The Finance Act 2017 introduced the latest Section 92CE of the Income Tax Act. This section of the Income Tax law deals with secondary adjustments on transfer pricing. Besides, before including this section, the Income Tax Department did not try to make any secondary adjustments for the difference between ALP (Arm’s Length Price) and the actual price.
Read on to learn all about Section 92CE of the Income Tax Act – what is it, its provisions and sub-sections.
The primary purpose of introducing transfer pricing is to bring parity in a transaction between Associated Enterprises (Related/Dependent Party) and Third Party (Unrelated/Independent Party). Here, one cannot claim tax benefits by entering into tax beneficial transactions with Associated Enterprises.
Transfer pricing refers to an accounting practice when an exchange of goods and services happens between two divisions of the same company. Through transfer pricing, organisations can save on taxes. Companies use this practice to reduce the tax burden on the parent company. However, tax authorities can contest these claims.
For instance, an Indian Company A buys goods worth ₹80 from their USA associate entity B at ₹100. As a result, Company A takes a deduction of ₹20 and ends up saving ₹20 on taxes. Hence, multinational companies manage to save millions through this practice. However, to curb these practices government introduced section 92CE of the Income Tax Act.
This section mandated transfer pricing regulation. For example, Company A must record its transactions at “Arm’s length price” (ALP). In this case, the ALP is ₹80, and the adjustment in taxable income will be ₹20. This is known as primary adjustment; however, this leads to a loss of Government funds. As a result, the GoI formed guidelines of section 92CE to bring back those funds.
Section 92CE aligns transfer pricing provisions with best international practices. Moreover, this section offers secondary adjustments in specific cases. Further, these secondary adjustments can be made if there are primary adjustments made to transfer prices like:
As per this sub-section, the assessee should make secondary adjustments to transfer prices specified by the primary adjustments. The provisions of section 92 (1) of income tax have specific exemptions like:
The provision under this sub-section provides excess money available with the associate enterprises that should be sent back to India. Further, the funds should be repatriated within the prescribed time. Moreover, there are 4 divisions in this sub-section.
Without bias to sub-section (2) provisions, where the excess money or part thereof has not been sent back within the set time, the assessee may have to pay an additional 18% income tax on the excess funds or part thereof.
Taxes that the assessee pays as per the guidelines of sub-section 2A will be treated as the final payment. Moreover, the assessee cannot claim back the taxes.
Deduction on paid taxes will not be allowed to the assessee under this act.
The assessee needs to make secondary adjustments on taxes paid under sub-section 2A. Further, individuals should calculate under the guidelines of sub-section (2). Additionally, they should make the secondary adjustments under sub-section (1).
After the introduction of section 92 CE of the income tax act, taxpayers have to be more careful while entering into international transactions. Moreover, GoI introduced this section to bring the excess funds into the Indian economy. However, experts find it challenging to conclude its purpose because of the ambiguous language employed to draft this section.
Ans: The term primary adjustment is a means to determine transfer price based on ALP. Further, the ALP increases total income or decreases losses.
Ans: One can use the following methods to calculate ALP:
Profit Split Method
Resale Price Method
Comparable Uncontrolled Price Method
Cost Plus Method
Transaction Net Margin Method
Board prescribed methods
Ans: The time limit is 90 days.
Ans: The rate of interest is 3.25% for the Indian rupee and 3.00% for foreign denominations.
Ans: Some exemptions are:
The amount should not be from the previous financial year
Should not exceed ₹1 crore
Taxpayers should make primary adjustments under AY 2016-2017
|Section 112A||Section 50||Section 245|
|Section 80QQB||Section 32AD||Section 250|
|Section 35D||Section 143 (1a)||Section 115BAB|
|Section 143||Section 79||Section 140A|
|Section 17(2)||Section 3||Section 94A|
|Section 147||Section 80||Section 40A|
|Section 48||Section 115AD||Section 14A|
|Section 45||Section 285BA||Section 6|
|Section 36||Section 87A||Section 80GGA|
|Section 244A||Section 234E||Section 28|
|Section 197||Sectio 548||Section 194J(1)(ba)|
|Section 145A||Section 80P||Section 92CD|
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