Domestic transaction of transfer pricing

17. Examine the applicability to domestic transactions of transfer pricing

Transfer pricing applies to domestic transactions via Specified Domestic Transactions (SDTs) under Section 92BA of the Income Tax Act. It ensures related domestic parties cannot shift profits or artificially reduce taxable income using non-market prices, particularly to claim tax holidays or lower corporate tax rates. [1, 2, 3]

1. Applicability and Scope

Domestic transfer pricing regulations apply to the following:

Inter-unit transfers: Goods or services transferred between an eligible profit-linked deduction business (e.g., under sections 80-IA, 10AA) and a non-eligible business.
Profit shifting: Transactions between related parties (Associated Enterprises) where one party inflates expenses or depresses profits to minimize tax liabilities. [2]

2. Monetary Threshold Limit

These provisions only trigger if the aggregate value of all specified domestic transactions entered into by the taxpayer during the financial year exceeds ₹20 Crores. If the aggregate value remains at or below this threshold, transfer pricing compliances are not required. [1, 5, 6, 7]

3. Compliance and Penalties

If a transaction qualifies as an SDT and exceeds the threshold:

Arm's Length Price (ALP): The transaction must be benchmarked against the ALP.
Documentation: Taxpayers must maintain detailed transfer pricing documentation to justify their pricing models.
Audit Report: Taxpayers must obtain and furnish a prescribed accountant’s report (Form 3CEB) certifying the details of these transactions.
Penalties: Failure to maintain records or report SDTs can attract significant financial penalties. [3, 8, 9, 10, 11]

For a deeper dive into the exact definitions of associated enterprises and accepted arm's length methods, you can refer to the official Income Tax Department Transfer Pricing Overview guide. [2, 3]