The Finance Bill 2017 presented by the Finance Minister before the Parliament, amongst other things, has introduced a new concept in the existing quagmire of transfer pricing i.e. Secondary Adjustments. As per the proposed law, in certain situations where the adjustment is made in the Arm's Length Price of an international transaction between the associated enterprises, resulting in an increase of income or reduction in loss shall require a secondary adjustment in the books of accounts in the form of receivables reflecting the amount adjusted by virtue of such adjustment.

The proposed law identifies 5 situations where such an adjustment would be warranted:-

  • Where the tax payer himself revises the Arm's Length Price while filing his return
  • Where the adjustment made by tax authorities is accepted by the tax payer; uncontested
  • Where the adjustment arises by virtue of an APA
  • The adjustment arises due to application of safe harbour rules or
  • The adjustment is a result of resolution under MAP.

The proposed law further provides that such adjustment amount, if not repatriated into India within the prescribed period, the same shall entail a notional interest which would also be subject of tax.

However, what appears to have been lost sight of the challenges which may arise in terms of having an impact on the book profit as per MAT in the year of adjustment as well as such repatriation would require a corresponding amendment in the regulatory laws dealing with the Foreign Exchange Management Act (FEMA).

The answers to the above questions are currently in the womb of future and may get unfold as and when tax litigation evolves around this issue.

Globally, the concept of secondary adjustment is not very popular considering the practical challenges associated with it. Although, the Government has proposed to adopt a simpler way of making secondary adjustment as against the available complex route, yet it may prove to be a recipe for protractive litigation.  

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