Concept of ‘Secondary Adjustments’ Introduced

IAS Prelims 2023

The Budget 2017 presented by Indian finance minister, ushered the concept of ‘secondary adjustments’.

It means that an adjustment that arises from imposing tax on a secondary transaction.

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

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.

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.

India has also introduced limitations (for tax purposes) on interest deductions in the hands of an Indian taxpayer on borrowings obtained from its foreign associate enterprise or even from third parties.