Secondary Adjustment in Transfer Pricing (India)

Your transfer pricing officer bumps your captive’s markup, your taxable income goes up, and you pay the extra tax. You think you are done. You are not.

The moment that first adjustment crosses ₹1 crore, a second rule wakes up. A secondary adjustment under Section 92CE says the extra profit was money that should have reached your Indian company but is still sitting with your foreign parent, and that money has to be physically brought back to India within about 90 days. Miss the window and the tax department treats it as an interest-free loan you gave your parent, and charges you notional interest on it every single year until you fix it. This guide explains how a primary adjustment triggers it, the numbers, and the one-time tax that lets you close it for good.

1 Primary adjustment versus secondary adjustment

Transfer pricing works in two stages, and most founders only know the first one.

A primary adjustment is the correction to your taxable income. If your Indian captive charged your foreign parent a markup below arm’s length, or lent it money interest-free, the price is restated to the arm’s length price (ALP) under Section 165 (old 92C). Your profit goes up on paper, and you pay tax on the difference. That is the adjustment everyone budgets for.

A secondary adjustment is the correction to your cash. Section 92CE says the primary adjustment is not just a book entry: the extra profit represents real money that, at arm’s length, would have come into your Indian company’s bank account. Instead it is sitting with your foreign associated enterprise (AE). The law insists that money actually be moved back to India, so the books and the cash tell the same story.

Section 92CE was inserted in the 1961 Act with effect from AY 2018-19, and the concept carries forward unchanged into the Income-tax Act, 2025 for TY 2026-27 and beyond. The mechanics below are the same either way.

2 What triggers a secondary adjustment

A secondary adjustment does not float around on its own. It only follows a primary adjustment, and only a primary adjustment of one of these five kinds:

For a typical Indian startup, the two live wires are a captive dev-centre markup set too low and an interest-free (or cheap) intercompany loan to the foreign parent. Both restate income upward, and both can leave real money parked abroad. That is precisely the excess Section 92CE chases.

3 The ₹1 crore threshold: when it does not apply

Section 92CE has a built-in relief so small corrections do not drag you into a cash-repatriation exercise. A secondary adjustment is not required where either of these is true:

• The primary adjustment for the year does not exceed ₹1 crore; or
• The primary adjustment relates to assessment year 2016-17 or earlier.

In plain terms: the rule bites only from AY 2017-18 onward, and only once your primary adjustment for that year crosses ₹1 crore. A ₹40 lakh true-up creates a tax cost but no repatriation duty. A ₹1.5 crore adjustment does.

4 Repatriate in 90 days, or it becomes a deemed loan

Once a secondary adjustment applies, the excess money must be brought back to India within the time set by Rule 10CB. The clock is 90 days, and where it starts depends on how the primary adjustment arose.

The notional interest rate under Rule 10CB depends on the currency of the underlying transaction:

5 Worked example: a low captive markup

Here is how it plays out on the most common startup fact pattern, a captive dev-centre billed below arm’s length. This picks up the low-markup case from our captive dev-centre guide.

Work the two stages:

• Primary adjustment = ₹46.2 crore − ₹43.2 crore = ₹3 crore added to Brewly India’s taxable income. Tax is paid on this.
• Because ₹3 crore is above ₹1 crore and the year is after AY 2016-17, a secondary adjustment applies. That ₹3 crore is money the parent should have paid but did not, so it is treated as excess sitting in the US.

Brewly now has 90 days to have the US parent remit ₹3 crore to India. Say it does not. The ₹3 crore becomes a deemed advance to the parent. Because Brewly invoices in US dollars, the foreign-currency rate applies: a six-month benchmark of, say, 5.5% plus 3%, so 8.5%. Notional interest is roughly ₹3 crore × 8.5% = ₹25.5 lakh added to income this year, and again next year, and the year after, until the ₹3 crore actually comes home.

6 Worked example: an interest-free intercompany loan

The second classic trigger is a loan to the parent that carries no interest. This follows on from our intercompany loans and guarantees guide.

The primary adjustment of ₹1.2 crore is above ₹1 crore, so the secondary adjustment engages. That ₹1.2 crore of interest was income Brewly should have received in cash from the parent. It did not, so the ₹1.2 crore is the excess to repatriate within 90 days.

If Brewly leaves it abroad, the ₹1.2 crore is a deemed advance and attracts notional interest at the applicable rate, again every year. Note the compounding nature of the trap: an interest-free loan first costs you imputed interest income (the primary adjustment), and then, if you do nothing, a second layer of imputed interest on the unrepatriated excess (the secondary adjustment).

7 The one-time tax escape hatch: Section 92CE(2A)

Sometimes repatriation is genuinely hard: the parent has no spare cash, or exchange-control and group-treasury constraints make a reverse remittance messy. Section 92CE(2A) gives you a way out.

Instead of repatriating the money and living with recurring interest, you can pay a one-time additional tax of 18%, plus a surcharge of 12%, on the excess money. That is an effective rate of about 20.16%. Once you pay it:

• You are not required to repatriate the excess anymore.
• No further notional interest is charged from the date the option is exercised.
• But you cannot claim this additional tax as a deduction, and cannot claim credit for it against any other liability.

8 Your secondary adjustment checklist

1. For every year with a TP adjustment, check whether the primary adjustment exceeds ₹1 crore and relates to AY 2017-18 or later.
2. If yes, identify the excess money sitting with the AE (the adjustment amount) that must come back.
3. Note the 90-day repatriation deadline under Rule 10CB, counted from the right start date (return due date, or APA / MAP order).
4. Prefer to raise a receivable and repatriate the cash inside the window: this closes the matter at zero extra cost.
5. If you cannot repatriate, compute the notional interest at the correct rupee or foreign-currency rate, and remember it recurs annually.
6. Compare that against the one-time 18% + 12% surcharge tax under 92CE(2A) and pick the cheaper path.
7. Fix the root cause: correct the captive markup and put arm’s length interest on intercompany loans, so the adjustment does not repeat next year.
8. Document the repatriation or the tax election in your TP file so it survives an assessment.

9 FAQs

Disclaimer: This article is general information as of August 2026 and is not tax or legal advice. Section 92CE, Rule 10CB, benchmark interest rates and the transition to the Income-tax Act, 2025 can change. Confirm your specific position with a qualified professional before acting.