Company Taxation

Secondary Adjustment

The concept of 'secondary adjustment' was introduced in 2017 to align transfer pricing provisions with international best practices. As a concept, secondary adjustment arises when the taxpayer agrees to a transfer price, which is different from what is recorded in the books of accounts. The taxpayer can agree to this different transfer price, either suo moto at the time of filing a tax return, or once the transfer pricing adjustment is done by the tax officer and not further litigated, or during the APA or Mutual Agreement Procedure (MAP) proceedings. The provisions require Indian taxpayers to repatriate the difference in transfer price as per tax and as per books of accounts (excess money) from the overseas AE within 90 days. In case the repatriation is not made within 90 days, it would be deemed as a loan given by the taxpayer to the AE, and the interest shall be computed till the time the repatriation is made by the AE. However, the Finance Bill (No. 2) of 2019, had provided certain clarifications regarding the effective implementation of these provisions, which are as follows:

  • These provisions shall not apply if the primary adjustment does not exceed INR 10 million or the same pertains to AY 2016-17 and earlier years. These two conditions are not cumulative.
  • The taxpayer may choose not to make a secondary adjustment by a one-time tax payment at 18% on the amount to be repatriated plus a 12% surcharge on such tax. However, the taxpayer will continue to pay the due interest till the date of such one-time tax, as per the existing provisions.
  • The amount of primary adjustment may be repatriated from any of the AEs not resident in India and not necessarily the transacting AEs.

Extensive Transfer Pricing Documentation

  • As a notable development, India's transfer pricing documentation requirements are being aligned with the OECD BEPS Project.
  • In line with the international consensus on this topic, it is now proposed that companies need to maintain and furnish extensive, group-level details to the Indian tax authorities by way of a Master File (MF) and Country-by-Country (CbC) report, in addition to the current transfer pricing documentation (i.e., local file) requirements in India.

Master File- Rule 10DA : The information to be captured in Master File can be broadly classified in four categories, i.e., (i) Description of the business, (ii) Particulars of intangibles, (iii) Particulars of financing activities, (iv) General information. Additionally, the groups consolidated financial statement is also expected to be included.

The applicability and timelines required for the Master File are as follows:

Entity Applicability Form to be filed Due Date
Indian subsidiary / affiliate of the multinational group A constituent entity irrespective of:
• Whether the entity has entered in international transactions
• Threshold applicability
• Whether the entity is resident or not
Part A of Form No. 3CEAA By due date of furnishing the return of Income (i.e., 30 November)
A constituent entity passing the prescribed thresholds Part B of Form No. 3CEAA By due date of furnishing the return of Income (i.e., 30 November)
The designated entity, where there are multiple constituent entities resident in India Form No. 3CEAB At least 30 days before the due date of filing Form No 3CEAA
  • CbC Report (CbCR) - Rule 10DB : The CbCR shall include economic information within the multinational group, such as the nature of main business activities, revenues, profit/loss, income taxes paid, stated capitals, accumulated earnings, number of employees, tangible assets, etc. for each country in which the group operates.
  • The CbC reporting requirements shall apply to Indian multinational groups having a consolidated revenue above a threshold to be prescribed. It was indicated that the revenue threshold will be INR 5,500 billion (which is meant to be equivalent to the globally adopted EUR 750 million per year).

The applicability and timelines required for CbCR are as follows:

Entity Applicability Form to be filed Due Date
Indian subsidiary/affiliate of the multinational group, wherein the parent entity is not a resident of India Intimation of details of parent entity/alternate reporting entity which will file the CbCR Form No. 3CEAC 2 months prior to furnishing the CbCR
Parent entity or alternate parent entity in India Every parent entity or the alternate reporting entity resident in India Form No. 3CEAD The due date for furnishing the CbCR is on or before the due date for filing of Return of Income for the relevant accounting year of the group.
Indian subsidiary/affiliate of the multinational group, wherein the parent entity is not a resident of India Intimation of multiple constituent group entities in India Form No. 3CEAE No timeline mentioned in the rules. This needs to be clarified by the CBDT.

The Finance Bill (No. 2) of 2019, had provided certain clarifications regarding the definition of accounting year:

In the case of an alternate reporting entity of an international group, wherein the parent entity is not a resident of India, the reporting accounting year shall be the one applicable to the parent entity. The amendment will take effect retrospectively from 1 April 2017 and will, accordingly, apply in relation to assessment year 2017-18 and the subsequent assessment years.

Penalty

From a comprehensive understanding perspective, the penalties prescribed in the Indian Income Tax Act, 1961 with respect to the failure to furnish the enhanced transfer pricing documentation are as follows:

  • Failure to furnish information and documentation under the proposed three-tier documentation structure by the due date will attract a penalty of INR 500,000
  • Failure to furnish the CbCR by the due date ranges from INR 5,000 to INR 50,000 per day
  • For non-furnishing or inaccurate furnishing of the CbCR, a penalty of INR 500,000 would be applicable.
Get in Touch
Maulik Doshi
Senior Executive Director
Transfer Pricing and Transaction Advisory Services

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