Section 170 of the Income Tax Act, 2025 provides that a secondary adjustment shall be made in cases where a primary adjustment is made to the transaction price if the excess money which is lying with the other Associated Enterprise (AE) is not repatriated to India. At first glance, it appears that the provisions governing the applicability of secondary adjustment are widely worded to include all scenarios of primary adjustment without any exceptions.
The concept of Secondary adjustment is prevalent in many
developed jurisdictions. In that sense, introduction of Secondary adjustments rules
in Indian transfer pricing regime is in conformity with international practice.
Where
a primary adjustment has been made to the transfer price, the assessee is
required to make secondary adjustment.
Text of Section 170
of the Income Tax Act, 2025
170. Secondary adjustment in certain cases.
(1) An assessee shall make a secondary
adjustment in every case where primary adjustment of one crore rupees or more
to the transfer price -
(a) has been made by the assessee on
his own in his return of income;
(b) made by the Assessing Officer has
been accepted by him;
(c) is determined by an advance
pricing agreement entered into by him under section 168;
(d) is made as per the safe harbour
rules made under section 167; or
(e) is arising as a result of
resolution of an assessment by way of the mutual agreement procedure under an
agreement entered into under section 159 for avoidance of double taxation.
(2) The excess money or part thereof
available with its associated enterprise shall be deemed to be an advance made
by the assessee to such associated enterprise if -
(a) 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; and
(b) such excess money or part thereof
is not repatriated to India within the time as may be prescribed.
(3) The excess money or part thereof
referred to in sub-section (2)
may be repatriated from any of the associated enterprises of the assessee which
is not a resident in India.
(4) The interest on advance as
referred to in sub-section (2)
shall be computed in such manner as may be prescribed.
(5) Without prejudice to the
provisions of sub-section (2),
where the excess money or part thereof has not been repatriated within the
prescribed time, the assessee may, at his option, pay additional income-tax at
the rate of 18% on such excess money or part thereof, as the case may be.
(6) The tax on the excess money or
part thereof so paid by the assessee under sub-section (5) shall be treated as the final payment of tax in respect of
the excess money or part thereof not repatriated and no further credit thereof
shall be claimed by the assessee or by any other person in respect of tax so
paid.
(7) Deduction under any other
provision of this Act shall not be allowed to the assessee in respect of the
amount on which tax has been paid as per sub-section (5).
(8) In a case where the additional
income-tax referred to in sub-section (5)
is paid by the assessee, he shall not be required to make secondary adjustment
under sub-section (1) and
compute interest under sub-section (4)
from the date of payment of such tax.
(9) For the purposes of this section,
-
(a) “arm’s length price” shall have
the meaning assigned to it in section 173(a);
(b) “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;
(c) “primary adjustment” to a transfer
price, means the determination of transfer price as per 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;
(d) “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.
Text of Rule 83 of the Income Tax Rules, 2026
83. Time period for repatriation of excess money under section 170(2) and computation of interest income under section 170(4) pursuant to secondary adjustments. –
(1) For the purposes of section 170(2)(b), the time limit for repatriation of excess money or part thereof in the circumstances mentioned in column B of the following Table shall be on or before ninety days from the date mentioned in column C thereof:
Table
|
S.
No. |
Circumstances |
Date |
|
A |
B |
C |
|
1. |
Primary adjustments to transfer price have been made suo motu by the assessee
in his return of income. |
Due date of furnishing of return under section 263(1). |
|
2.
|
Primary adjustments
to transfer price as determined in the order of Assessing Officer or the
appellate authority has been accepted by the assessee. |
Date of the order of Assessing Officer or the appellate authority, as the case may
be. |
|
3. |
Primary adjustment to transfer price is determined by an advance
pricing agreement entered into by the assessee under section 168 in respect
of a tax year on or before the due date of furnishing of return for the relevant
tax year. |
Due date of furnishing of return under section 263(1). |
|
4. |
Primary adjustment to transfer price is determined by an advance
pricing agreement entered into by the assessee under section 168 in respect
of a tax year after the due date of furnishing of return for the relevant tax
year. |
End of the month in which the advance pricing agreement has been entered into. |
|
5. |
Option is exercised by the assessee as per the safe harbour rules
under section 167. |
Due date of furnishing of return under section 263(1). |
|
6. |
Primary adjustment to transfer price is determined by the resolution
arrived at under mutual agreement procedure under a Double Taxation Avoidance
Agreement entered into under section 159 (1) or (2). |
Date of order giving effect under rule 121(10) to
such resolution. |
(2) The imputed per annum interest income on excess money or part thereof, which is not repatriated within the time limit as per sub-rule (1) shall be computed -
(a) at the one-year
marginal cost of fund lending rate of the State Bank of India as on the 1st April
of the relevant tax year plus 325 basis points in the cases where the
international transaction is denominated in Indian rupee; or
(b) at the reference
rate of the relevant foreign currency, as defined in rule 89(3), as on the 30th
September of the relevant tax year plus 300 basis points in the cases where the
international transaction is denominated in foreign currency.
