The concept of 'Secondary Adjustment' was introduced in Finance Act 2017 by introducing new Section 92CE in the Indian Income Tax Act (the Act) to align transfer pricing provisions with international best practices. Additionally, Finance Bill 2019 clarified certain anomalies on the applicability of these provisions, liberalized repatriation mechanism, and provided one-time tax payment option to the taxpayers as an alternative to actual repatriation.
In line with the provisions in the Act, on 15 June 2017, to operationalize the secondary adjustment regulations, Central Board of Direct Taxes (CBDT) had prescribed (vide Notification No. 52/2017)1 Rule 10CB in Income-tax Rules, 1962 (the Rules) to provide the following:
- The time limit for repatriation of funds in different events/ scenarios of primary adjustments; and
- Interest to be imputed in case of failure to repatriate funds within the prescribed time.
Recently on 30 September 2019, CBDT further amended Rule 10CB (vide Notification No.76/2019/ F.No.370142/12/2017-TPL) to provide below changes:
Change in the time limit for repatriation of excess money or part thereof in certain cases to eliminate the hardships faced by taxpayers entered into APA and MAP
| Nature of primary adjustment | Time limit for repatriation (Before amendment) | Time limit for repatriation (After amendment) |
| Advance Pricing Agreement (APA) entered | 90 days from the due date of filing of return of income | If APA is entered on or before the due date of filing of return for the relevant previous year - 90 days from the due date of filing of a return of income |
| If APA is entered after the due date of filing of return for the relevant previous year - 90 days from the end of the month in which the APA has been entered into | ||
| Mutual Agreement Procedure (MAP) entered under a Double Taxation Avoidance Agreement (DTAA) | 90 days from the date of giving effect by the Assessing Officer under Rule 44H of the Rules to the resolution arrived at under MAP |
Impact of the aforesaid amendment
Considering an example, ABC Co. is engaged in the business of providing IT-enabled support services having a pricing policy of cost plus 15%. ABC Co. files an APA application covering the period FY 2015-16 to FY 2019-20 considering cost plus 15% as pricing policy. An APA is signed on 31 March 2018, wherein cost plus 17% has been considered as arm's length price as against pricing policy of cost plus 15% put forth by ABC Co. In this example, we have demonstrated the impact of secondary adjustment before and after amendment as below:
| Primary adjustment in relation to APA entered into (Difference between 15% and 17%) | Time limit for repatriation (Before amendment) | Time limit for repatriation (After amendment) |
| Adjustment in respect of FY 2015-16 | 28 February 2017 | 29 June 2018 |
| Adjustment in respect of FY 2016-17 | 28 February 2018 | 29 June 2018 |
| Adjustment in respect of FY 2017-18 | 28 February 2019 | 28 February 2019 |
We can observe that change in the time limit for repatriation will immensely benefit the taxpayers, especially in cases of APA, since there exists a time lag between applying for the APA and actual conclusion.
The period from when interest shall be chargeable in case of failure to repatriate funds within prescribed time limits:
| Nature of primary adjustment | Time Limit for repatriation |
| Suo-moto adjustment made in return of income | From the due date of filing of a return of income |
| APA entered (before the due date of filing return of income for the previous year) | |
| Safe Harbour Rule (SHR) exercised | |
| APA entered (after the due date of filing return of income for previous year) | From the end of the month in which the APA has been entered into |
| MAP entered under a DTAA | From the date of giving effect by the Assessing Officer under Rule 44H of the Rules to the resolution arrived at under MAP |
| Transfer Pricing Adjustment made by the relevant authority in the relevant order | From the date of order (by the assessing officer or the relevant appellate authority) |
Amendment to explanation to rules
Additionally, the above notification has incorporated the explanation to Rule 10CB to explain that rate of exchange for the calculation of the value in rupees of the international transaction denominated in foreign currency shall be telegraphic transfer buying rate of such currency on the last day of the previous year in which such international transaction was undertaken.
Whereas, Telegraphic transfer buying rate shall mean (as provided in Explanation to Rule 26):
"The rate or rates of exchange adopted by the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), for buying such currency having regard to the guidelines specified from time to time by the Reserve Bank of India for buying such currency where such currency is made available to that bank through a telegraphic transfer."
SKP's Comments
The time limit for repatriation of excess money or part thereof as per erstwhile rules have now been rationalized in certain cases wherein earlier time limit did not seem to be practical (such as in cases of APA and MAP), eliminating hardships faced by taxpayers.
At the same time, the clarity in respect of the period from when the interest shall be chargeable in case of failure to repatriate funds within prescribed time limits has now been appropriately aligned with the time limits for repatriation.
Footnote
1. Tax Alert - Secondary Adjustments Operationalised | 20 June 2017
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
