14 October, 2014

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Secondary adjustments are not permissible under Indian Transfer Pricing regulations

In a recent case of PMP Auto Components P. Ltd v. DCIT, where the assessee advanced loan to its subsidiary in Bakony, the revenue authorities imputed notional interest on the said investment. The Tribunal held that imputing interest to a transaction of investment in subsidiary should be regarded as a ‘secondary adjustment’ which is not permissible under Indian Transfer Pricing regulations and accordingly deleted the adjustment made for notional interest.

The main issue over here is regarding the secondary TP adjustment on account of notional interest on the income receivable from the AE –PMP Bakony.

First of all a secondary adjustment is an adjustment that arises from imposing tax on a secondary transaction. While a secondary transaction is a 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. Secondary transactions may take the form of constructive dividends, constructive equity contributions, or constructive loans.

In respect of the given case the TPO made a secondary adjustment on account of interest chargeable on additional capital infused, as no amount of interest was realised by the assessee on additional capital infused.

However, the Dispute Resolution Panel (DRP) deleted the adjustment by holding that Indian TP provisions in the Act do not envisage the concept of ‘secondary transfer pricing adjustment’.

Ultimately the Tribunal upheld the DRP’s order and ruled in favour of assessee.

In respect of the secondary adjustment, which was over and above the entire amount of capital investment, it was held that it was not permissible as per the provisions of the Income Tax Act, 1961.

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