Transfer pricing refers to the pricing of goods, services, and intangibles between associated enterprises. It ensures that transactions between related parties are carried out at an arm’s length price. In India, transfer pricing was introduced through the Finance Act, 2001, primarily to deal with international transactions. However, with the introduction of Specified Domestic Transactions (SDTs) under the Finance Act, 2012, the ambit of transfer pricing has expanded to include certain domestic transactions.
Evolution and Legislative Framework
Transfer pricing provisions were initially applicable only to international transactions between associated enterprises. Over time, tax authorities observed the possibility of profit shifting within domestic group entities, especially where one unit enjoys a tax benefit like a tax holiday or a lower tax rate. To address such scenarios, the Finance Act, 2012 brought Specified Domestic Transactions under the scope of transfer pricing regulations.
Under Section 92 of the Income-tax Act, 1961, any income arising from an international transaction or a specified domestic transaction shall be computed having regard to the arm’s length price. Sections 92 to 92F form the cornerstone of transfer pricing law in India. Additionally, Rule 10A to Rule 10E of the Income Tax Rules lay down the procedural aspects.
Scope of Specified Domestic Transactions
Specified Domestic Transactions refer to transactions that are not international in nature but are deemed to be significant from a tax perspective due to their potential to impact the taxable income of an entity. The scope of SDTs includes the following:
- Transactions referred to in Section 80A
- Inter-unit transfers referred to in Section 80-IA(8) and Section 80-IA(10)
- Any business transacted between the assessee and other persons under Section 10AA
- Payments referred to in Section 40A(2)(b) to related parties
- Transactions under Chapter VI-A or Section 10AA involving undertakings claiming profit-linked deductions
- Any other transaction as may be prescribed
Initially, these provisions were applicable only if the aggregate value of such transactions exceeded INR 5 crore. This threshold was subsequently increased to INR 20 crore by Finance Act, 2015.
Applicability of Transfer Pricing to SDTs
Unlike international transactions that always come under transfer pricing scrutiny, SDTs are reportable and require arm’s length compliance only if their aggregate value exceeds the prescribed threshold. The rationale behind extending transfer pricing to SDTs is to prevent the misuse of tax benefits through non-arm’s length pricing between related domestic parties.
For example, a taxpayer operating a unit in a tax holiday zone may shift profits by inflating the prices of goods or services transferred from a non-tax holiday unit, thereby reducing taxable income. Transfer pricing regulations for SDTs seek to counter such practices.
Types of Specified Domestic Transactions
The types of transactions that fall under the SDT regime include:
Transactions under Section 40A(2)(b)
This provision targets payments made to related parties for goods, services, or facilities. If such payments are not at arm’s length, they may be disallowed. Under transfer pricing regulations, these payments need to be benchmarked to ensure fairness.
Inter-Unit Transfers under Section 80-IA
Section 80-IA allows deduction for profits from infrastructure development. If goods or services are transferred from such eligible business to any other business carried on by the assessee, the value should be computed at the market price. Transfer pricing ensures that this market price is appropriately determined.
Business Transactions under Section 10AA
Section 10AA provides tax benefits to SEZ units. Transactions between SEZ and non-SEZ units of the same taxpayer need to comply with transfer pricing rules to avoid undue tax advantage.
Other Transactions under Chapter VI-A
Profit-linked deductions under Chapter VI-A, such as those under Sections 80-IB or 80-IC, may involve internal transfers or transactions that affect taxable profits. These are also covered under SDT provisions to ensure arm’s length pricing.
Arm’s Length Price and Methods of Computation
Arm’s length price is the price that would be charged between unrelated parties in an uncontrolled transaction. For both international transactions and SDTs, the arm’s length price needs to be determined using prescribed methods, which include:
- Comparable Uncontrolled Price (CUP) Method
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Profit Split Method (PSM)
- Transactional Net Margin Method (TNMM)
- Any other method as prescribed by the board
For SDTs, TNMM and CUP are more commonly used due to the nature and availability of comparable data in domestic contexts.
