- Section 92CE was introduced to make transfer pricing adjustments mandatory in the books of account of the taxpayer and associated enterprise (AE) to reflect the consistent allocation of profits between them. - Primary adjustments refer to adjustments that increase or decrease income/loss to align with arm's length pricing. Secondary adjustments require aligning the books of both parties with the primary adjustment. - If excess funds are not repatriated to India by the AE, it will be deemed an advance from the taxpayer to the AE, on which interest must be computed. This could lead to further transfer pricing adjustments. - Secondary adjustments in the AE's books may be difficult to implement practically, as the taxpayer and tax authorities have no control

1. Amendment to Transfer Pricing Provisions – Attempt to
balance income and cash flow
March 17, 2017 [2017] 79 taxmann.com 166 (Article)
Dharmesh Shah
CA
Introduction
1. As per s. 92 to 92F of the Income Tax Act, 1961 ('the Act'), any
income arising from the 'International Transactions' or 'Specified
Domestic Transactions' between the two 'Associated Enterprises' (AE)
shall be computed having regarded to Arm's Length Price (ALP) of the
transaction. If the transactions with AEs are not at the ALP, necessary
adjustments are required to be made to the income declared by the
assessee.
Recently, s. 92CE has been introduced in the Finance Bill, 2017
bringing a major change in the provisions relating to Transfer Pricing
(TP). Until now, the TP provisions required certain adjustments to the
income of the assessee as a result of which income and tax thereon
were enhanced. With the introduction of s. 92CE, the Legislature has
made it mandatory to bring these adjustments into the books of
account of assessee as well as its AE to reflect consistency in the actual
allocation of profits between the assessee and it's AE pursuant to the
adjustments on account of ALP. Attempt is also made to ensure that
the enhancement in the income also results in the cash inflow for the
assessee.
Analysis of provisions of s. 92CE of the Act
2. For easy understanding and discussion, these provisions so
introduced in the Finance Bill are reproduced below:
"92CE. (1) Where a primary adjustment to transfer price,—
(i) has been made suo motu by the assessee in his return of
income;
(ii) made by the Assessing Officer has been accepted by the
assessee;
(iii) is determined by an advance pricing agreement entered
into by the assessee under section 92CC;
(iv) is made as per the safe harbour rules framed under section
92CB; or
(v) is arising as a result of resolution of an assessment by way
of the mutual agreement procedure under an agreement
entered into under section 90 or section 90A for avoidance
of double taxation the assessee shall make a secondary
adjustment:
Provided that nothing contained in this section shall apply, if,­
(i) the amount of primary adjustment made in any previous

2. year does not exceed one crore rupees; and
(ii) the primary adjustment is made in respect of an assessment
year commencing on or before the 1st day of April, 2016.
(2) Where, as a result of primary adjustment to the transfer
price, there is an increase in the total income or reduction in the
loss, as the case may be, of the assessee, the excess money which is
available with its associated enterprise, if not repatriated to
India within the time as may be prescribed, shall be deemed to be
an advance made by the assessee to such associated enterprise
and the interest on such advance, shall be computed in such
manner as may be prescribed.
(3) For the purposes of this section,—
(i) "associated enterprise" shall have the meaning assigned to
it in sub­section (1) and sub­section (2) of section 92A;
(ii) "arm's length price" shall have the meaning assigned to it in
clause (ii) of section 92F;
(iii) "excess money" means the difference between the arm's
length price determined in primary adjustment and the
price at which the international transaction has actually
been undertaken;
(iv) "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;
(v) "secondary adjustment" means an adjustment in the books
of account 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."
As per the above provisions,
a. The adjustments on account of ALP resulting into addition
to the total income or reduction of loss have been referred as
'Primary Adjustment'.
b. The 'Secondary Adjustment' has been defined to mean an
adjustment in the books of account of the assessee and its AE
to reflect that the actual allocation of profits between the
assessee and its AE 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.
As per the memorandum to the Finance Bill, provisions of secondary
adjustments are internationally recognized methods to align the
economic benefit of transactions with arm's length position.
The Secondary Adjustment has been proposed to be made in the books
of account of the assessee in 5 specific instances, namely, where
primary adjustment to TP :
(i) has been made suo motu by the assessee in his return of
income;

