Secondary Adjustment Transfer Pricing – International Taxation Case Study
Gama Ltd., an Indian company, has provided you the following information for year ended 31.3.2019 : –
| Transaction | Related Enterprise | Amount as per Invoice (Rs. in crores) |
Amount as per ITR |
| Purchase of raw-materials | Gama , China | 200 | 180 |
| Payment of royalty | Gama Pty Singapore | 100 | 90 |
| Sale of finished goods | Gama Malaysia | 50 | 25 |
| Interest on loan | Gama Inc. USA | 125 | 125 |
| Fee for consultancy paid to Gama Cyprus | Gama , Cyprus – | 100 | 100 |
You are also provided the following further information : –
During the course of assessment, the interest paid to Gama Inc. USA who was reduced by the AO to Rs. 100 crores. This adjustment was accepted by the company.
During the course of assessment, Fee for consultancy paid to Gama Cyprus who was reduced by the AO to Rs. 80 crores. This adjustment was not accepted by the company , and it preferred in appeal with the CIT(A) on this matter.
The company, entered into an Advance Pricing Agreement u/s 92CC , wherein, the purchase of raw-materials was agreed at Rs. 180 crores with the relevant authority ;
(a) Compute the amount of any secondary adjustment, which is required to made under Income-tax Act, 1961 for A.Y. 2020-21 , assuming a rate of interest of 11%, and that the transactions materialized on 31.3.2019 ?
(b) Compute the amount of any secondary adjustment, in case the CIT (Appeals) reduces the payment for Fee for consultancy paid to Gama Cyprus by Rs. 10 crores, which is accepted by Gama Ltd. , A.Y. 2020-21 assuming a rate of interest of 11%, that the transactions materialized on 31.3.2019, and Gama Ltd. was able to get the excess money back from the AE within the prescribed time to the extent of Rs. 50 crores ?
Secondary Adjustment – Transfer Pricing Case Study – Solution : –
Section 92CE(i) provides that the assessee shall make secondary adjustment where the primary adjustment to transfer price , exceeding Rs. 1 crore, has been : –
a)Made suomotu by the assessee in his return of income; or
b)Made by the Assessing Officer and has been accepted by the assessee; or
c)Determined by an advance pricing agreement entered into by the assessee u/s 92CC; or
d)Made as per the safe harbour rules framed u/s 92CB; or
e)Arises as a result of resolution of an assessment by way of the mutual agreement procedure.
In view of the above, the excess money available with the AE shall be computed as under :
| S.
No |
Transaction | Related Enterprise | Amount as per Invoice(Rs. in crores) | Amount as per ITR |
| 1 | Purchase of raw-materials | Gama , China | 20 | Adjustment to be made since price has been determined under an advance pricing agreement entered into by the assessee u/s 92CC |
| 2 | Payment of royalty | Gama Pty Singapore | 10 | Adjustment accepted by the assessee |
| 3 | Sale of finished goods | Gama Malaysia | 25 | Adjustment accepted by the assessee |
| 4 | Interest on loan | Gama Inc. USA | 25 | Adjustment accepted by the assesse pursuant to order of the AO |
| 5. | Fee for consultancy paid to Gama Cyprus | Gama , Cyprus – | – | Since adjustment has not bee accepted by the assesse as per the order of the AO |
| Excess Money available with the AE | 80 |
(a)
| Particulars | Amount |
| Excess Money available with the AE | 80 |
| Less : –
Amount received within prescribed time |
Nil |
| Advance on which secondary adjustment is to be computed @ 11% | 80 |
| Interest due on excess money | Rs. 8.8 crores |
(b) If CIT (Appeals) reduces the payment for Fee for consultancy paid to Gama Cyprus by Rs. 10 crores, which is accepted by Gama Ltd., the excess money available with the AE would be 90 crores.
| Particulars | Amount |
| Excess Money available with the AE | 90 |
| Less : –
Amount received within prescribed time |
(50) |
| Advance on which secondary adjustment is to be computed @ 11% | 40 |
| Interest due on excess money | Rs.4.4 crores |
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