Documentation Requirements for SDTs
Section 92D read with Rule 10D mandates detailed documentation for transfer pricing compliance. This applies equally to SDTs. The documentation should include:
- Details of the ownership structure and profile of the taxpayer and its group entities
- Nature and terms of the SDTs
- Functional, asset, and risk analysis
- Method used and justification for its selection
- Computation of the arm’s length price
- Supporting documents such as invoices, contracts, and financial statements
Taxpayers engaging in SDTs must maintain contemporaneous documentation and submit the accountant’s report in Form 3CEB.
Role of Form 3CEB
Form 3CEB is a report certified by a chartered accountant that details the international and specified domestic transactions entered into by a taxpayer. It includes particulars such as:
- Nature and value of the transaction
- Method used to determine the arm’s length price
- Certification by a professional that the pricing is at arm’s length
The form must be furnished electronically by the due date, usually in line with the tax audit report under Section 44AB.
Penalties for Non-Compliance
Failure to comply with transfer pricing regulations, including those applicable to SDTs, can attract significant penalties. Some of these include:
- 2 percent of the value of each international or specified domestic transaction for failure to maintain documentation
- 2 percent of the transaction value for failure to furnish Form 3CEB
- Penalty of 50 to 200 percent of the tax avoided for adjustments made to the taxpayer’s income
Therefore, taxpayers must approach SDTs with the same diligence as international transactions.
Practical Challenges in Implementation
Although the rationale for extending transfer pricing to SDTs is strong, several practical challenges persist:
- Lack of availability of reliable comparables for benchmarking
- Difficulty in applying methods such as CUP or TNMM in a domestic setting
- High compliance burden for medium-sized enterprises
- Interpretation issues in identifying whether a transaction falls under SDT or not
To address these challenges, the Central Board of Direct Taxes (CBDT) has issued several clarifications, circulars, and safe harbor rules. However, due to evolving business models and complexity of intra-group transactions, challenges continue to arise.
Judicial Precedents and Interpretation
Indian courts and tribunals have played an important role in shaping the interpretation of SDT provisions. In some notable rulings, courts have emphasized the importance of substance over form, upheld the use of appropriate methods based on facts of the case, and addressed issues such as bundled transactions and aggregation.
Judgments have also clarified that even genuine transactions between related parties can be subjected to scrutiny if not appropriately benchmarked. Hence, taxpayers need to be cautious while dealing with SDTs.
Relevance to Business Entities
Transfer pricing and SDT provisions are especially relevant to:
- Businesses claiming tax holiday benefits
- Entities operating in SEZs
- Companies with multiple units across different tax jurisdictions
- Family-owned businesses with significant intra-group dealings
- Joint ventures and partnerships where related party transactions are frequent
Ensuring compliance with SDT provisions protects businesses from future litigation and fosters transparency in inter-unit dealings.
Strategic Considerations
While complying with SDT regulations, businesses should consider:
- Structuring transactions in a tax-neutral and transparent manner
- Regular benchmarking studies to assess arm’s length pricing
- Engaging professional advisors to prepare robust documentation
- Identifying and segregating SDTs from international transactions to avoid overlap and duplication
Early assessment and planning of SDTs help avoid surprises during scrutiny and litigation.
Policy Rationale Behind SDTs
The policy objective behind bringing SDTs under transfer pricing rules is to ensure that tax incentives are not misused through manipulation of inter-unit pricing. By requiring arm’s length pricing even for domestic transactions, the law aims to:
- Promote fairness and equity in taxation
- Prevent erosion of the tax base
- Encourage accurate reporting of taxable income
This ensures that benefits like SEZ exemptions or infrastructure-related deductions are granted only on actual business performance and not artificially inflated profits.
