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Secondary Adjustment Transfer Pricing

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May 5, 2021

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8 mins read

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 : –

International Taxation Services

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

For any queries, please write them in the Comment Section or Talk to our tax expert

Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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