Section 170: secondary adjustment in certain cases

When a secondary adjustment is required

An assessee must make a secondary adjustment in every case where a primary adjustment of ₹1 crore or more to the transfer price:

• has been made by the assessee on his own in his return of income;
• made by the Assessing Officer has been accepted by him;
• is determined by an advance pricing agreement entered into under Section 168;
• is made as per the safe harbour rules made under Section 167; or
• arises as a result of resolution of an assessment by way of the mutual agreement procedure under a double-taxation avoidance agreement entered into under Section 159.

Excess money treated as a deemed advance

If, as a result of the primary adjustment, there is an increase in the assessee's total income or reduction in loss, and the resulting "excess money" (or part of it) held by the associated enterprise is not repatriated to India within the prescribed time, that excess money (or the unrepatriated part) is deemed to be an advance made by the assessee to the associated enterprise.

This excess money may be repatriated from any of the assessee's associated enterprises that is not resident in India.

Interest on this deemed advance is computed in the manner prescribed.

Option to pay 18% additional income-tax instead

Instead of repatriating the excess money and computing notional interest, the assessee may, at his option, pay additional income-tax at the rate of 18% on the excess money (or part) not repatriated within the prescribed time.

Tax so paid is treated as the final payment of tax on that excess money - no further credit for it can be claimed by the assessee or any other person, and no deduction under any other provision of the Act is allowed in respect of the amount on which this tax has been paid.

Where this 18% additional tax is paid, the assessee is not required to separately make the secondary adjustment or compute notional interest from the date of payment of that tax.

Key definitions

For the purposes of this section:

• "arm's length price" has the meaning assigned in Section 173(a).
• "excess money" means the difference between the arm's length price determined in the primary adjustment and the price at which the international transaction was actually undertaken.
• "primary adjustment" to a transfer price means determination of the transfer price as per the arm's length principle, resulting in an increase in total income or reduction in loss.
• "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 them is consistent with the transfer price determined by the primary adjustment - removing the imbalance between cash account and actual profit.

Frequently asked questions