a] Primary adjustment is defined to mean the determination of the transfer price in accordance with the arm’s length principle resulting in an increase in the total income or reduction in the loss, as the case may be, of the taxpayer.
A “secondary adjustment” has been defined to mean an adjustment in the books of accounts of the taxpayer and its associate enterprise (AE) to reflect that the actual allocation of profits between the taxpayer and its AE are consistent with the transfer price determined as a result of primary adjustment.
Therefore, the provisions on secondary adjustment seek to target such cash or fund benefit by seeking repatriation of such excess funds lying with the Associated Enterprise. Here, any funds not repatriated by the Associated Enterprise will be termed as an “advance” given by the Assessee to the Associated Enterprise and notional interest rate, as prescribed, will be added to the Total income of the Assessee by way of a secondary adjustment (Section-92CE).
b] In cases where the underlying transaction is held not to be at arm’s length, primary adjustments are made in order to align the said transfer price with the arm’s length price (ALP) attained.
Secondary adjustments are designed to ensure that the cash profits of the taxpayer are in line with the tax profits following a primary adjustment, which is an adjustment that is made to the transfer price where the price in an intercompany transaction differs from what would be expected in a transaction between unrelated third parties.
