Clause 170 Secondary adjustment in certain cases.

Income Tax Bill, 2025

Introduction

Clause 170 of the Income Tax Bill, 2025 introduces and consolidates the concept of secondary adjustment in transfer pricing, continuing the legislative policy first articulated in Section 92CE of the Income-tax Act, 1961. Both provisions are situated within the broader context of special provisions aimed at the avoidance of tax, specifically targeting cross-border transactions between associated enterprises (AEs) to ensure that profits are allocated in accordance with the arm's length principle. This commentary examines Clause 170 in depth, analyzing its individual components, legislative intent, interpretative challenges, and practical implications. It then systematically compares each provision with the corresponding aspects of Section 92CE, highlighting similarities, distinctions, and potential areas for reform or clarification.

Objective and Purpose

The legislative intent behind secondary adjustments is to reinforce the effectiveness of transfer pricing regulations by addressing not only the accounting and tax consequences of primary adjustments but also the actual movement of funds between associated enterprises. The core objective is to align the economic reality (cash flows) with the arm's length price determined for tax purposes, thereby closing loopholes that could be exploited for base erosion and profit shifting (BEPS). Historically, before the introduction of secondary adjustment provisions, tax authorities could only make a primary adjustment to the reported transfer price, increasing the taxable income of an Indian entity when a transaction with an AE was found to be not at arm's length. However, the excess income so added often remained with the foreign AE, leading to a mismatch between the profits recognized for tax and the actual cash position of the Indian entity. This disconnect was identified as a BEPS risk, prompting the introduction of secondary adjustment rules to require repatriation of the excess money or, failing that, to treat it as a deemed advance with attendant interest or additional tax consequences. Clause 170 of the Income Tax Bill, 2025, and Section 92CE of the Income-tax Act, 1961, are thus designed to ensure that the transfer pricing adjustments have real economic substance and not merely book-entry effects.

Detailed Analysis of Clause 170

1. Triggering Events for Secondary Adjustment
   • Clause 170(1) mandates secondary adjustments in cases where a primary adjustment of INR 1 crore or more to the transfer price has been made in any of the following situations:
     1. On the assessee's own initiative in the return of income;
     2. By the Assessing Officer and accepted by the assessee;
     3. Pursuant to an Advance Pricing Agreement (APA) u/s 168;
     4. As per safe harbour rules u/s 167;
     5. Arising from Mutual Agreement Procedure (MAP) resolution under a Double Tax Avoidance Agreement (DTAA) as per section 159.
   • Comparison with Section 92CE(1): The language and structure are almost identical. Both provisions enumerate the same five scenarios, with only the section references updated to reflect the new Bill's numbering. The monetary threshold (INR 1 crore) is retained. Notably, Section 92CE includes specific carve-outs via provisos, such as exclusion for adjustments not exceeding INR 1 crore and for assessment years up to 2016-17, which are not explicitly stated in Clause 170 but may be addressed in the prescribed rules or subsequent clarifications.
2. Deemed Advance and Repatriation Requirement
   • Clause 170(2) establishes that if, as a result of primary adjustment, there is an increase in total income or reduction in loss, and the excess money is not repatriated to India within the prescribed time, such excess is deemed to be an advance by the assessee to its AE. This triggers a notional interest charge.
   • Clause 170(3) clarifies that repatriation can be made from any non-resident AE, not necessarily the one involved in the original transaction.
   • Comparison with Section 92CE(2) and Explanation:The provisions are substantially similar. Section 92CE(2) treats the unrepatriated excess money as a deemed advance and requires interest computation. The Explanation in Section 92CE (inserted by Finance (No. 2) Act, 2019) also clarifies that repatriation can be from any non-resident AE. Clause 170 makes this explicit in the main text, possibly reflecting a legislative intent to provide greater clarity up front.
3. Interest Computation
   • Clause 170(4) stipulates that the interest on the deemed advance shall be computed in the prescribed manner.
   • Comparison with Section 92CE(2): Both provisions defer the specifics of interest computation to prescribed rules, maintaining flexibility for the government to adjust rates and methods as circumstances evolve. This approach is consistent with international best practices, where interest is typically computed at arm's length rates reflecting the currency and nature of the transaction.
4. Option to Pay Additional Income-tax
   • Clause 170(5) introduces an option for the assessee: instead of making a secondary adjustment and computing interest, the assessee may opt to pay an additional income-tax at 18% on the unrepatriated excess money.
   • Clause 170(6) provides that such tax payment is final and no further credit can be claimed by the assessee or any other person.
   • Clause 170(7) prohibits deduction under any other provision for the amount on which such tax has been paid.
   • Clause 170(8) relieves the assessee from the obligation to make a secondary adjustment or compute interest from the date of payment of the additional tax.
   • Comparison with Section 92CE(2A)-(2D): These provisions closely mirror the amendments made to Section 92CE by the Finance (No. 2) Act, 2019, which introduced the option to pay 18% additional tax in lieu of secondary adjustment and interest. The structure and effect are the same: finality of tax payment, no further deduction, and cessation of interest accrual. The Bill's version is more streamlined, integrating these elements in a logical sequence.
5. Definitions
   • Clause 170(9) defines key terms:
     • "arm's length price" (by reference to section 173(a));
     • "excess money" as the difference between the arm's length price and the actual transaction price;
     • "primary adjustment" as the determination of transfer price resulting in increased income or reduced loss;
     • "secondary adjustment" as an adjustment in the books to reflect the arm's length allocation of profits and remove imbalance between cash and profit.
   • Comparison with Section 92CE(3):The definitions are essentially the same, with updated cross-references to the new Bill's sections.