(3)
The interest referred to in sub-rule (2) shall be chargeable on excess money or
part thereof which is not repatriated in cases referred to in column B of the
Table in sub-rule (1) from the date mentioned in column C thereof.
(4)
For this rule, the exchange rate for conversion of the value of international
transactions denominated in foreign currency into Indian rupees, shall be the
telegraphic transfer buying rate of such currency on the last day of the tax year
in which the transaction was undertaken and the telegraphic transfer buying
rate‖ shall have the meaning assigned to in rule 207.
What is primary adjustment?
§ Primary
adjustment to a transfer price means the determination of transfer price in
accordance with the arm’s length
principle
§ Such
adjustment results in increase in
total income or reduction
in the loss of the assessee.
§ Such
adjustment shall be made :
Ø either
Suo moto by the assessee in his return of income or
Ø by
Assessing officer which is accepted by the assessee or
Ø adjustments
made pursuant to Advance Pricing Agreement (APA) entered into or
Ø resolutions
under Mutual Agreement Procedure (“MAP”) or
Ø upon
availing safe harbor under the Act.
What is Secondary Adjustment ?
“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(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.
OECD’s Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrations (‘OECD TP
Guidelines’) defines the term ‘Secondary Adjustment’ as “a
constructive transaction that some countries will assert under their
domestic legislation after having proposed a primary adjustment in order
to make the actual allocation of profits consistent with the primary
adjustment.” SA legislation is already prevalent in many tax jurisdictions
like Canada, United States, South Africa, Korea, France etc. Whilst
the approaches to SAs by individual countries vary, they represent an
internationally recognised method to realign the economic benefit of the
transaction with the arm’s length position. It restores the financial
situation of the relevant related parties to that which would have
existed, if the transactions had been conducted on an arm’s length basis.
The underlying economic premise
for the SA is perhaps best expressed in the OECD TP Guidelines, which
state: “… secondary adjustments attempt to account for the
difference between the re-determined taxable profits and the
originally booked profits.”
Cases, where secondary adjustment is
not required
In the following cases, secondary
adjustment is not required to be made:
(i)
the amount of primary adjustment
made in any previous year does not exceed one crore rupees, or
(ii)
the primary adjustment is made in
respect of an assessment year commencing on or before the 1st day of April,
2016.
When secondary adjustment is mandatory [Section 170(1)]
An assessee shall make
a secondary adjustment in every case where primary adjustment of one crore
rupees or more to the transfer price due to :
(a) Suo moto adjustment
made by the assesse in return of income;
(b) Adjustment by Assessing
Officer accepted by assesse;
(c) is determined by an
Advance Pricing Agreement entered into by him under section 168;
(d) is made as per Safe
Harbour rules made under section 167; or
(e) is arising as a result of resolution of an
assessment by way of the mutual agreement procedure (MAP) under an agreement
entered into under section 159 for avoidance of double taxation
Deemed to be an advance made by the assesse to such Associated Enterprise [Section 170(2)]
If excess money is not repatriated to India,
then:
👉 It is deemed as loan/advance to Associated
Enterprise (AE)
(b) Non-repatriation to India within prescribed time
Source of repatriation [Section 170(3)]
Repatriation can be made from any non-resident
Associated Enterprise (not necessarily same Associated Enterprise).
Interest on deemed advance [Section 170(4)]
Interest is charged on such deemed advance (as
prescribed rules).
Option to the assessee to pay one time income tax [Section 170(5)]
An option is available to the assessee to pay a one-time additional tax @ 18% (plus
surcharge & HEC) on the un-repatriated amount,
Finality of tax [Section 170(6)]
§ This 18% tax is final tax
§ No credit allowed to assessee or any other person
No deduction allowed [Section 170(7)]
Deduction under any other provision of this Act
shall not be allowed to the assessee in respect of the amount on which tax has
been paid as per sub-section (5).