3. (ii) made by the Assessing Officer has been accepted by the
assessee;
(iii) is determined by an advance pricing agreement entered into
by the assessee u/s. 92CC.
(iv) is made as per the safe harbour rules framed u/s. 92CB; or
(v) is arising as a result of resolution of an assessment by way of
the mutual agreement procedure under an agreement
entered into u/s. 90 or s. 90A for avoidance of double
taxation.
Further, as per s. 92CE(2), as a result of primary adjustment, if there is
an increase in the total income or reduction in the loss of the assessee,
excess money which is available with its AE will have to be repatriated
to India and to the extent it is not repatriated, it shall be deemed to be
an advance made by the assessee to the AE on which interest will have
to be calculated.
This means that if adjustments are made by the assessee suo motu in
the return or made by the Assessing Officer in the order passed by him
or in any other instances as explained above, the books of account of
assessee will have to be aligned with such adjustments to reflect
increase in profits and corresponding receivables from the AE. The
secondary adjustment is not required, if the adjustments are disputed
by the assessee.
To avoid difficulties, it has also been provided that the said provisions
relating to secondary adjustments would not be applicable, if ­
(a) The amount of primary adjustment does not exceed Rs. 1
crore; and
(b) Primary adjustment made is for A.Y. 2016­17 or prior years.
The manner in which the new provision is worded may have far­
reaching implications and may also increase litigation.
Some of the issues which may arise out of these provisions are
discussed below:
Treatment of Secondary Adjustments as the advance to the
AE ­ Consequences of Interest
3. As per s. 92CE, if the amount, in respect of which secondary
adjustments are made, is not received or repatriated to India, it shall
be deemed to be an advance given by the assessee to its AE and the
consequential interest will have to be computed on the same.
For example, the company PQR Ltd has purchased certain materials
from its AE situated abroad at a price of Rs. 10 crores in respect of
which the ALP is determined at Rs. 7 crores. This would result in the
adjustment of Rs. 3 crores to the income of the assessee, i.e., PQR Ltd.
If this adjustment is accepted by the company, the amount of Rs. 3
crores will have to be accounted for in the books of PQR Ltd. and the
corresponding advance will have to be shown in the name of its AE.

4. The immediate consequence which would arise is that the secondary
adjustment would result into consequential TP adjustments towards
interest income from its AE and the interest income may have to be
computed on the basis of the ALP. Moreover, until the amount is
repatriated to India, the advances will continue to be reflected in the
Balance Sheet of the assessee at the year­end and the same may have
to be re­instated at the prevailing foreign exchange rates.
Secondary adjustment also in the books of AE
4. Further, the definition of 'Secondary Adjustment' u/s. 92CE(3)(v)
prescribes adjustments in the books of account of the assessee as well
as its AE.
Thus, the said provision mandates that the adjustments also have to be
made in the books of the AE. The requirement of the section to amend
the books of AE seems practically difficult task and may cause
unintended hardships to the AE. This is because neither the assessee
nor the Tax department may have control over the books of the AE
which is located in the foreign tax jurisdiction. Under these
circumstances, these provisions may be difficult to be fully
implemented.
Constructive distribution of dividend and applicability of s.
2(22)(e)
5. If these transactions are treated as advances given to the AE, the
provisions of s. 2(22)(e) of the Act may get attracted. As per s. 2(22)(e)
of the Act, any loan or advances made by the company to the
shareholder having beneficial interest of more than 10% of the voting
power of the assessee­company or to such entity where such
shareholder is having substantial interest would be treated as dividend
in the hands of the shareholder to the extent of accumulated profits of
the company. If such shareholder is the AE of the assessee, the
consequences of treatment of advance would follow in the hands of
such AE. In such scenario, there would be a fear of these transactions
being treated as dividends in the hands of AE.
Effectively, the provision may act like double edged sword. The AEs will
be hit hard­once due to making it obligatory for them to repay advance
and secondly, due to payment of tax u/s. 2(22)(e) of the Act. If the AE
is taxable in the foreign tax jurisdiction and out of reach of the tax
department, the assessee may also run risk of it being treated as the
representative assessee for the said AE. This can invite problems and
difficulties for the assessee as well.
Impact of the adjustments on the computation of book
profits for subsequent years
6. Once the provisions of s. 92CE(2) are complied with and the
adjustments are introduced in the books of account for the subsequent
years, certainly income for the subsequent years when the secondary
adjustments are carried out would get enhanced.

