![\"Bringing](\"https:\/\/taxclick.org\/wp-content\/uploads\/2017\/02\/Globe-in-Hand.jpg\")
<\/a><\/p>\nIn view of the above, in Budget 2017 it is proposed to insert a new section 94B, in line with the recommendations of OECD BEPS Action Plan 4, to provide that interest expenses claimed by an entity to its associated enterprises shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise, whichever is less.<\/span><\/p>\nThe provision shall be applicable to an Indian company, or a permanent establishment of a foreign company being the borrower who pays interest in respect of any form of debt issued to a non-resident or to a permanent establishment of a non-resident and who is an ‘associated enterprise’ of the borrower. Further, the debt shall be deemed to be treated as issued by an associated enterprise where it provides an implicit or explicit guarantee to the lender or deposits a corresponding and matching amount of funds with the lender.<\/span><\/p>\nThe provisions shall allow for carry forward of disallowed interest expense to eight assessment years immediately succeeding the assessment year for which the disallowance was first made and deduction against the income computed under the head “Profits and gains of business or profession to the extent of maximum allowable interest expenditure.<\/span><\/p>\nIn order to target only large interest payments, it is proposed to provide for a threshold of interest expenditure of one crore rupees exceeding which the provision would be applicable.<\/span><\/p>\nBanks and Insurance business are excluded from the ambit of the said provisions keeping in view of special nature of these businesses. This amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.<\/span><\/p>\nSecondary Adjustment <\/span><\/strong>in case of Transfer Pricing <\/span><\/strong>
\n<\/span><\/h2>\n“Secondary adjustment” means an adjustment in the books of accounts of the assessee and its associated enterprise to reflect that the actual allocation of profits between the assessee and its associated enterprise are consistent with the transfer price determined as a result of primary adjustment, thereby removing the imbalance between cash account and actual profit of the assessee.<\/span><\/p>\nThe OECD Transfer Pricing Guidelines for Multinational Corporations and Tax Administrations (\u201cOECD transfer pricing guidelines\u201d) define the term secondary adjustments as \u201can adjustment that arises from imposing tax on a secondary transaction\u201d. A secondary transaction is further defined as \u201ca constructive transaction that some countries will assert under their domestic legislation after having proposed a primary adjustment in order to make the actual allocation of profits consistent with the primary adjustment.\u201d<\/em><\/span><\/p>\nAs per the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD transfer pricing guidelines), secondary adjustment may take the form of constructive dividends, constructive equity contributions, or constructive loans.<\/span><\/p>\nThe provisions of secondary adjustment are internationally recognised and are already part of the transfer pricing rules of many leading economies in the world. Whilst the approaches to secondary adjustments by individual countries vary, they represent an internationally recognised method to align the economic benefit of the transaction with the arm’s length position.<\/span><\/p>\nIn order to align the transfer pricing provisions in line with OECD transfer pricing guidelines and international best practices , a new section 92CE is inserted which provides that the assessee shall be required to carry out secondary adjustment where the primary adjustment to transfer price, has been made suo motu by the assessee in his return of income; or made by the Assessing Officer has been accepted by the assessee; or is determined by an advance pricing agreement entered into by the assessee under section 92CC; or is made as per the safe harbour rules framed under section 92CB; or is arising as a result of resolution of an assessment by way of the mutual agreement procedure under an agreement entered into under section 90 or 90A.<\/span><\/p>\nAs in the Finance Bill 2017 lists the following instances of Primary Adjustment:<\/span><\/p>\n\n- made suo moto by the taxpayer on its tax return<\/span><\/li>\n
- made by the Assessing Officer, accepted by the taxpayer<\/span><\/li>\n
- determined under an Advance Pricing Agreement (APA)<\/span><\/li>\n
- made as per Safe Harbour Rules<\/span><\/li>\n
- arising from a resolution under Mutual Agreement Procedure (MAP)<\/span><\/li>\n<\/ul>\n
Kindly have a look at this example to understand the meaning of primary adjustment and secondary adjustment<\/em><\/span><\/p>\nA Company ABC, is a captive service provider providing services to its holding company, Company PQR. The services are provided on a cost plus basis at the actual transaction price of cost of $1000 + 10% markup = $1100. However computed arm\u2019s length price comes out to be Cost of 1000 + 15% markup = $1150.<\/span><\/p>\nIn this case<\/em>
\n<\/strong><\/span><\/p>\n(a) Primary adjustment<\/strong><\/span><\/p>\nPrimary adjustment in the hands of Company ABC: $1150 \u2013 $1100 = $50 ( arms length price \u2013 actual price) on which tax will be paid. But it may be seen that the excess cash in the hands of Company PQR is $50. However, there is no adjustment in the hands of PQR or ABC for the excess cash in hands of PQR and cash deficit in the hands of ABC to the extent of $50.<\/span><\/p>\n(b) Secondary Adjustment <\/strong><\/span><\/p>\nSecondary Adjustment seeks to address the following<\/span><\/p>\n\n- the impact of the excess cash of $50 in the hands of Company PQR<\/span><\/li>\n
- the impact of cash deficit of $50 in the hands of Company ABC.<\/span><\/li>\n<\/ul>\n
Had the transaction been conducted at arm\u2019s length originally, the amount of $50 would have been reported in the books of accounts of Company ABC, and collected in the ordinary course of business. Eventually, Company ABC would incur cost related to repatriation of the amount of 50.<\/span><\/p>\nTherefore, to address the above issue it is proposed to provide that where as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the assessee, the excess money which is available with its associated enterprise, if not repatriated to India within the time as may be prescribed, shall be deemed to be an advance made by the assesse to such associated enterprise and the interest on such advance, shall be computed as the income of the assessee , in the manner as may be prescribed.<\/span><\/p>\nIn the above example, Per Finance Bill 2017, Secondary Adjustment is proposed to operate in the following manner:<\/span><\/p>\n– Every company with a Primary Adjustment must capture such amount ($50) in its books of accounts, and also the books of accounts of the related party<\/span><\/p>\n– The amount so booked ($50) must be received within a stipulated period, else interest would be applied at a specified rate (to be prescribed)<\/span><\/p>\nIn other words, if the amount of primary adjustment is not received into the country, such balance would be treated as an advance on which interest would be applied in a manner, yet to be prescribed.<\/span><\/p>\nIt is also proposed to provide that such secondary adjustment shall not be carried out if, the amount of primary adjustment made in the case of an assessee in any previous year does not exceed one crore rupees and the primary adjustment is made in respect of an assessment year commencing on or before 1st April,2016.<\/span><\/p>\nThis amendment will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19 and subsequent years.<\/span><\/p>\n