Secondary Adjustment Transfer Pricing — Practical Overview
Section 92CE of the Income Tax Act, introduced in 2017, mandates a 'secondary adjustment' where a primary transfer pricing adjustment exceeds ₹1 crore and the additional income is not repatriated to India within the prescribed period. The secondary adjustment treats the un-repatriated amount as a deemed advance to the associated enterprise (AE), attracting deemed interest income at SBI base rate plus 3.25% (or international rate as notified).
Regulatory and Statutory Framework
Practical impact: even after the primary TP addition is settled (paid or finally adjudicated), the secondary adjustment continues to accrue interest year-on-year until repatriation, with each year's interest itself becoming a primary adjustment subject to TP and secondary-adjustment treatment — a compounding cycle.
Process and Documentation Requirements
The end-to-end process typically involves: (a) initial fact-finding and document collection — incorporation documents, financial statements, board resolutions, and any prior filings on the matter; (b) regulatory analysis — identification of applicable provisions, exemptions, and procedural prerequisites; (c) drafting of the substantive deliverable — whether a report, application, certificate, or representation; (d) obtaining necessary internal approvals from the company's board or shareholders; (e) submission to the regulatory authority with supporting evidence; (f) follow-up on queries and rectifications; (g) post-completion compliance maintenance and record-keeping. Our advisory covers: quantifying the secondary adjustment liability for past primary adjustments; structuring repatriation through dividends, royalties, or capital reduction; one-time 18% additional tax election under Section 92CE (in lieu of deemed interest, for specified primary adjustments); and ongoing tracking of secondary-adjustment exposures across years.
Common Pitfalls and How We Avoid Them
From our litigation and assessment experience, the most frequent issues that escalate into adverse outcomes are: (a) inadequate documentation supporting the technical position taken; (b) inconsistency between disclosures across different statutory filings (income tax, ROC, GST); (c) failure to obtain timely contemporaneous evidence (board minutes, valuer reports, contracts); (d) reliance on form over substance — the Indian regulatory regime increasingly looks through form to economic substance; (e) missed limitation periods for filings, replies, or appeals. Our engagement methodology builds in checks against each of these failure modes from kick-off.
Why CA V. Viswanathan and Virtual Auditor
The combination of FCA, ACS, CFE, and IBBI Registered Valuer credentials under one practice — IBBI/RV/03/2019/12333 — is rare, and is precisely the breadth needed for engagements that span direct tax, indirect tax, corporate law, FEMA, and valuation simultaneously. Our practice has been operating since 2012 with offices in Chennai, Bangalore, and Mumbai, and serves clients across India through secure document-room workflows, named partner ownership, and weekly status updates. Engagements are scoped on fixed-fee terms wherever the work permits, with full transparency on inclusions and exclusions.
Engagement Process and Next Step
Free 30-minute consultation with CA V. Viswanathan to scope your specific requirement, identify the right approach, and provide a written fixed-fee quote within 24 hours. Engagements typically commence within 3-5 working days of acceptance, with kickoff document checklist shared upon engagement letter signing. References from comparable engagements available on request, subject to confidentiality. Call +91 99622 60333 or email support@virtualauditor.in to schedule.
Frequently Asked Questions
What is secondary adjustment?
Under section 92CE of the Income-tax Act, 1961 (section 170 of the Income-tax Act, 2025 from tax year 2026-27), where a primary transfer-pricing adjustment of more than ₹1 crore is made (by the assessee in its return, by the Assessing Officer and accepted, or under an APA or safe harbour), the excess money attributable to the adjustment that remains with the associated enterprise is treated as a deemed loan to that enterprise, on which interest must be computed.
When does Section 92CE apply?
Timing depends on the specific regulatory trigger, statutory deadline, or transaction requirement. Virtual Auditor recommends proactive planning to avoid penalties and compliance gaps. Contact our team for timeline-specific guidance.
What is the interest rate on deemed loan?
Rule 10CB prescribes the one-year marginal cost of funds lending rate of the State Bank of India as on 1 April of the relevant year plus 3.25% for rupee-denominated transactions, and the six-month LIBOR (now the equivalent benchmark rate) plus 3% for foreign-currency transactions.
How long to repatriate primary adjustment?
Within 90 days from the due date of the return (where the adjustment is made by the assessee), from the date of the order (where made by the officer and accepted), or from the date of the APA or safe harbour option. If not repatriated, the assessee may instead pay a one-time additional income-tax of 18% (plus surcharge and cess) on the excess money under section 92CE(2A) of the Income-tax Act, 1961 (section 170 of the Income-tax Act, 2025).
Does FEMA apply to secondary adjustment?
Virtual Auditor provides expert advisory on this through our FCA + ACS + CFE + IBBI Registered Valuer practice. Contact us at +91 99622 60333 or visit virtualauditor.in for detailed guidance specific to your situation.
Do these related-party dealings need transfer-pricing work, and what documentation will I receive?
Transfer pricing applies to international transactions with associated enterprises, and to specified domestic transactions above ₹20 crore. Where the aggregate value of international transactions exceeds ₹1 crore, the prescribed documentation must be kept, and every entity with such transactions files an accountant’s report (Form 3CEB) by the due date (the Income-tax Act, 1961 for tax years up to 2025-26; the corresponding provisions of the Income-tax Act, 2025 from tax year 2026-27). Large groups also file a master file and country-by-country report. You receive a transfer-pricing study that maps each transaction, analyses functions, assets and risks, selects the method, benchmarks against comparable companies, and concludes on the arm’s length price, together with the certified report. If the price is adjusted in assessment, we support the objection and appeal.