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Indian Tax Administration invites public comments on proposal to amend rules on "secondary adjustment" provisions under APA and MAP

Executive summary

India’s Finance Act 2017 introduced the “secondary adjustment” provision in the Indian Tax Law to address the collateral consequences arising from a primary transfer pricing (TP) adjustment. The provisions relating to a secondary TP adjustment are generally applicable for primary TP adjustments made from the financial year (FY) 2016-17 onwards. The primary adjustment, if not repatriated to India within the prescribed time, shall be deemed to be an advance made by the taxpayer to such associated enterprise (AE). The Indian Tax Administration, on 15 June 2017, issued the rules1 for implementation of these provisions. Under the rules, the time limit for cash repatriation in cases of primary adjustment pursuant to an Advance Pricing Agreement (APA) or Mutual Agreement Procedure (MAP) was 90 days from the due date of filing the income tax return. There were however some difficulties in implementing these time lines/rules relating to computing the time limits for repatriation. Considering this, the Indian Tax Administration proposed draft rules (Draft Rules), on 19 June 2018, for public comments pertaining to the application of “secondary adjustment” provisions in the case of an APA or MAP. As per the Draft Rules, commencement of the 90-day time limit for purposes of secondary adjustment would be as follows:

  • In the case of APAs, from the date on which the APA has been entered into by the taxpayer
  • In the case of MAP, from the date of giving effect by the tax officer to the resolution reached under the MAP

Public comments can be sent electronically by 9 July 2018 to the Indian Tax Administration at the email address ustp13@nic.in.

Detailed discussion

The provisions relating to “secondary adjustments” are applicable in the case of primary TP adjustments made from FY 2016-17 onwards. These provisions are primarily intended to ensure that profit allocations between the AEs are consistent with the primary TP adjustment. The primary adjustment is defined to mean the determination of the transfer price in accordance with the arm’s-length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the taxpayer.

A “secondary adjustment” has been defined to mean an adjustment in the books of accounts of the taxpayer and its AE to reflect that the actual allocation of profits between the taxpayer and its AE are consistent with the transfer price determined as a result of the primary adjustment.

The secondary TP adjustment is required where a primary adjustment to the transfer price occurs in one of the following circumstances:

  • Voluntarily made by the taxpayer in the tax return
  • Made by the tax officer and accepted by the taxpayer
  • Determined by an APA entered into by the taxpayer
  • Made as per the safe harbor rules
  • Resulted from a MAP resolution

The primary adjustment, if not repatriated to India within the prescribed time, shall be deemed to be an advance made by the taxpayer to such AE. Also, interest on such advance shall be computed in the hands of the taxpayer in such manner as prescribed.

The Indian Tax Administration, through its notification dated 15 June 2017, had issued rules prescribing the time limit for repatriation of a primary adjustment as well as the applicable interest rate for the purpose of interest computation in cases where the primary adjustment is not repatriated to India.

However, during the course of implementing these provisions, certain difficulties were noted in respect of the primary adjustment that arises on account of an APA entered into by the taxpayer or on account of an agreement reached under the MAP. Accordingly, in order to remove these difficulties, on 19 June 2018, the Indian Tax Administration issued Draft Rules pertaining to the application of “secondary adjustment” provisions in the case of an APA or MAP. Public comments, in this regard, can be sent electronically by 9 July 2018 at the email address ustp13@nic.in. A summary of the proposed changes are as follows:

Scenario under which primary adjustment is determined
Time limit for repatriation
As per the current rules
As per the Draft Rules

Adjustment pursuant to APA

On or before 90 days from the due date of filing income tax return

On or before 90 days from the date on which the APA has been entered into by the taxpayer

Adjustment pursuant to MAP

On or before 90 days from the date of giving effect by the tax officer to the resolution reached under the MAP

No changes have been proposed in other scenarios under which the “secondary adjustment” provision gets triggered.

Implications

The Draft Rule proposes to clarify the current rules relating to computation of time limits for the purpose of secondary adjustment. In the case of APAs, by providing a time limit of 90 days from the date of signing the APA, the draft seeks to align the time line for secondary adjustment with the time limit which is prescribed for filing an amended tax return to give effect to the APA. In the case of MAP, the proposal to link the time limit to the date of giving effect to the MAP resolution is a positive development.

Endnote

1. Rule 10CB of the Income Tax Rules, 1962.

EYG no. 010011-18Gbl

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