined in primary adjustment and the price at which the international transaction has actually taken place.
- The excess money gives rise to secondary adjustment. However, secondary adjustment provisions would not be applicable in the following circumstances
- If the amount of primary adjustment in any previous year does not exceed INR 1 crore or
- The primary adjustment is made in respect of AY 2016-17 or an earlier AY. The secondary adjustment is applicable only if the primary adjustment exceeds 1 crore.
- Otherwise, secondary adjustment is triggered in the following timeframe:
In the event of non-repatriation of excess money
- Excess money has to be repatriated by the respective AE within a specified period.
- if not repatriated to India within the time as may be prescribed shall be deemed to be an advance and the interest on such advance shall be computed as the income of the assessee in the prescribed manner.
- Time limit for repatriation of excess money – on or before 90 days from the date given below:
- In the event of failure on the part of AE to repatriate the money, interest on the advance money would be imputed:
Part payment and payment by another AE
- Earlier, the provisions of 92CE did not recognize part payment on the part of the AE towards secondary adjustment.
- So even if the AE makes part payment towards the secondary adjustment, the entire secondary adjustment was considered as advance and interest on the same was calculated.
- This anomaly has been removed by amending section 92CE(5), thereby interest has to be computed only for the unpaid part.
- This provision is applicable retrospectively from April 1, 2018.
- Further, the budget 2019 has given a clarification that the excess money or part thereof could be transferred by any of the non-resident AE.
- In other words, any group company can pay for the secondary adjustment and it need not necessarily come from the concerned AE.
Remedy from Secondary adjustment
- Before the budget 2019, once secondary adjustment kicks in, there would be year on year interest consequence as long as the excess money is repatriated by the AE in full.
- Repatriation would involve adjustments in the AE books which would have TP implications in its home country.
- As a way to avoid this perennial interest payment, budget 2019 has come up with alternative.
- The assessee could either bring in the excess money from any of its AEs or alternatively pay 18% tax on the excess money or part thereof which would be treated as final payment of tax and no more secondary adjustment needs to be made.
- This would in reality treat the secondary adjustment as ‘Dividend’ and is akin to DDT imposed on the same.
- However, the assessee or the AE cannot claim credit for the taxes paid. Further no deduction would be allowed in the computation in respect of such tax paid.
Secondary adjustment means:
- Any transfer pricing adjustment which is made on the basis of arm’s length price of international transaction
- An adjustment in the books of account of the assessee and its Associated Enterprise to reflect that the actual allocation of profits are consistent with the transfer price
- Any transfer pricing adjustment which is made on the basis of arm’s length price of international transaction in the consecutive year
Secondary adjustment is an adjustment in the books of account of the assessee and its Associated Enterprise to reflect that the actual allocation of profits is consistent with the transfer price
Secondary Adjustment shall not be made when Primary Adjustment to transfer price:
- Has been determined under Advance pricing agreement
- Has been determined as per safe harbor rules
- Is challenged by assessee before income tax authorities
Secondary Adjustment shall not be made when Primary Adjustment to transfer price is challenged by assessee before income tax authorities.
What would be the time limit for repatriation of excess money (available with associated enterprise) to India, where Primary adjustment has been made suomoto by the assessee in his return of income
- Within 120 days from due date of filing return of income
- Within 90 days from due date of filing return of income
- Within 60 days from due date of filing return of income
The repatriation time limit is within 90 days from due date of filing return of income