Industry-wise Impact of SDTs
The implications of SDT provisions vary across industries. For example:
- In the manufacturing sector, inter-unit transfers of raw materials and finished goods need pricing justification
- In services, payments for shared resources or managerial services to related parties fall under scrutiny
- In infrastructure and power generation, which often enjoy tax holidays, internal pricing between units requires careful analysis
Each industry must tailor its transfer pricing approach to match its operational realities and ensure SDT compliance.
Understanding the Computation Mechanism for SDTs
Specified Domestic Transactions (SDTs) must adhere to the arm’s length principle, even though they occur between related Indian entities. The process begins with identifying the relevant transactions and then benchmarking them using one or more prescribed methods. The goal is to determine whether the pricing is consistent with what would have been charged between unrelated parties in comparable circumstances.
The computation process involves determining the fair market value of the goods, services, or assets transferred or services provided. This ensures that the pricing does not result in tax base erosion by way of profit shifting.
Key Methods of Determining Arm’s Length Price
The Indian Income Tax Act prescribes several methods for computing the Arm’s Length Price (ALP) of SDTs. These include:
Comparable Uncontrolled Price Method (CUP)
Under this method, the price charged in a comparable uncontrolled transaction is considered. It is often applied to transactions involving tangible goods or commodities where reliable data on comparable transactions is available.
Resale Price Method (RPM)
RPM is applied where a product purchased from an associated enterprise is resold to an independent party. The resale price to the independent entity is reduced by an appropriate gross margin, representing the arm’s length price.
Cost Plus Method (CPM)
This method adds an appropriate gross profit margin to the direct and indirect costs of production incurred by the supplier in a controlled transaction.
Profit Split Method (PSM)
PSM is applied in scenarios where transactions are so interrelated that they cannot be evaluated separately. It allocates profits to each party based on their contribution to the transaction.
Transactional Net Margin Method (TNMM)
This widely used method evaluates the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer earns from a controlled transaction.
Other Method
The Income Tax Rules also allow the use of any other method which takes into account the price charged or paid or profit arising in comparable uncontrolled transactions.
Documentation Requirements
Robust documentation is crucial to support the pricing of SDTs and to demonstrate that the transactions were carried out at arm’s length. The documentation requirements broadly include:
- Description of the ownership structure
- Profile of the group and related entities
- Details of the SDTs undertaken
- Functional, asset, and risk (FAR) analysis
- Selection and justification of the most appropriate method
- Economic analysis and benchmarking
- Details of comparables selected
Maintaining contemporaneous documentation is mandatory where the value of aggregate SDTs exceeds the prescribed threshold.
Compliance Thresholds and Exemptions
As per Indian regulations, transfer pricing provisions are applicable to SDTs if the aggregate value of such transactions exceeds INR 20 crore in a financial year. If the value does not exceed the threshold, transfer pricing documentation is not mandatory, although the transactions must still comply with the arm’s length principle.
The threshold limits are prescribed to ensure that only material transactions are subject to intensive compliance, reducing the administrative burden for small or infrequent SDTs.
Specified Domestic Transactions in Focus
Several types of domestic transactions fall under the category of SDTs, particularly when conducted between related parties or entities eligible for tax holidays. These include:
- Expenditures in respect of which payment is made to a related party (Section 40A(2)(b))
- Transactions between units of the same entity under a tax holiday regime (Section 80-IA(8) and 80-IA(10))
- Transactions referred to in any other provision under Chapter VI-A or Section 10AA involving more than ordinary profits due to related party dealings
The inclusion of these transactions ensures a level playing field and helps plug revenue leakage that could arise from pricing manipulation within domestic boundaries.
Reporting Requirements under Form 3CEB
Form 3CEB is a mandatory report that must be certified by a Chartered Accountant and filed by taxpayers engaging in SDTs. It includes a detailed statement of all international and specified domestic transactions, along with method selection and justification.
The key sections of Form 3CEB include:
- Part A: General information about the taxpayer
- Part B: International transactions
- Part C: Specified Domestic Transactions
Form 3CEB must be filed electronically before the due date for filing the income tax return, typically by October 31 following the end of the financial year.
