Secondary Adjustment Under Transfer Pricing: Section 92CE Explained

Most discussions of Indian transfer pricing focus on the primary adjustment: correcting the price of a related-party transaction to what an arm's length party would have charged, and adding the difference to taxable income. Section 92CE goes a step further and asks a different question: if the pricing was wrong, where did the money that should have come to India actually end up, and has it come back? This is the secondary adjustment regime, and it is frequently overlooked until a primary adjustment is already final, at which point the repatriation clock is already running.

What Counts as a Primary Adjustment That Triggers Section 92CE

Section 92CE(1) lists the situations in which a primary adjustment can trigger secondary adjustment obligations: an adjustment made suo moto by the taxpayer in its own return of income, an adjustment made by the Assessing Officer that has attained finality (including one accepted by the taxpayer), an adjustment determined through an Advance Pricing Agreement entered into by the taxpayer, an adjustment made under the safe harbour rules, or an adjustment arising from a Mutual Agreement Procedure resolution under a tax treaty. In each of these, once the primary adjustment increases the Indian entity's income, the associated enterprise is treated as holding excess money that economically belongs to the Indian entity.

The Rs 1 Crore Threshold

Secondary adjustment provisions apply only where the amount of the primary adjustment exceeds Rs 1 crore for the relevant year. A primary adjustment below this threshold does not trigger the repatriation obligation or the deemed-advance mechanism, even if the transaction otherwise falls within one of the trigger categories above. The provision also has no retrospective effect on adjustments relating to assessment years before AY 2017-18, since Section 92CE itself was introduced with effect from AY 2018-19.

The 90-Day Repatriation Window

Once a covered primary adjustment is made, the excess money held by the associated enterprise needs to be repatriated to India within a defined window:

"Excess money" here means the difference between the arm's length price determined and the price actually charged in the transaction, to the extent it results in higher income for the Indian entity; that difference is what needs to physically flow back from the associated enterprise.

If the Money Is Not Repatriated in Time: The Deemed Advance

If the excess money, or any part of it, remains unrepatriated once the 90-day window lapses, it is deemed to be an advance made by the Indian entity to the associated enterprise. Notional interest income on this deemed advance is then computed and added to the Indian entity's taxable income, year after year, for as long as the amount remains outstanding. This interest computation depends on the currency of the underlying transaction:

• Rupee-denominated transactions: benchmarked to the one-year MCLR of the State Bank of India as on 1 April of the relevant previous year, plus a prescribed spread over that base rate.
• Foreign-currency-denominated transactions: benchmarked to a specified foreign-currency reference rate as on 30 September of the relevant previous year, plus a prescribed spread.

Because reference rates, prescribed spreads, and the underlying foreign-currency benchmark mechanics can be updated by the rules over time (including any transition away from older interbank benchmark rates), taxpayers should confirm the precise figures applicable for the relevant year with the current rules or their advisor rather than assuming a fixed percentage applies indefinitely.

The Alternative: One-Time Additional Tax Under Section 92CE(2A)

Tracking a deemed advance and computing notional interest year after year is administratively heavy, particularly for a modest excess-money balance. Section 92CE(2A) offers an alternative: the taxpayer can instead choose to pay a one-time additional income tax on the amount of excess money that has not been repatriated within the prescribed time. Once this tax is paid, the taxpayer is not obligated to repatriate that specific amount, and no further secondary adjustment or deemed-advance interest is computed on it in subsequent years, effectively closing out the exposure for that balance.

Whether the repatriation route, the deemed-advance route, or the one-time tax route is more efficient depends on the amount involved, how long repatriation is expected to take, the associated enterprise's practical ability to remit funds (including any exchange control constraints in its own jurisdiction), and a comparison of the effective cost of the one-time tax against the present value of ongoing deemed-advance interest. This is a case-specific computation rather than a default choice, and taxpayers should model it against their own facts and current rates before deciding, since the applicable additional-tax rate is itself subject to change and should be confirmed at the time of payment rather than assumed from an earlier year.

Why This Matters Beyond the Primary Adjustment

A common planning mistake is treating a primary transfer pricing adjustment, whether accepted in assessment, resolved via APA, or self-reported, as the end of the exposure. Section 92CE means the real financial cost can continue accruing well after the primary adjustment is finalised, if the underlying cash does not actually move. This makes it important to track repatriation status as a distinct compliance item, separate from and after the primary transfer pricing analysis covered under the five prescribed transfer pricing methods, and to build the 90-day repatriation deadline into the compliance calendar as soon as a primary adjustment of this scale is on the horizon, rather than after the return due date has already passed. Where the underlying transaction also required Form 3CEB reporting, the secondary adjustment position should be reviewed alongside it, and any resulting deemed-advance or one-time tax exposure factored into the same year's tax provisioning.