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The Finance Bill 2017 proposes to introduce secondary adjustment to existing Transfer Pricing (TP) regime in order to align transfer pricing provisions in line with OECD transfer pricing guidelines and international best practices. These provisions shall take effect from assessment year (“AY”) 2018-19.

Meaning of Secondary Adjustments

To “mean adjustment in books of accounts of the Taxpayer and its associated enterprise to reflect actual allocation of profits between the Taxpayer and its AE consistent with transfer price determined as a result of Primary Adjustments, thereby removing the imbalance between cash account and actual profit of Taxpayer”.

Instances of Primary Adjustments

a) Made Suo motu by the Taxpayer in his return of income
b) Made by AO and accepted by Taxpayer
c) Determined by advance pricing agreement entered into by Taxpayer
d) Made as per safe harbour rules framed under section 92CB
e) Arising as a result of resolution of an assessment by way of MAP under agreement entered into under section 90 or 90A

Conditions for Secondary adjustments:

Section 92CD provides that Secondary Adjustments provisions shall not apply if -

  • Primary Adjustments in any previous year does not exceed INR 1 Cr, and*
  • Primary Adjustments is made in respect of assessment year commencing on or before 1 April 2016

Forms of Secondary adjustments that can be proposed:

  • Constructive dividends
  • Constructive equity contributions or constructive/ deemed loans.

While a rule based on constructive dividends would treat the excess profits transferred to the overseas company as a deemed dividend (which may be subject to withholding tax), an equity contribution rule would treat the excess profits as deemed equity contribution. The third option treats the excess profits as a deemed loan from the potentially advantaged company, and seeks to accrue deemed interest thereon.

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.


Published by

(taxation manager)
Category Others   Report

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