Penalties for Non-Compliance
Failure to comply with the documentation or reporting requirements under SDT provisions can attract significant penalties:
- INR 1,00,000 for failure to maintain prescribed documentation
- INR 1,00,000 for failure to report transactions in Form 3CEB
- 2% of the value of each transaction for failure to furnish information or documentation during assessment
Timely compliance with transfer pricing rules and maintenance of robust documentation are therefore essential to avoid adverse financial consequences.
Practical Challenges in Implementing SDT Regulations
While the objective of SDT regulations is clear, taxpayers often face several challenges in practical implementation:
Availability of Comparable Data
Unlike international transactions where external comparable data may be available from global databases, finding comparable data for domestic transactions is more difficult. This adds complexity to benchmarking analysis.
Subjectivity in Method Selection
The choice of the most appropriate method involves a degree of subjectivity. Tax authorities may challenge the taxpayer’s choice, leading to prolonged disputes.
Difficulty in Valuing Certain Transactions
Some transactions, such as shared services or inter-unit transfers, may not have direct market comparables. Establishing an arm’s length price for such dealings is often challenging.
Overlapping Provisions with Other Sections
Certain SDTs may also fall under the ambit of other sections of the Income Tax Act (such as Section 40A(2)). Taxpayers must carefully analyze overlaps and avoid double counting or misreporting.
Judicial View on Specified Domestic Transactions
Judicial pronouncements have helped shape the interpretation of SDT regulations. Courts have clarified the scope of SDTs, the approach to benchmarking, and the treatment of inter-unit transactions. For instance, rulings have emphasized substance over form and the need for adequate documentation to justify pricing.
Some key observations include:
- Profit shifting within eligible and non-eligible units is not permitted, even within the same legal entity
- ALP must be determined irrespective of whether the transactions ultimately lead to tax savings
- Taxpayer intent is not a defense against improper transfer pricing
These judicial decisions reinforce the need for meticulous compliance and reinforce the importance of treating domestic transfer pricing with the same seriousness as international transactions.
Advance Pricing Agreements and SDTs
While Advance Pricing Agreements (APAs) are more commonly associated with international transactions, their logic is applicable to SDTs as well. Although APAs are not directly available for SDTs, their principles can guide internal pricing policies and mitigate risks of litigation.
Companies engaging in large-scale or recurring SDTs may benefit from developing internal pricing frameworks aligned with APA-like principles, ensuring consistency and reducing the chance of disputes.
Use of Safe Harbour Rules
Safe harbour rules provide a margin or condition under which the taxpayer is presumed to have complied with arm’s length pricing. Currently, safe harbour provisions primarily apply to international transactions. There is no separate safe harbour mechanism for SDTs as of now.
However, industry bodies have recommended extending safe harbour rules to certain domestic transactions as well, especially for sectors like infrastructure and power generation, where inter-unit transfers are frequent.
Role of Internal Audit and Risk Management
Proactive internal controls and audits play a critical role in ensuring SDT compliance. Regular reviews of inter-unit and related party transactions, along with updated benchmarking, help identify discrepancies early.
Internal risk assessments should consider the following:
- Materiality of domestic related party transactions
- Alignment of pricing with arm’s length standards
- Adequacy of supporting documentation
- Status of past assessments and potential risks
Incorporating SDT compliance into enterprise risk management frameworks is a forward-looking approach that mitigates both financial and reputational risks.
Sector-Specific Considerations
Certain sectors encounter unique issues in dealing with SDTs:
- Power and Energy: Inter-unit power transfers under Section 80-IA
- Pharmaceuticals: Contract research and manufacturing services between group entities
- Infrastructure: Transactions between project SPVs and holding entities
- Retail and FMCG: Inter-branch goods transfers and promotional cost allocations
Tailored benchmarking and method selection must account for the specific economic realities of each sector. Sector-specific databases, wherever available, can provide valuable support for reliable comparables.
