Library / Income-tax Act, 2025: The Professional's Master Guide

57. Case Study 10: Transfer Pricing Adjustment and Secondary Adjustment

Facts. Following Illustration 56 (Indus Tech), a primary adjustment of Rs. 3 crore is made for Tax Year 2026-27 by the TPO in an order passed on 30 June 2029, which the company accepts without appeal. The excess money is not repatriated. Assume the prescribed interest rate for a rupee denominated advance is 11.75% (the rate is linked to the SBI lending rate plus a spread, as per the Rules).

57.1 Option A: leave the money with the parent

Deemed advance	3,00,00,000
Imputed interest each year at 11.75%	35,25,000
Tax on imputed interest at 25.168% (section 200 company)	8,87,172 a year

57.2 Option B: pay the one-time additional tax

Excess money	3,00,00,000
Additional tax at 18% plus 12% surcharge plus 4% cess	62,89,920

Analysis. The one-time tax equals about seven years of tax on imputed interest. If the parent can return the money within a year or two, repatriation (Option C) is clearly the best, because it stops interest and needs no extra tax. Option B makes sense only if the money is unlikely to be repatriated for many years. The tax on imputed interest is not creditable against the one-time tax. The company must also consider FEMA reporting of any receivable.