Secondary Adjustments Transfer Pricing in Bangalore | Section 92CE business restructuring TP India
An Indian R&D centre’s TP audit concludes with a primary adjustment of INR 25 crore, lifting the cost-plus margin from 12% to 13.5%. The company accepts the adjustment, pays the additional tax, and considers the matter closed.
Eighteen months later, the assessing officer issues a notice under Section 92CE asking why the INR 25 crore differential has not been repatriated from the foreign parent into India, and proposing to treat the unrepatriated amount as a deemed advance from the Indian entity to the parent, with notional interest imputed.
The secondary adjustment was a step the company didn’t know existed. Secondary Adjustments Transfer Pricing in Bangalore are the compliance tail that follows every primary TP adjustment, and the recent codification of business restructuring within the international transaction definition under the Income-tax Act, 2025 has added a new dimension to TP analysis for group reorganisations.
What Are Secondary Adjustments and When Do They Apply?
Section 92CE of the Income-tax Act, 1961 (now correspondingly under the Income-tax Act, 2025) provides that where a primary transfer pricing adjustment is made (whether by the taxpayer, the assessing officer, the APA, or by way of safe harbour), and the differential amount is not repatriated to India within the prescribed period, the unrepatriated amount is deemed to be an advance from the Indian entity to the foreign associated enterprise, with notional interest imputed at a prescribed rate.
The Mechanism in Operation
A primary adjustment is made: the Indian entity’s profit is increased (or expense reduced) by an amount based on transfer pricing analysis.
The differential amount represents profit that should have been with the Indian entity but was earned by the foreign associated enterprise.
The taxpayer is required to repatriate the differential to India within the prescribed period (currently 90 days from the due date of the relevant tax assessment).
Where the repatriation does not happen, the unrepatriated amount is treated as a deemed advance.
Notional interest is imputed on the deemed advance, currently at one-year MCLR of SBI plus 325 basis points for INR transactions, and at 6-month LIBOR (now SOFR equivalent) plus 300 basis points for foreign currency transactions.
The notional interest is taxable in the Indian entity’s hands. The deemed advance and the imputed interest continue until the repatriation is completed, with the interest accruing year after year.
Secondary Adjustments Transfer Pricing in Bangalore effectively convert a one-time TP adjustment into a continuing source of taxable income unless the repatriation is completed.
The De Minimis Carve-Out
The secondary adjustment doesn’t apply where the primary adjustment is less than INR 1 crore in the relevant assessment year. Below this threshold, the primary adjustment stands alone without secondary consequences.
Exit Through One-Time Payment
The 2019 amendments allowed taxpayers to discharge the secondary adjustment obligation through a one-time additional tax payment equal to the tax that would have been payable on the deemed interest, at a rate of approximately 18% (including surcharge and cess) on the unrepatriated amount.
This is often the cleaner option for taxpayers where repatriation is operationally difficult.
How Does Business Restructuring TP Work Under the 2025 Act?
The Income-tax Act, 2025 expanded the definition of “international transaction” under Section 163.
The earlier definition under Section 92B of the 1961 Act covered the purchase, sale, transfer, lease, or use of tangible or intangible property, provision of services, lending or borrowing of money, and “any other transaction having a bearing on profits”.
The 2025 Act extends this to explicitly include “business restructurings” within the enumerated categories, alongside cost-sharing arrangements.
What Business Restructuring Includes
Reorganisations within an MNE group that involve cross-border redeployment of functions, assets, or risks.
Examples: conversion of a full-fledged distributor into a limited-risk distributor, migration of intangible IP from one group entity to another, centralisation of procurement, treasury, or back-office functions in a regional hub, reorganisation of supply chains, transfer of IP rights, customer relationships, or business contracts.
The OECD’s TP Guidelines (Chapter IX) provide the international framework.
The TP Analysis for Business Restructuring
Pre-restructuring: what functions, assets, and risks did the Indian entity have? What was the value of the Indian operation under the pre-restructuring arrangement?