Tax Authority Approach to Scrutiny
Tax authorities adopt a risk-based approach to select cases for scrutiny under SDT provisions. Factors that may trigger scrutiny include:
- High-value SDTs close to the threshold limit
- Repeated reporting of similar transactions over multiple years
- Transactions with entities claiming tax holidays
- Cases where SDT disclosures do not align with financial statements
Taxpayers must ensure consistency and transparency across all reporting formats, including tax filings, financial statements, and statutory audit reports.
Importance of FAR Analysis
Functional, Asset, and Risk (FAR) analysis is a cornerstone of transfer pricing evaluation, including SDTs. It helps establish the economic roles of each party in the transaction, forming the basis for profit attribution.
Key elements of FAR analysis include:
- Functions performed by each party
- Tangible and intangible assets employed
- Risks borne by each entity
An accurate and granular FAR analysis strengthens the case for the selected pricing method and reduces exposure to adjustments during assessments.
Overview of Compliance Mechanisms
Compliance with transfer pricing and specified domestic transaction (SDT) regulations requires accurate documentation, careful planning, and timely reporting. The Indian Income-tax Act prescribes detailed compliance obligations for taxpayers engaged in international transactions or SDTs.
Maintenance of Documentation
Section 92D of the Income-tax Act mandates that every person who enters into an international transaction or a specified domestic transaction must maintain prescribed documentation. This documentation should substantiate the arm’s length nature of the transaction.
The prescribed documentation includes:
- A description of the ownership structure of the taxpayer’s group
- Details of the business of the taxpayer and its associated enterprises
- Nature and terms of international or domestic transactions
- Functional, asset, and risk analysis (FAR analysis)
- Description of the method considered and the rationale for choosing it
- Economic analysis and benchmarking study
- Details of comparable companies
Taxpayers whose aggregate value of international transactions or SDTs does not exceed the prescribed threshold (generally INR 1 crore) are eligible for simplified documentation requirements.
Transfer Pricing Audit and Form 3CEB
Taxpayers who engage in international or SDTs exceeding the prescribed threshold must obtain a report from a Chartered Accountant in Form 3CEB. This report is a detailed summary of transactions, methods applied, comparables used, and arm’s length pricing declarations.
The audit must be completed and Form 3CEB submitted by the due date of filing the income tax return, generally October 31 for companies.
Penalties for Non-Compliance
Non-compliance with transfer pricing and SDT regulations can attract stringent penalties:
- Failure to maintain documentation: 2% of the value of each transaction
- Failure to furnish Form 3CEB: INR 100,000
- Adjustment leading to understatement of income: 100% to 300% of tax on the underreported amount
- Transfer pricing documentation is also subject to scrutiny during assessments, and incorrect or incomplete records can result in significant financial and legal consequences
Advance Pricing Agreements (APAs)
An APA is an agreement between a taxpayer and the tax authority to determine the arm’s length price of international or SDTs in advance. Introduced in India to provide certainty and reduce disputes, APAs are available for:
- Unilateral agreements with Indian tax authorities
- Bilateral or multilateral agreements involving foreign tax authorities
APAs offer benefits such as:
- Certainty in pricing for covered transactions
- Reduced litigation
- Reduced compliance burden
- Rollback provisions for up to four previous assessment years
Safe Harbour Rules
Safe harbour provisions are rules that offer prescriptive margins or pricing benchmarks that, if followed, result in automatic acceptance by tax authorities. These rules are designed to simplify compliance and reduce litigation.
Safe harbour rules apply to specific transactions, such as:
- Provision of IT or ITES services
- Contract R&D services
- Financial transactions like intra-group loans or guarantees
The rules lay down fixed operating margins or interest rates that taxpayers must apply to qualify for safe harbour. If these margins are maintained, the transaction is presumed to be at arm’s length.
