To understand the meaning, need,objective and issues of secondary adjustment and to know the intent of government to introduce secondary adjustment in transfer pricing. Method of secondary adjustment adopted by India. To analyse Union Budget 2019 amendments regarding secondary adjustment. Finally, to know the method of secondary adjustment adopted in other countries.

1. Secondary Adjustment
CA. Divakar Vijayasarathy

2. Credits and Acknowledgments
Bharathi Priya R D
Jugal Gala

3. Legends Used in the Presentation
Act Income Tax Act, 1961
AE Associated Enterprise
APA Advance Pricing Agreement
DDT Dividend Distribution Tax
DTAA Double Taxation Avoidance Agreement
LIBOR London Interbank Offered Rate
MAP Mutual Agreement Procedure
OECD Organisation for Economic Co-operation and Development
PY Previous Year
Rules Income Tax Rules, 1962
SBI State Bank of India
SEZ Special Economic Zone
TP Transfer Pricing

4. Presentation Schema
Background
Overview of
Secondary
Adjustment
Meaning of
Relevant Terms
Methods of
Secondary
Adjustment
Applicability
Treatment of
Excess Money
Computation of
Time Limit and
Interest Income
Option for One
Time Additional
Income-Tax
Non-
Applicability
Illustration
Practical Issues
and Way
Forward
Global
Perspective

5. Background
The Finance Act, 2017 introduced the provisions relating to secondary
adjustment
In order to align India’s TP rules with OECD TP guidelines

6. Overview of Secondary Adjustment
“Secondary adjustment” means an adjustment in the books of accounts of the assessee and its
associated enterprise (AE) pursuant to a primary adjustment
Meaning
To reflect the actual allocation of profits between the assessee and its AE, being consistent with
the transfer price determined as a result of primary adjustment
Need
To remove the imbalances between cash account and actual profit of the assesseeAim

7. Meaning of Relevant Terms
• Determination of transfer price in accordance with
the arm’s length principle which results in increase in
total income or reduction in loss of the assessee
Primary adjustment
• Difference between arm’s length price determined in
a primary adjustment and the price at which the
international transactions have actually taken place
Excess money

8. International Transaction – Sec 92B
Transaction between two or
more AEs either or both non-
resident
Having bearing on profit,
income, losses or assets
Includes mutual arrangement
for allocation of common costs
Transaction entered into by an
enterprise with a person other
than an AE
Prior agreement between other
person and AE or the terms of
the relevant transaction are
determined in substance
between other person and AE
Either enterprise or AE or both
are non-resident and other
person may or may not be a
non-resident
Deemed International Transaction – Sec 92B(2)

9. Methods of Secondary Adjustment
Deemed
dividend
Deemed
advance
Deemed equity
contribution
In India, secondary adjustment is done using “deemed advance” as the medium
Excess money will be treated as
deemed dividend and dividend
distribution tax on excess money has
to be paid
Excess money will be treated as
deemed advance and interest on
excess money has to be paid
Excess money will be deemed as
capital contribution

10. Applicability – Sec 92CE
Secondary adjustment can be made only when primary adjustment is upheld
Secondary adjustment can be done
Suo moto by the assessee
Under Safe Harbour Rules
Under ("APA") on or after the 1st April 2017*
By the department at the time of assessment
Under Mutual Agreement Procedure ("MAP")
*Retrospective effect from A Y 2018-19 (Amendment vide Union Budget 2019)

11. Treatment of Excess Money as Deemed Advance
Then such excess money will be treated as
deemed advance made by the assessee to its
AE and the interest will be charged on such
advance
If the excess money or part thereof as the
case may be which is available with its AE, if
not repatriated to India within 90 days*
* Union Budget 2019 has further clarified that excess money or part thereof may be repatriated from any of the
AE of the assessee which is not a resident in India with retrospective effect from 1st April 2018
Then, the excess
money must be
repatriated
within 90 days
As a result
of primary
adjustment
If there is reduction in
loss of the assessee
If there is an increase
in total income