5. This may have an impact on the computation of the book profits for
the subsequent years in case of corporate entities and may impact their
tax liabilities in case if the tax u/s. 115JB exceeds the tax determined
under the normal provisions for that year.
As a result of the same, the assessee may have to face double taxation
of the same income, once by virtue of the primary adjustments carried
out in the year in which the transactions are carried out and secondly
on account of MAT tax in the year when such adjustments are
introduced in the books by crediting profit and loss account.
Secondary adjustment ­ only if primary adjustment causes
change in income of assessee
7. There may be instances where the secondary adjustments may not
have to be made, even if the adjustment on account of ALP is to be
made.
In a case where the transactions pertain to acquisition of fixed assets
by a company, undisputedly no deduction of any expenditure is
claimed by the assessee. In such scenario even if the adjustments are
proposed in terms of TP regulations, only the value of assets would
change and there may not be any impact on the income of the
company, except to the extent of depreciation claimed on the same.
In case of 'International transaction' perhaps the secondary
adjustment would only arise to the extent of value of depreciation. This
is because secondary adjustment specifically provides for adjustments
in the books to reflect that actual allocation of profits of assessee and
its AE are consistent and imbalance between cash account and actual
profits is removed. Since in such case the imbalance is only to the
extent of depreciation, only such amount may be introduced in the
books.
However, in case of 'Specified Domestic Transactions' even the
adjustment for depreciation may not have to be made. This is because
the specified domestic transactions, as per s. 92BA, only cover
incidence of expenditure in respect of which payment has been made
or is to be made. If the transaction is not in the nature of expenditure,
the TP provisions would not be applicable and no primary adjustment
would arise. Admittedly, depreciation is an allowance and not
expenditure and, hence, TP provisions may not arise. In such cases
even no secondary adjustment is required to be carried out by the
assessee.
Accounting treatment in the year adjustments
8. While incorporating the amount of primary adjustments in the
books P & L A/c. may have to be credited with the said amount and the
corresponding debit would have to be given in the balance sheet as an
advance to the AE.
In the P & L A/c., in terms of the accounting standard followed by the
company, these adjustments may have to be treated as prior period

6. adjustments and, accordingly, may have to be given a special treatment
based on the applicable accounting standards.
Repatriation of the excess amount (secondary adjustments)
from AE ­ Implications of other laws
9. The secondary adjustments have to be brought into the books of the
assessee and held as an advance made by the assessee to such AE.
Several guidelines have been issued by the Govt. of India and the RBI
explaining the procedure of repatriation of funds and several
compliances have to be made as per the provisions of the FEMA.
One may, therefore, have to see the implications of the provisions of the
FEMA and compliance with the RBI with respect to repatriation of the
funds. One may also have to see the provisions relating to the indirect
tax laws, more particularly with respect to possibility of allegation of
under invoicing of the transaction and possible evasion of duties.
Increase in litigation possible
10. These newly introduced provisions may also increase litigation
multifold. This is because these provisions would only apply if the
primary adjustment to the TP has been made in five different
scenarios. These scenarios would show that a need for secondary
adjustments would arise if, in principle, such adjustment is either
made by the assessee itself or is accepted by the assessee in accordance
with the modes specified u/s. 92CE(1). Thus, consequences of
secondary adjustments have to be borne by the assessee if it accepts or
admits these adjustments on account of the TP regulations.
Undisputedly, if conceding to the TP adjustments would result into
further hardship to the assessee and it's AE, there are greater chances
that the assessee may not admit or accept such adjustments and may
challenge the same in appeal. Once these adjustments are disputed by
an assessee in appeal, the provisions of s. 92CE would not be
applicable and the assessee would be out of the purview of these harsh
provisions.
Applicability of s. 92CE ­ Retrospectively?
11. As explained in foregoing paras, the applicability of s. 92CE is
subject to certain exceptions. The proviso to s. 92CE(1) says that the
secondary adjustments may not be carried out, if:
(a) the amount of primary adjustment made in any previous
year does not exceed Rs. 1 crore; and
(b) the primary adjustment is made in respect of an assessment
year commencing on or before the 1st day of April, 2016.
Concluding Remarks
12. There are serious concerns in the manner the said exception has
been worded in the Act, more particularly due to the use of the word
'and' between the two scenarios. Since the two scenarios mentioned in
the proviso to s. 92CE(1) are combined by use of 'and", it would mean

7. that in order to fall within the exception, the case of the assessee must
comply with both conditions simultaneously, i.e., primary adjustment
should be less than Rs. 1 crore and it should pertain to A.Y. 2016­17 or
the earlier years.
In other words, and to put it differently, secondary adjustment would
still be, required if either:
(a) Primary adjustment is more than Rs. 1 crore even in respect
of past years; or
(b) Primary adjustment pertains to A.Y. 2017­18 or thereafter.
If such interpretation is intended by the Legislature, it would cause
immense hardships to the assessee as they would be subjected to
secondary adjustments even in respect of past years and would have
retrospective effect.
It is necessary that the assessee should consider various issues that
arise due to introduction of the said provisions. The CBDT or the
Finance Ministry should also look into clarifying the issues which may
unintentionally cause hardship to the assessees.
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