Section 170: secondary adjustment in certain cases

Introduction

Section 170 requires a secondary adjustment after a qualifying primary transfer-price adjustment of ₹1 crore or more. It addresses the excess money remaining with the associated enterprise and sets routes for repatriation, deemed advance and additional tax.

Key takeaways

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.

Step-by-step flow for applying Section 170

1. 1

   Is there a primary adjustment of ₹1 crore or more?

   Made by the assessee in its return, made by the Assessing Officer and accepted, determined by an advance pricing agreement, made under safe harbour rules, or arising from a mutual agreement procedure resolution.

   • No: No secondary adjustment under Section 170(1).
   • Yes: Go to the next step.
2. 2

   Make the secondary adjustment in the books

   Adjust the books of the assessee and its associated enterprise so that the allocation of profits matches the transfer price after the primary adjustment.

3. 3

   Is the excess money repatriated to India within the prescribed time?

   It may come from any non-resident associated enterprise.

   • Yes: No deemed advance arises for the repatriated amount.
   • No: The unrepatriated amount is a deemed advance to the associated enterprise, and interest on it is computed in the prescribed manner.
4. 4

   Does the assessee opt to pay additional income-tax of 18%?

   • Yes: 18% is paid on the unrepatriated excess money. It is the final payment of tax and no credit for it can be claimed; no deduction is allowed in respect of the amount on which it is paid; and no secondary adjustment or interest is needed from the date of payment.
   • No: Interest on the deemed advance continues to be computed in the prescribed manner.

Practical checklist

Glossary

Primary adjustment

The initial change to transfer price used in computing taxable income.

Secondary adjustment

The corresponding adjustment addressing excess money with the associated enterprise.

Frequently asked questions