Dispute Resolution Mechanisms
Transfer pricing disputes are among the most litigated issues in Indian tax practice. To address this, the Income-tax Act provides several mechanisms for resolution:
Dispute Resolution Panel (DRP)
The DRP is a quasi-judicial authority available to eligible taxpayers (primarily foreign companies and Indian subsidiaries of foreign companies). The DRP reviews draft assessment orders that contain variations detrimental to the taxpayer and issues binding directions.
Mutual Agreement Procedure (MAP)
MAP is available under tax treaties and allows competent authorities of two countries to resolve transfer pricing disputes. The procedure facilitates cooperation between countries and avoids double taxation.
Appellate Remedies
Taxpayers may also pursue traditional appellate routes, including appeals to the Commissioner of Income-tax (Appeals), the Income Tax Appellate Tribunal (ITAT), and further courts.
Key Judicial Pronouncements
Indian transfer pricing law has been shaped by several landmark judgments:
EKL Appliances Ltd. v. CIT
The Delhi High Court held that a company need not earn profits in every transaction. Commercial rationality must be preserved, and arm’s length principles must not be applied in an overly rigid manner.
Maruti Suzuki India Ltd. v. CIT
This case emphasized the importance of functional analysis in determining the existence of an international transaction and the role of implicit guarantees in controlled transactions.
Morgan Stanley & Co. v. DIT
The Supreme Court clarified the treatment of deputed employees and permanent establishments, significantly impacting transfer pricing and attribution of profits.
Trends in Transfer Pricing Litigation
Transfer pricing has consistently been a top area of dispute in Indian tax law. Common issues that lead to litigation include:
- Rejection of comparables by the tax department
- Application of inappropriate pricing methods
- Disallowance of marketing intangibles
- Excessive adjustment margins
With the introduction of APAs, MAPs, and safe harbour rules, the litigation trend has seen some moderation, but disputes continue, especially in high-value and complex transactions.
Specified Domestic Transactions: Issues in Focus
Although initially focused on international transactions, Indian tax law has increasingly emphasized SDTs. Key areas that draw scrutiny include:
Inter-unit Transactions in Businesses Claiming Deductions
Transactions between different units of the same enterprise, particularly when one unit claims a tax holiday (under sections like 80-IA or 10AA), are often examined to ensure that profits are not artificially shifted.
Payments to Related Parties under Section 40A(2)(b)
These payments are scrutinized to determine whether they are excessive or unreasonable compared to market standards. Arm’s length principles are used to test such expenses.
Challenges in Benchmarking
SDTs often lack adequate comparable data due to their domestic nature and unique industry practices. Benchmarking such transactions requires custom approaches and sound economic rationale.
Digital Economy and Transfer Pricing
The rise of the digital economy has posed new challenges for transfer pricing, including:
- Determining value creation in data-driven business models
- Attribution of profits to jurisdictions without physical presence
- Pricing of intangibles such as algorithms, platforms, and user data
India has responded by implementing equalization levy, Significant Economic Presence (SEP) rules, and BEPS-aligned measures, but aligning transfer pricing with the digital economy remains a global challenge.
BEPS and Indian Transfer Pricing
India is an active participant in the OECD-G20 Base Erosion and Profit Shifting (BEPS) project. BEPS aims to curb tax avoidance strategies that exploit gaps in tax rules.
Country-by-Country Reporting (CbCR)
Introduced under Action 13 of BEPS, CbCR mandates large multinational groups to file a report showing global allocation of income, taxes, and business activity. Indian entities that are part of such groups must comply with these requirements.
Master File and Local File
Taxpayers are required to prepare a master file (providing global group information) and a local file (providing detailed transaction-level information). These requirements enhance transparency and audit readiness.
Transfer Pricing for Financial Transactions
Financial transactions between associated enterprises, such as:
- Inter-company loans
- Guarantees
- Cash pooling arrangements
must be priced in accordance with arm’s length principles. Challenges arise in benchmarking interest rates, guarantee commissions, and factoring in credit risk.