Ambiguities and Interpretative Issues

Despite the structural clarity, both Clause 170 and Section 92CE raise certain interpretative and practical issues:

• Prescribed Time for Repatriation: Neither provision specifies the time limit for repatriation in the main text, leaving it to the rules. In practice, this has led to uncertainty and litigation, particularly where the rules are amended or interpreted differently by taxpayers and authorities.
• Computation of Interest: The manner of interest computation is delegated to rules, which may lead to disputes over the applicable rate, currency, and compounding method.
• Scope of "Associated Enterprise": While Section 92CE refers to Section 92A for the definition of AE, Clause 170 cross-refers to section 173(a) for "arm's length price" but does not explicitly define AE within the clause, potentially requiring reference to the general definitions in the Bill.
• Finality and Non-deductibility: The prohibition on further credit or deduction is clear, but the interaction with other provisions (e.g., MAT, carry forward of losses) could give rise to interpretive challenges.

Practical Implications

The secondary adjustment mechanism has significant implications for various stakeholders:

• For Businesses:
  • Companies with cross-border transactions must ensure not only that their transfer pricing is robust but also that any primary adjustment is followed by the actual movement of funds to India, or be prepared to face interest or additional tax costs.
  • The 18% additional tax provides a clear, albeit costly, exit route for cases where repatriation is impractical due to regulatory, commercial, or foreign exchange restrictions.
  • Secondary adjustments may impact cash flows, financial planning, and group treasury operations.
• For Tax Authorities:
  • The provisions are designed to deter profit shifting and ensure that transfer pricing adjustments have real economic impact.
  • Administrative challenges remain in tracking repatriation and enforcing interest computation, especially in complex group structures.
• For Advisors:
  • There is an increased need for proactive advice on structuring transactions, documenting transfer pricing, and managing the compliance burden associated with secondary adjustments.

Comparative Analysis: Clause 170 vs. Section 92CE

Policy and International Context

India's secondary adjustment regime is broadly aligned with OECD guidance (Action 13 of the BEPS Project) and the practices of several other jurisdictions, including the United States, which have similar rules to ensure that transfer pricing adjustments are reflected in actual cash flows. The option to pay a one-time tax in lieu of secondary adjustment is a pragmatic response to business realities, especially where repatriation is constrained by foreign exchange controls or commercial considerations. However, the Indian regime is notable for its relatively high tax rate (18%) and the absence of a de minimis threshold for smaller adjustments in the new Bill (subject to rules). The detailed prescription of events triggering secondary adjustment, the manner of interest computation, and the finality of tax payment are all in line with international best practices, though the compliance burden remains significant.

Potential Areas for Reform or Clarification

• Clarity on Carve-outs: Explicitly retaining or updating the carve-outs for small adjustments and pre-2016 years in the main text of Clause 170 would enhance certainty.
• Interest Computation Rules: Prompt and clear notification of rules for interest computation is essential to avoid disputes.
• Interaction with Other Provisions: Further guidance on interaction with other tax provisions (e.g., MAT, carry forward of losses, foreign tax credits) would be beneficial.
• Administrative Simplification: Consideration could be given to further simplification for smaller taxpayers or transactions, possibly through increased thresholds or safe harbour rules.

Conclusion

Clause 170 of the Income Tax Bill, 2025, represents a continuity and consolidation of the secondary adjustment regime first introduced in Section 92CE of the Income-tax Act, 1961. The provisions are largely harmonized, with only minor structural and reference updates, reflecting the maturing of India's transfer pricing framework in line with global standards. The regime is robust in its design, targeting both the tax and cash flow aspects of transfer pricing adjustments, though practical challenges remain in terms of compliance, administration, and interpretative clarity. The option to pay additional tax provides flexibility, but its high rate may be burdensome for some taxpayers. As the new Bill is implemented, further guidance and possible refinements in rules will be crucial to ensure certainty and effectiveness in achieving the policy objectives of aligning profits, cash flows, and tax outcomes in international transactions.

Full Text:

Clause 170 Secondary adjustment in certain cases.