Introduction:
Section 92CE of the Income Tax Act is an important provision that deals with the concept of secondary adjustments in transfer pricing. Transfer pricing is a critical aspect of international taxation that deals with the determination of prices for transactions between two related parties. In this blog, we will discuss the provisions of Section 92CE in detail.
Overview of Section 92CE:
Section 92CE was introduced by the Finance Act, 2017, and it came into effect from April 1, 2018. The section applies to cases where a primary adjustment has been made to the transfer price of an international transaction, and the arm’s length price (ALP) of the transaction exceeds the price actually charged. In such cases, Section 92CE requires a secondary adjustment to be made to the books of accounts of the taxpayer.
Primary Adjustment:
The primary adjustment refers to the adjustment made to the transfer price of an international transaction to align it with the arm’s length price. The primary adjustment can be made by the taxpayer or the tax authorities, depending on the circumstances of the case.
Secondary Adjustment:
The secondary adjustment, as the name suggests, is a further adjustment that needs to be made to the books of accounts of the taxpayer. The purpose of the secondary adjustment is to reflect the actual allocation of profits between the related parties.
Modes of Secondary Adjustment:
Section 92CE provides for two modes of secondary adjustment:
Deemed Dividend:
Under this mode, the excess money that is not repatriated to India within the prescribed time limit will be deemed to be an advance or loan to the foreign associated enterprise (AE). The deemed advance or loan will be treated as a deemed dividend and taxed at the rate of 30%.
Notional Loan:
Under this mode, a notional loan is deemed to have been given by the Indian entity to the foreign AE, and interest is charged on such notional loan. The interest charged on the notional loan is treated as income and taxed accordingly.
Time Limit for Secondary Adjustment:
Section 92CE provides that the secondary adjustment needs to be made within 90 days from the end of the financial year in which the primary adjustment is made. If the secondary adjustment is not made within the prescribed time limit, a penalty of 1% per month is levied on the amount of primary adjustment.
Details on the Application of Section 92CE:
Section 92CE applies in cases where the transfer price of an international transaction is not at arm’s length, and a primary adjustment is made to align the transfer price with the arm’s length price. The secondary adjustment is required to ensure that the profits are correctly allocated between the related parties.
It is important to note that the secondary adjustment is not an additional tax liability. The adjustment is made to the books of accounts of the taxpayer, and the tax liability arises only if the taxpayer fails to comply with the provisions of the section.
Deemed Dividend:
Under the deemed dividend mode of secondary adjustment, the excess money that is not repatriated to India within the prescribed time limit is treated as a deemed advance or loan to the foreign AE. The deemed advance or loan is treated as a deemed dividend and taxed at the rate of 30%.
The time limit for repatriation of excess money is 90 days from the end of the financial year in which the primary adjustment is made. If the excess money is not repatriated within the prescribed time limit, the deemed dividend mode of secondary adjustment is applied.
Notional Loan:
Under the notional loan mode of secondary adjustment, a notional loan is deemed to have been given by the Indian entity to the foreign AE, and interest is charged on such notional loan. The interest charged on the notional loan is treated as income and taxed accordingly.
The interest rate on the notional loan is the rate prevalent in the open market for similar loans. The time limit for making the notional loan adjustment is also 90 days from the end of the financial year in which the primary adjustment is made.
Penalty for Non-compliance:
Section 92CE provides for a penalty of 1% per month on the amount of primary adjustment if the secondary adjustment is not made within the prescribed time limit. The penalty is levied until the date of compliance with the provisions of the section.
Challenges in implementing Section 92CE:
The implementation of Section 92CE presents several challenges for taxpayers and tax authorities. Some of the significant challenges are:
- Valuation of Primary Adjustment: The determination of the arm’s length price is often a complex and challenging exercise. The valuation of the primary adjustment requires a careful analysis of several factors, such as the nature of the transaction, the functions performed by the related parties, and the economic conditions prevailing in the market.
- Identification of Excess Money: The identification of the excess money that needs to be repatriated within the prescribed time limit is also a challenging task. The taxpayer needs to maintain proper documentation to identify the excess money and ensure that it is repatriated within the prescribed time limit.
- Computation of Interest: The computation of interest on the notional loan is also a complex task. The interest rate on the notional loan is the rate prevalent in the open market for similar loans. The taxpayer needs to maintain proper documentation to determine the appropriate interest rate and ensure that the notional loan adjustment is made within the prescribed time limit.
- Interpretation of the Section: The provisions of Section 92CE are relatively new, and there is limited judicial precedent on the interpretation of the section. The lack of clarity on the provisions of the section can lead to disputes between the taxpayers and the tax authorities.
Conclusion:
Section 92CE of the Income Tax Act is an important provision that aims to ensure that the profits are appropriately allocated between related parties. The implementation of the section presents several challenges for taxpayers and tax authorities, and it is essential to ensure that the provisions of the section are interpreted correctly and implemented in a manner that is fair and reasonable to all parties involved.
Taxpayers engaged in international transactions must carefully consider the provisions of Section 92CE and ensure that they comply with the provisions of the section to avoid any adverse consequences. The tax authorities also need to ensure that the provisions of the section are implemented in a fair and reasonable manner to prevent disputes and litigation.
Read more useful content:
- section 145 of income tax act
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- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
- What is Section 92CE of the Income Tax Act?
Section 92CE of the Income Tax Act is a provision that requires secondary adjustments to be made to the transfer price of an international transaction if the primary adjustment is not at arm’s length.
2. What is a primary adjustment?
A primary adjustment is made to align the transfer price of an international transaction with the arm’s length price.
3. What is a secondary adjustment?
A secondary adjustment is required to ensure that the profits are correctly allocated between related parties.
4. When is a secondary adjustment required?
A secondary adjustment is required when the primary adjustment is not at arm’s length.
5. What are the modes of secondary adjustment under Section 92CE?
The modes of secondary adjustment under Section 92CE are the deemed dividend mode and the notional loan mode.
6. What is the time limit for making the secondary adjustment?
The time limit for making the secondary adjustment is 90 days from the end of the financial year in which the primary adjustment is made.
7. What happens if the excess money is not repatriated within the prescribed time limit?
If the excess money is not repatriated within the prescribed time limit, the deemed dividend mode of secondary adjustment is applied.
8. What is the penalty for non-compliance with Section 92CE?
Section 92CE provides for a penalty of 1% per month on the amount of primary adjustment if the secondary adjustment is not made within the prescribed time limit.
9. What are the challenges in implementing Section 92CE?
The challenges in implementing Section 92CE include the valuation of primary adjustment, identification of excess money, computation of interest, and interpretation of the section.
10. How can taxpayers comply with the provisions of Section 92CE?
Taxpayers can comply with the provisions of Section 92CE by maintaining proper documentation, ensuring that the primary adjustment is at arm’s length, and making the secondary adjustment within the prescribed time limit.