Indian tax authorities have increasingly scrutinized such transactions, emphasizing the need for appropriate documentation and comparability analysis.
Intangibles and Transfer Pricing
Intangibles, such as trademarks, patents, and know-how, present unique valuation and allocation challenges. Determining ownership, control, and economic contribution is critical.
Recent Indian guidance and global developments under BEPS stress the importance of aligning transfer pricing outcomes with value creation, particularly in the context of development, enhancement, maintenance, protection, and exploitation (DEMPE) functions.
Intra-Group Services and Cost Allocation
Multinational enterprises often share administrative, legal, or IT services across group entities. Transfer pricing rules require allocation of costs for such services on a reasonable and supportable basis.
Challenges in this area include:
- Identifying whether services are actually rendered
- Assessing whether services provide a benefit
- Choosing appropriate allocation keys
- Avoiding duplication or overcharging
Transfer Pricing Risk Assessment by Tax Authorities
The Indian tax administration uses risk assessment tools and data analytics to identify high-risk transactions. Criteria include:
- Abnormal profit margins
- Large year-on-year fluctuations
- Transactions with low or nil profitability
- Use of tax havens or low-tax jurisdictions
Cases flagged as high risk may be selected for audit or further scrutiny.
Role of Technology in Transfer Pricing
Technology has become integral to transfer pricing, from data collection and benchmarking to documentation and compliance monitoring.
Key tools include:
- TP software for economic analysis
- AI-enabled document review systems
- Centralized compliance dashboards for multinationals
- Use of big data and analytics by tax authorities
Digital transformation helps reduce compliance burden, enhance audit readiness, and mitigate risk.
Transfer Pricing in Emerging Sectors
As new sectors emerge, including fintech, renewable energy, pharmaceuticals, and e-commerce, traditional pricing methods may be inadequate.
Authorities and taxpayers must adapt:
- For fintechs, pricing software and data services poses unique challenges
- Renewable energy projects often involve hybrid financing structures
- E-commerce models raise questions on platform fees and marketing intangibles
The transfer pricing landscape is evolving rapidly, requiring proactive adaptation from both taxpayers and regulators.
Conclusion
Transfer pricing regulations and the provisions related to Specified Domestic Transactions (SDTs) have become central pillars of India’s tax enforcement framework. Initially targeted at curbing profit shifting by multinational enterprises, these regulations have evolved to encompass certain high-value domestic transactions to ensure that related parties do not manipulate taxable income through preferential pricing.
The historical backdrop of introducing SDTs under the Finance Act, 2012, reflects a proactive legislative approach to close loopholes in domestic tax avoidance. With the expansion of scope and refinement of rules, taxpayers are now required to maintain robust documentation and adhere to arm’s length principles even in purely domestic dealings. This has prompted Indian businesses, particularly those with group entities, captive units, or closely held structures, to reevaluate their pricing strategies and compliance practices.
Practical application of SDT provisions involves careful consideration of transaction types, correct selection of the Most Appropriate Method, and consistent benchmarking through reliable comparable data. Inaccurate or insufficient documentation can lead to heavy penalties and prolonged litigation, placing greater importance on maintaining transparent and defensible transfer pricing policies.
Judicial interpretations and administrative clarifications over the past decade have further shaped the understanding of SDTs, offering guidance while also highlighting areas of ambiguity. The interplay between sections such as 40A(2)(b), 92BA, and 92E requires a nuanced approach in transaction planning and reporting. As tax authorities continue to scrutinize related party dealings, businesses must stay updated on legislative changes, safe harbor rules, and evolving jurisprudence.
In a global economy where intra-group transactions are common and business structures increasingly complex, India’s approach to transfer pricing, extending to domestic transactions, demonstrates its commitment to fair taxation and curbing base erosion. For taxpayers, the key lies in aligning commercial rationale with statutory compliance, ensuring that both international and domestic transactions withstand regulatory review under the arm’s length standard.