12. Computation of 90 Days - Rule 10CB(1)
Where a primary adjustment to transfer price Computation of 90 days
Made by an assessee on his own in his return of income
From the due date of filing of return
under section 139(1) of the Act
Determined under APA
Made under the Safe Harbour Rules
Made vide MAP under a DTAA
Made by the Assessing Officer/Appellate Authority and
accepted by the assessee
From the date of order of Assessing
Officer or Appellate Authority
Excess money or part thereof, if not repatriated to India within 90 days then such
money will be treated as deemed advance and interest shall be computed

13. Computation of Interest Income – Rule 10CB(2)
Imputed per
annum interest
Where the international
transaction is denominated in
Indian rupee
At the 1 year marginal cost of
fund lending rate of SBI as on
1st of April of the relevant PY
plus 325 basis points
Where the international
transaction is denominated in
foreign currency
At 6 month LIBOR as on 30th
September of the relevant PY
plus 300 basis points

14. Option for One-time Additional Tax*
Where repatriation is not made within 90 days, the assessee will have an option to pay additional
income-tax at the rate of 18% on such excess money or part thereof
Interest shall still be calculated till the date of payment of such additional tax
Additional surcharge at the rate of 12% on such additional tax
The tax paid shall be the final payment of tax and no credit shall be allowed
The underlying expenditure on which such additional tax paid shall not be allowed as deduction under
any other provisions
If the additional tax is paid, secondary adjustment and consequent interest calculation need not be
made from the date of payment of such additional tax
* Inserted vide Union Budget 2019 - will be effective from 1st September 2019

15. Non Applicability – Sec 92CE
If the amount of primary adjustment made in any previous year does not exceed
₹1 crore
If the primary adjustment is made in respect of an assessment year before A Y
2016-17
Or*
*Vide Union Budget 2019, the words “and” has been substituted with “or” with retrospective effect from 1st April 2018
Thus, provisions of secondary adjustment shall not be applied if any of the above conditions is not satisfied

16. Illustration
‘A’ Ltd
Indian company
‘X’ Ltd
Foreign company
Subsidiary
company of ‘A’
Ltd
Renders Service
Transaction price is not at arm’s length price
Arm’s Length Price ₹ 5 crore
Transaction price ₹ 3.5 crore
Excess money ₹ 1.5 crore
Primary adjustment of ₹ 1.5 crores (exceeding ₹ 1 crore) has been upheld
by the assessee. ₹ 1.5 crores shall be shown as receivable from X Ltd in the
books of A Ltd.
• ‘X’ Ltd or any of the AE of ‘A’ Ltd has to repatriate the excess money ₹
1.5 crore within 90 days
• If not repatriated within 90 days excess money will be deemed as
advance given by ‘A’ Ltd to ‘X’ Ltd and interest will be charged on such
amount
• ‘A’ Ltd has an option of making one time additional income-tax at the
rate of 18% on such excess money plus surcharge

17. Analysis under Various Scenarios
Scenario 1 – Where excess
money is repatriated
Scenario 2 – Where part of excess money is
repatriated
Scenario 3 – Where excess money is
not repatriated
 Excess money of ₹ 1.5 crore is
repatriated by ‘X’ Ltd within
90 days
 No interest will be charged
 Credit of such amount in the
books of ‘A’ Ltd and debit of
such amount in the books of
‘X’ Ltd
 Say ₹ 0.9 crore (part of excess money) is
repatriated by ‘X’ Ltd within 90 days
 No interest will be charged on ₹ 0.9 crore
 Credit of ₹ 0.9 crore in the books of ‘A’ Ltd and
debit of such amount in the books of ‘X’ Ltd
 ₹ 0.6 crore shall be treated as deemed advance
 Interest will be charged on ₹ 0.6 crore
 Option of one-time additional tax payment is
available on ₹ 0.6 crore
 Additional income tax = (₹0.6 crore*18%) + 12%
surcharge
 Therefore, additional income tax along with
surcharge shall be ₹ 0.12 crore
 No credit shall be allowed for payment of ₹ 0.12
crore
 If option is availed, no secondary adjustment
and consequent interest calculation shall be
made
 Entire excess money of ₹ 1.5 crore
is not repatriated within 90 days
 ₹ 1.5 crore shall be treated as
deemed advance
 Interest will be charged on ₹ 1.5
crore
 Option of one-time additional tax
payment is available on ₹ 1.5
crore
 Additional income tax = (₹1.5
crore*18%) + 12% surcharge
 Therefore, additional income tax
along with surcharge shall be ₹
0.30 crore
 No credit shall be allowed for
payment of ₹ 0.30 crore
 If option is availed, no secondary
adjustment and consequent
interest calculation shall be made

