India’s Domestic Transfer Pricing: Key Rules & Compliance

India’s Transfer Pricing and Specified Domestic Transactions: A Straight-Talk Walkthrough

Let’s be honest — transfer pricing isn’t exactly the kind of thing you’d casually bring up over a cup of chai. But once you start peeling back the layers, especially how it’s played out in India, it’s surprisingly intriguing. What started out as a way to regulate international transactions slowly crept into our local deals too. And like most things in tax law, it came with its fair share of drama, loopholes, and course corrections.

From Global Games to Desi Deals: The Birth of SDTs

So here’s the deal — back in April 2013, India’s tax department had a lightbulb moment. They realised if companies could shuffle profits around internationally to sidestep taxes, they could just as easily pull the same stunt within the country. Particularly in cases where certain businesses claimed profit-linked deductions. That’s when Specified Domestic Transactions (SDTs) were born — a neat little way to plug those gaps and make sure even domestic dealings followed the fair pricing rule, aka the arm’s length principle.

What Exactly Are SDTs?

Wondering what counts as an SDT? Well, Section 92BA of the Income Tax Act has a ready-made list. In simple terms, it covers six key categories of domestic transactions that the government thought could be manipulated. Here’s a plain-English breakdown:

Payments to related parties — this one’s actually been scrapped since 2017 (more on that in a bit).
Income from shipping businesses under Section 80A.
Transactions involving infrastructure development businesses under Section 80-IA(8).
Deals under Section 80-IA(10) for those enjoying profit-linked deductions.
Other deductions under Chapter VI-A.
And finally, anything else the government feels like adding in future. Gotta love that open-ended clause.

The 2017 Plot Twist: Exit Section 40A(2)(b)

Now, this one shook things up. In 2017, the Finance Act decided to give payments to related parties under Section 40A(2)(b) the boot from the SDT category. And it wasn’t a subtle tweak — it was a clean, no-saving-clause removal. Meaning, from that point, it’s like it never existed. Courts backed this too, with the Karnataka High Court’s decision in PCIT vs. TT Steel Service India Pvt. Ltd. sealing the deal. Transfer Pricing Officers (TPOs) lost the authority to adjust these transactions, and companies collectively sighed in relief.

Thresholds: The INR 20 Crores Benchmark

Let’s talk numbers, because this is where it gets interesting. Initially, the SDT threshold was INR 5 crores, but from Assessment Year 2016-17, it shot up to INR 20 crores. That’s a 300% jump, by the way. The catch? It’s an aggregate threshold. So, if a company’s combined SDTs cross INR 20 crores, every single transaction, no matter how small, comes under the transfer pricing scanner.

Picture a giant like Tata Steel and its web of subsidiaries. If their SDTs cross the limit, even the tiniest internal deal could be picked apart by the tax office.

Documentation: Where the Real Work Lies

Now, if you think just setting a fair price is enough, think again. Section 92D makes it crystal clear — companies have to maintain detailed documentation for SDTs, on par with international transactions. That means:

Mapping out ownership structures
Business models
Industry overviews
Functions, Assets, and Risks (aka FAR analysis)

Imagine being Reliance Industries, trying to lay out every function, asset, and risk across subsidiaries, joint ventures, and associates. Add to that economic analyses, benchmarking studies, and projections. It’s as complicated as it sounds.

How Do You Set a Fair Price? Six Ways to Do It

The law gives you six officially recognised methods to decide what’s arm’s length. Each fits different situations, and you pick based on how well it matches your transaction type and available data.

Comparable Uncontrolled Price (CUP): Simple — compare your price with what unrelated parties pay for the same thing.
Resale Price Method (RPM): Work backwards from the resale price after deducting a fair profit.
Cost Plus Method (CPM): Add a reasonable markup to your costs.
Transactional Net Margin Method (TNMM): Compare net profit margins with similar businesses. This one’s India’s favourite since it’s practical.
Profit Split Method (PSM): Split profits based on each party’s contribution — handy when unique intangibles are involved.
Any Other Method: If nothing else works, use any logical, consistent method.

Who’s Checking? Meet the Transfer Pricing Officer (TPO)

Per Section 92CA, if the tax officer suspects something fishy in your SDTs, they can rope in a TPO — but only with the Commissioner’s okay. The TPO then takes a closer look and suggests adjustments if needed.

New in Budget 2025: Block Assessments

Here’s the new buzzword: block assessments. Starting Assessment Year 2026-27, if you get your arm’s length price for a transaction approved, that pricing holds good for similar transactions for the next two years too. You just have to opt in, and the TPO decides within a month. It adds predictability and spares companies from the yearly dance of fresh reviews.

Section 155(21) ensures your income gets auto-adjusted for those future years to reflect the accepted pricing.

Reporting Duties: Form 3CEB

If your company deals with SDTs, a chartered accountant’s report (Form 3CEB) is a must. It’s not a mere formality — it’s a deep dive into your transfer pricing compliance. Usually, the deadline is October 31, but lately, CBDT’s been offering grace periods. For AY 2024-25, TP audit cases had until December 15, and corporate ITRs until November 15.

Tolerance Ranges: A Breathing Space

Because exact matches are rare, the CBDT sets tolerance ranges every year. For AY 2024-25, wholesale traders get a 1% leeway and everyone else gets 3%. It helps avoid endless disputes over marginal differences.

The Penalty Game: No Room for Error

Get sloppy, and it’ll cost you. Here’s the breakdown:

Section 271(1)(c): 100–300% of tax on any TP adjustment.
Section 271AA: 2% of transaction value for incomplete or missing documentation.
Section 271BA: INR 1 lakh for not filing Form 3CEB.
Section 271G: Another 2% if you fail to submit info when asked.

Bottom line — it’s way cheaper to stay compliant than gamble on these penalties.

Safe Harbor: A Little Cushion

Safe harbour provisions give companies a pre-approved pricing margin to avoid scrutiny. The threshold’s been upped from INR 200 crores to 300 crores, covering:

Software and IT services
Intra-group loans and guarantees
Contract R&D
Pharma development services
Auto components
Low-value intra-group services

Looking Ahead: Tech-Driven Compliance

Budget 2025 signals a shift towards digitisation and global alignment. With things like block assessments and increased use of tech in scrutiny processes, it’s moving towards a smoother, more transparent system. Less face-to-face with TPOs, more online filings. But the golden rule remains: document everything, and document it well.

Practical Tips: Keeping It Clean

Here’s what I usually tell clients to stay out of hot water:

Over-document, don’t under-document. The more you have, the safer you are.
Benchmark every year — markets and comparables evolve.
Collaborate internally. Tax, finance, and legal teams should sync up.
Leverage tech tools for compliance, tracking, and reporting.

Wrapping Up

Sure, India’s SDT rules have evolved and tightened, but they’re also getting more practical. The government’s listening, streamlining where possible, and focusing on fairness. As long as you keep those records tight, stay proactive, and use the tolerance ranges and safe harbour options smartly, you’ll be just fine. And who knows — maybe transfer pricing will finally earn a spot in your next chai-time conversation.