Relief from further compliance [Section 170(8)]
If 18% tax is paid :
§ No need for secondary adjustment
§ No interest computation thereafter
Key Definitions [Section 170(8)]
§ Primary Adjustment → to a transfer price, means the determination of transfer
price as per 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
§ Secondary Adjustment → Book adjustment to align profits
§ Excess Money → Difference between the arm’s length price determined in
primary adjustment and the price at which the international transaction has
actually been undertaken;
Illustration : Based on Income Tax Act - Section 170 of the Income Tax
Act, 2025:
Example - 1
(i)
Scenario: An Indian Company (A) sells goods to its US
Subsidiary (B) for ₹10 Crore, but the arm's length price (ALP) is determined to
be ₹ 15 Crore.
(ii)
Primary Adjustment: A transfer pricing adjustment of ₹ 5 Crore (₹ 15
Cr - ₹ 10 Cr) is made, increasing Company A's taxable income.
(iii)
The “Excess Money”: The ₹ 5 Crore extra profit remains in the
books of the US subsidiary.
(iv) Secondary Adjustment: Company
A must repatriate (bring back) the ₹ 5 Crore excess money from Subsidiary B to
India within 90 days of the assessment.
(v) Consequence if the excess
money is not repatriated within the prescribed time limit : If
Company A fails to repatriate within the prescribed time limit, the ₹ 5 Crore,
this sum is considered a “deemed loan” from A to B, and interest is charged on
this amount, which is added to A’s income.
Example - 2
(i) An Indian company “A” has
sold goods worth Rs. 20 crore to its overseas subsidiary “B”. The arm’s length
price is say Rs.30 crore.
(ii) The primary adjustment is
made by the Assessing Officer by applying arm’s length principle amounting to
Rs. 10 crore (30-20).
(iii) Excess Money Rs. 10 crore.
(iv) “A” will have to debit the account of “B” by Rs. 10 crore in its
books of accounts.
(v) “A” will have to receive Rs. 10
crore from “B” within the prescribed time provided in Rule 83(1) of the Income
Tax Rules, 2026.
(vi) If “A” fails to receive the sum, then Rs. 10
crore will be deemed advance from “A” to “B” and the interest on such advance
shall be computed in the manner to be prescribed in Rule 83(2) of the Income
Tax Rules, 2026..
International Approaches to Secondary Adjustments
Globally, the OECD prescribes Secondary
Adjustment to take any form including constructive equity contribution,
loan or dividend.
(a) Deemed Capital Contribution Approach
(b) Deemed Dividend Approach
(c) Deemed Loan Approach.
Secondary Adjustment – Global Scenario
|
Jurisdiction |
Approach adopted
for SA |
|
Member State of
European Union: |
|
|
France, Austria,
Bulgaria, Denmark, Germany, Luxembourg, Netherlands, Slovenia, Spain |
Deemed profit
distribution /Constructive dividend |
|
USA |
Deemed distributed
income /Deemed capital contribution, as the case may be. |
|
South Africa |
Deemed dividend
approach for Companies; Deemed donation approach for persons other than
Companies. |
|
UK |
Deemed loan (Proposed) |
|
Canada |
Deemed dividend |
|
South Korea |
Deemed dividend /
Deemed capital contribution, as the case may be. |
Proviso to section 92CE(1), cannot be interpreted as a bar on any secondary adjustment by assessee, even de hors requirements under section 92CE(1)
Proviso
to section 92CE(1), cannot be interpreted as a bar on any secondary adjustment
by assessee, even de hors requirements under section 92CE(1). Thus as long as
an APA refers to secondary adjustments, whether specifically permissible under
law or not, these secondary adjustments are to be carried out. It is thus not
correct to say that, in principle, in terms of provisions of section 92CE, no
refund of taxes could be claimed or allowed on account of secondary adjustments
even if, for example, as in instant case, such secondary adjustments end up
reducing income of foreign AE assessees as a result of partial repatriation of
income. [In favour of assessee] (Related Assessment years : 2011-12 to 2016-17)
- [Gemological
Institute of America Inc. v. Additional Commissioner of Income Tax
(International Taxation) [2021] 127 taxmann.com 167 (ITAT Mumbai)]
