Section 92CE Of The Income Tax Act: Secondary Adjustment In Certain Cases, Provisions And Sub-Sections
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.
Table of contents
What is Section 92CE of the Income Tax?
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.
What are the Provisions of Section 92CE of the Income Tax?
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:
- The assessee has made a suo motu in his return of income.
- When an Assessing Officer makes primary adjustments in transfer prices. Further, the assessee should accept the Assessing Officer.
- Authorities determine the transfer prices in advance for primary adjustment. Further, the assessee has entered the pricing agreement under section 92CC.
- Further, adjustments are according to safe harbour rules under section 92CB.
- Moreover, adjustment arises due to a resolution of an assessment in the mutual agreement procedure.
Explanation and Amendment of Section 92CE Under Clause 30?
Sub-Section 92CE(1)
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 amount should not exceed ₹1 crore for primary adjustment
- The primary adjustment should be made in accordance with the assessment year, beginning before or on 1st April 2016
Sub-Section 92CE(2)
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.
- Sub-Section 92CE(2A)
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.
- Sub-Section 92CE(2B)
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.
- Sub-Section 92CE(2C)
Deduction on paid taxes will not be allowed to the assessee under this act.
- Sub-Section 92CE(2D)
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).
Final Word
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.
FAQs on Section 92CE
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
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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