A primary transfer pricing adjustment restates the taxable income of an entity to reflect the arm's length price. But restating income on paper does not, by itself, move any actual money between the entities involved. If the group's controlled transaction was priced below arm's length, the additional profit implied by the adjustment sits, in economic substance, with the counterparty that received the underpriced goods or services, not with the entity now reporting the higher income. Secondary adjustments exist to resolve this mismatch between the tax accounts and the actual flow of funds.
The Deemed Dividend and Deemed Loan Mechanisms
Two mechanisms dominate secondary adjustment practice. Under the deemed dividend approach, the excess amount is treated as if it had been distributed as a dividend from the entity that retained the economic benefit to its parent or shareholder, potentially triggering dividend withholding tax. Under the deemed loan approach, the mechanism India adopted under Section 92CE of the Income-tax Act, the excess amount is treated as a loan from the adjusted entity to its associated enterprise, with notional interest imputed on the outstanding balance until it is actually repatriated.
Why Secondary Adjustments Matter More Than They Appear To
Secondary adjustments can compound the cost of a primary adjustment substantially. A primary adjustment increases taxable income once; a secondary adjustment can trigger recurring notional interest income (or withholding tax) year after year until the underlying cash is actually repatriated to the jurisdiction that made the adjustment. Groups that treat a primary TP adjustment as a one-time cost frequently underestimate the ongoing exposure created by an unaddressed secondary adjustment.
Repatriation as the Escape Route
Most regimes that impose secondary adjustments, including India's, allow the notional interest exposure to be extinguished by actually repatriating the excess money into the jurisdiction within a prescribed timeframe following the primary adjustment. This makes the practical response to a primary TP adjustment as much a treasury and FEMA/exchange-control question as a tax question, repatriation needs to be executed correctly under the applicable capital account regulations, not just accounted for on paper.
Double Taxation Risk
Because not all jurisdictions recognise secondary adjustments or provide symmetrical relief, and because a deemed dividend or deemed loan may not be honoured by the counterparty jurisdiction as a genuine transaction, secondary adjustments carry a meaningful risk of double taxation that is harder to resolve through a Mutual Agreement Procedure than the primary adjustment itself, since MAP relief is generally framed around the primary income allocation rather than the deemed distribution or loan.
Building Secondary Adjustments into TP Risk Management
Groups that model TP audit exposure typically stop at the primary adjustment, quantifying the additional tax on restated income and treating that as the full cost of a potential dispute. A more complete risk model layers in the secondary adjustment mechanism applicable in the relevant jurisdiction, the notional interest rate likely to be applied, and a realistic repatriation timeline, so that the true worst-case exposure, not just the headline primary figure, informs how aggressively a group is willing to defend a given pricing position.
Conclusion
A primary adjustment under Section 92C, or its equivalent elsewhere, only restates taxable income; it does not move the underlying cash. Wherever a secondary adjustment regime applies, such as the deemed loan mechanism under Section 92CE, the notional interest exposure and the repatriation deadline need to be modelled as part of the same transfer pricing risk assessment as the primary adjustment itself, not as a separate, later compliance step.
