Primary Adjustment
Where transactions are not held to be at Arms’ length price, primary adjustment is made to arrive at such price.
However, it does not address the issue of additional cash benefit that AE earned by retaining such excess fund with it.
Secondary Adjustment
To give effect to such benefit, secondary adjustment is made by TPO. Where as a result of primary adjustment, there is an increase in increase or reduction of loss, such money should be repatriated to India within 90 days of final order.
Example
Google India has rendered services to Google US resulting in net profit of 10% on costs. However, TPO determined that Google India should have earned 15% on costs rather than 10%. Now, Google US has to repatriate the excess 5% lying with it to Google India within 90 days of order. Otherwise secondary adjustment shall be made.
If the excess money is not repatriated to India within the above time limit, it shall be deemed as an advance made by Indian entity to the AE. Notional Interests shall be levied on such advance if money is not received within the time limit.
Option available to Indian entity
Where excess money is not repatriated to India within such time, Indian entity has the option to pay additional income tax at the rate of 18%+ surcharge & cess on such excess money. In such case, it will not be required to make secondary adjustment
Important note: Above provisions shall not apply where amount of primary adjustment does not exceed INR 1 crore.
