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Transfer pricing: Centre moves forward, introduces secondary adjustments
May, 15th 2017

India has taken the next big step in its transfer pricing framework with the Budget ushering in the concept of ‘secondary adjustments’.

The move, which aligns the country’s transfer pricing provisions with OECD transfer pricing guidelines, will have implications for MNCs’ tax liability and cash flows, say tax experts.

India is introducing this concept nearly 16 years after transfer pricing provisions were introduced in the income tax law in 2001.

Secondary adjustment
Simply put, for the purpose of ‘secondary adjustments’, the taxman is now being empowered to treat any unrepatriated ‘primary adjustments’ as deemed advance and bring the interest on such advances to tax at the hands of domestic taxpayer.

Globally, countries approach this situation either by treating the amount as deemed dividend or a loan on which notional interest is charged. India has followed the latter approach.

To cite an example, in case of sale of goods where the transaction value is, say, ?100 but the arm’s length price is determined by the tax authorities at, say, ?120, then the differential of ?20 is a primary adjustment. If this ?20 is not brought into India, then secondary adjustment by way of interest on ?20 will be made.

The Budget has sought to introduce the concept of ‘secondary adjustments’ only in situations where the ‘primary adjustment’ is in excess of ?1 crore.

Samir Gandhi, Partner, Deloitte, Haskins & Sells, said the move was a “fair step” and represented an internationally recognised method to align the economic benefit with the arm’s length position. “This should not be seen as any revenue augmentation effort. They are only accounting for the economic benefits of a transaction”, Gandhi told BusinessLine.

‘Prone to litigation’
G Ramaswamy, former CA Institute President, said ‘secondary adjustments’ would be “prone to litigation” and there is need to increase the de-minimis primary adjustment to ?5 crore from the level of ?1 crore proposed now.

Rahul K Mitra, National Head, Transfer Pricing & BEPS, KPMG in India, said any amount subject to tax in the hands of the Indian taxpayer in the form of ‘secondary adjustment’ would not be available for set off in the hands of the foreign ‘associated enterprise’ concerned, in its foreign jurisdiction. The set-off benefit will be available only for primary adjustments, he added.

Jiger Saiya, Partner-Direct Tax, BDO India, said secondary adjustments in the field of transfer pricing was one of the key changes proposed by the latest Finance Bill (Budget).

“While the Government has indicated that this proposal aligns with international best practices and OECD transfer pricing guidelines, but it would now mandate a corresponding adjustment in the books of the overseas counterpart and trigger transfer pricing implications in the overseas jurisdiction,” Saiya added.

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