Post-restructuring: what functions, assets, and risks does the Indian entity now have? What is the value of the Indian operation under the new arrangement?
The differential: is compensation due to the Indian entity for the lost or transferred functions, assets, or risks?
The arm’s length question for restructuring is whether an independent enterprise in the Indian entity’s position would have accepted the restructuring on the terms offered, including any compensation payment.
Where the answer is no, a TP adjustment is appropriate.
Common adjustments: exit charges for the Indian entity transferring out an established business, valuation adjustments for IP migrations, profit allocation adjustments for changes in functional profile.
Business restructuring TP in India was always present as a residual category, the 2025 Act has made it explicit and codified, which is likely to increase enforcement focus.
The Section 92CE business restructuring TP India framework therefore connects secondary adjustment considerations with the broader transfer pricing implications of cross-border business reorganisations.
What Should Companies Actually Do?
For Secondary Adjustments
After any primary TP adjustment (whether taxpayer-initiated, APA-resulting, or audit-imposed), evaluate whether the INR 1 crore threshold is crossed.
If yes, determine repatriation feasibility within the 90-day window.
If repatriation is feasible, document it carefully (inward remittance, accounting entries, AD bank receipt).
If repatriation is not feasible, evaluate the one-time payment option as an alternative to ongoing interest accrual.
For Business Restructuring
Document any cross-border restructuring contemporaneously: the rationale, the pre- and post-restructuring functional profile, the valuation analysis, the compensation (if any).
The documentation should be ready before the restructuring is implemented, not after the audit notice.
Where the restructuring involves IP migration or significant functional shifts, an independent valuation by a SEBI-registered Category I merchant banker or qualified valuer is advisable.
Business restructuring TP in India under the 2025 Act framework warrants the same level of planning as the underlying corporate transaction.
Coordinate With FEMA
Cross-border restructurings often involve FEMA-relevant transactions (share transfers, asset purchases, fund movements).
The TP analysis should be coordinated with the FEMA compliance position, including pricing analysis under the FEM (Non-Debt Instruments) Rules, 2019.
Inconsistencies between the TP position and the FEMA-reported transaction values create exposure on both fronts.
Plan the Post-Restructuring TP Profile
Once restructured, the Indian entity’s ongoing TP position (markups, comparables, methodology) needs to be re-anchored to the new functional profile.
The pre-restructuring benchmarking is no longer relevant, new benchmarking studies, possibly a new APA, and updated intercompany agreements are typically needed.
Section 92CE business restructuring TP India isn’t a one-time event, it triggers a multi-year compliance and documentation refresh.
Frequently Asked Questions
Q1. Can the One-Time Payment Under Secondary Adjustment Be Claimed as a Tax Deduction?
No. The one-time payment is in lieu of imputed interest income, it is not a deductible business expense. It’s a tax cost that closes the secondary adjustment exposure.
Q2. Does the Secondary Adjustment Apply to Safe Harbour Cases?
The secondary adjustment provisions apply where there is a primary adjustment.
Safe harbour cases don’t typically produce primary adjustments (the safe harbour margin is deemed arm’s length), so secondary adjustments don’t usually arise from safe harbour.
APA cases can result in primary adjustments (where the APA price differs from the actually charged price), in which case secondary adjustment applies on the differential.
Q3. Is There a TP Adjustment for “No Compensation” in a Business Restructuring?
Yes. The arm’s length analysis asks whether independent parties would have entered into the restructuring on the same terms.
Where they would not (because the restructuring extracts value from the Indian entity without compensation), the TPO can impute a compensation amount and assess it as taxable income.
The 2025 Act’s explicit inclusion of business restructuring in Section 163 supports this analysis.
Q4. How Is the Post-Restructuring TP Profile Re-Benchmarked?
After a business restructuring, the Indian entity’s new functions, assets, and risks define a different tested party profile.
A fresh benchmarking analysis is required, with comparables matched to the new functional profile.
For significant restructurings, applying for an APA on the post-restructuring transactions is often the cleanest way to lock in TP certainty for the new structure.