18. Practical Issues - Applicability
• There is no mention of the period from when the calculation of interest should
start and when it shall end
Calculation of
interest amount
• The secondary adjustment envisages the repatriation of money from associated
enterprises back to assessee; however, neither the charging section nor the
specified rule provides the treatment of repatriated amount
Treatment after
money is
repatriated
• Enhancement of deduction under Section 10AA to include repatriated amount as
well when amount is repatriated back from associated enterprises
Enhanced
deduction under
Section 10AA

19. Practical Issues – In relation to AE
• Law of land extends its scope outside India which is not tenable; the AE may not
entertain such adjustment in their books of accounts
Adjustment in
the books of AE
• In case when relationship between assessee and AE ceases to exist within the time
period stipulated by the rule, the assessee may not have cushion to demand for
adjustment in the books of accounts of the other party and in turn, for repatriation
of money
When
relationship with
AE ceases
• The governing tax law of associated enterprises may not permit to send money
back to India or there may be concerns for repatriation if the transfer price is
accepted by the tax authorities of associated enterprises outside India
Repatriation of
money from
associated
enterprises

20. Practical Issues - Transfer Pricing Law
• At the time of primary adjustment, difference between the arms' length price
and the transfer price i.e. excess money, is charged to tax as transfer pricing
adjustment and if the same is not repatriated, interest is calculated thereon,
which may tantamount to double taxation
Double Taxation
• The applicability of provisions of secondary adjustments may be challenged
for transactions between head office in one jurisdiction and branch in another
jurisdiction considering the fact that the branch is only the extended arm of
head office in another jurisdiction
Applicability for
transactions between
HO and branch
• Legality of secondary adjustments in case of deemed international
transactions whereby transaction are entered between assessee and party
other than associated enterprises because charging section talks only about
repatriation from associated enterprises
Applicability on
deemed international
transactions

21. Other Issues
• Against a receivable amount of AE being outstanding, the assessee can
subsequently book bad debts and claim the entire receivable amount as an
expenses - a way to mitigate the further implication of secondary adjustments
Bad debts
• There is ambiguity under what head of income the interest amount shall be
charged; whether income from business or profession or income from other
sources.
Head of income
• Treatment of unpaid interest if the amount is not repatriated from AE and it still
remains outstanding - whether the interest amount in next year shall be
calculated on the excess money only or excess money along with the unpaid
interest amount of last year
Interest on
interest

22. Way Forward
The backdrop under which provisions of secondary adjustment were brought in the legislation is
appreciating but the framing of relevant sections and rules requires a re-examination
Union Budget 2019 has amended Sec 92CE which clarifies certain issues; however, still a certain level of
ambiguity exists which the law-maker should address to
Instead of excess amount being construed of advance, if the said amount can be re-characterised as
dividend amount paid to AE’s, Dividend Distribution Tax ("DDT") or withholding of tax on dividend
amount, as the case may be, can be charged
The intent behind rationalising the provisions of secondary adjustment can achieve its objective
without affecting the books of accounts of assessee as well as AE

23. Global Perspective
Country Approach Adopted Details
South Africa Deemed dividend – For
Companies
Deemed donation – For
others
Substitutes 'Deemed Loan' approach with approach of
'Deemed Dividend‘ – subject to withholding tax at
specified rates
United Kingdom
(UK)
Deemed loan Loan ceases to exist when funds are repatriated in cash or
by netting with existing debt
United States of
America (USA)
Deemed capital contribution No secondary adjustment if repatriation corresponding to
amount allocated in a primary adjustment is through
account receivable or related party payable
South Korea Deemed dividend Subject to withholding taxes at the rate specified in the
corporate tax law or applicable treaty
Canada Deemed dividend Subject to withholding tax of 25% and may be reduced
depending on the provisions of a relevant tax treaty

24. Thank You
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