Income Tax 2025

Appearance

Secondary adjustment in certain cases. ​

170(1) ​

An assessee shall make a secondary adjustment in every case where primary adjustment of one crore rupees or more to transfer price—

  • (a) has been made on his own in his return of income;
  • (b) made by the Assessing Officer has been accepted by him;
  • (c) is determined by an advance pricing agreement entered into by him under section 168;
  • (d) is made as per the safe harbour rules made under section 167; or
  • (e) is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 159 for avoidance of double taxation.

170(2) ​

The excess money or part thereof available with its associated enterprise shall be deemed to be an advance made by the assessee to such associated enterprise if––

  • (a) as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee; and
  • (b) such excess money or part thereof is not repatriated to India within the time as prescribed.

170(3) ​

The excess money or part thereof referred to in sub-section (2) may be repatriated from any of the associated enterprises of the assessee which is not a resident in India.

170(4) ​

The interest on advance as referred to in sub-section (2) shall be computed in such manner as prescribed.

170(5) ​

Without prejudice to the provisions of sub-section (2), where the excess money or part thereof has not been repatriated within the prescribed time, the assessee may, at his option, pay additional income-tax at the rate of 18% on such excess money or part thereof, as the case may be.

170(6) ​

The tax on the excess money or part thereof so paid by the assessee under sub-section (5) shall be treated as the final payment of tax in respect of the excess money or part thereof not repatriated and no further credit thereof shall be claimed by the assessee or by any other person in respect of tax so paid.

170(7) ​

Deduction under any other provision of this Act shall not be allowed to the assessee in respect of the amount on which tax has been paid as per sub-section (5).

170(8) ​

In a case where the additional income-tax referred to in sub-section (5) is paid by the assessee, he shall not be required to make secondary adjustment under sub-section (1) and compute interest under sub-section (4) from the date of payment of such tax.

170(9) ​

In this section,—

  • (a) “arm’s length price” shall have the meaning assigned to it in section 173(a);
  • (b) “excess money” means the difference between the arm’s length price determined in primary adjustment and the price at which the international transaction has actually been undertaken;
  • (c) “primary adjustment” to a transfer price, means the determination of transfer price as per the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the assessee;
  • (d) “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 the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee
Explanation

Section Summary: ​

Section 170 of the Income Tax Act introduces the concept of secondary adjustments in cases where a primary adjustment to transfer pricing (adjustments made to align transactions with the arm’s length price) exceeds ₹1 crore. The purpose of this section is to ensure that the financial accounts of the taxpayer and their associated enterprises reflect the correct allocation of profits after a primary adjustment. If the excess money resulting from the primary adjustment is not repatriated to India within a prescribed time, it is treated as an advance, and interest or additional tax may apply.

Key Changes: ​

  1. Introduction of Secondary Adjustment: This is a new provision requiring taxpayers to adjust their books of account to reflect the correct allocation of profits after a primary adjustment.
  2. Threshold for Application: Applies only when the primary adjustment exceeds ₹1 crore.
  3. Repatriation Requirement: Excess money must be repatriated to India within a prescribed time; otherwise, it is deemed an advance, and interest or additional tax applies.
  4. Option to Pay Additional Tax: Taxpayers can opt to pay additional income tax at 18% on the excess money instead of repatriating it.
  5. Finality of Tax Payment: Tax paid under this section is treated as final, and no further credits or deductions are allowed.

Practical Implications: ​

  1. For Taxpayers:

    • Taxpayers must ensure that their transfer pricing documentation is robust to avoid primary adjustments.
    • If a primary adjustment occurs, they must either repatriate the excess money or pay additional tax.
    • Failure to comply may result in deemed advances, interest charges, or additional tax liabilities.

  2. For Businesses:

    • Multinational enterprises with cross-border transactions must align their transfer pricing policies with the arm’s length principle to avoid adjustments.
    • Businesses must maintain accurate records and ensure timely repatriation of funds to avoid penalties.

  3. Compliance Burden:

    • Taxpayers must track and report primary adjustments exceeding ₹1 crore.
    • They must also ensure that secondary adjustments are reflected in their books of account.

Critical Concepts: ​

  1. Arm’s Length Price (ALP): The price at which unrelated parties would transact under similar circumstances. Determined under Section 173(a).
  2. Primary Adjustment: An adjustment made to align the transfer price with the ALP, resulting in an increase in taxable income or reduction in loss.
  3. Secondary Adjustment: An adjustment in the books of account to reflect the correct allocation of profits after a primary adjustment.
  4. Excess Money: The difference between the ALP and the actual transaction price.
  5. Repatriation: Bringing the excess money back to India within the prescribed time.

Compliance Steps: ​

  1. Identify Primary Adjustments:

    • Determine if a primary adjustment exceeding ₹1 crore has been made (e.g., through self-assessment, assessment by the tax officer, or mutual agreement procedures).

  2. Repatriate Excess Money:

    • Ensure that the excess money is repatriated to India within the prescribed time to avoid deemed advances and interest charges.

  3. Make Secondary Adjustments:

    • Adjust the books of account of the taxpayer and the associated enterprise to reflect the correct allocation of profits.

  4. Option to Pay Additional Tax:

    • If repatriation is not feasible, pay additional income tax at 18% on the excess money.

  5. Maintain Documentation:

    • Keep records of primary adjustments, repatriation, and secondary adjustments for audit purposes.

Examples: ​

  1. Scenario 1: A taxpayer in India sells goods to its foreign associated enterprise at ₹10 crore, but the ALP is determined to be ₹12 crore. A primary adjustment of ₹2 crore is made. The taxpayer must repatriate ₹2 crore to India within the prescribed time. If not, the ₹2 crore is deemed an advance, and interest is charged.

  2. Scenario 2: In the same case, if the taxpayer opts not to repatriate the ₹2 crore, they can pay additional tax at 18% (₹36 lakh). Once paid, no further adjustments or interest calculations are required, and the tax is treated as final.

This section ensures that transfer pricing adjustments are fully reflected in the financial accounts and that taxpayers comply with the arm’s length principle in cross-border transactions.