Which law and report apply?
Domestic transfer pricing applies to specified domestic transactions (SDTs), including certain transfers within the same taxpayer. A relationship, a large payment or a difference in tax rates does not by itself make a transaction an SDT. Identify the statutory category first and then apply the annual aggregate threshold. The examples below use FY 2024–25 (AY 2025–26) and the Income-tax Act, 1961.
| Relevant period | Definition and report |
|---|---|
| Periods governed by the Income-tax Act, 1961, including FY 2025–26 / AY 2026–27 | Section 92BA defines the transactions. Sections 92C, 92D and 92E govern benchmarking, documentation and reporting; use Form 3CEB under rule 10E. |
| Tax year 2026–27 onward under the Income-tax Act, 2025 | Use section 164 for the definition and section 172 for the accountant’s report in Form 48 under the notified Income-tax Rules, 2026. Section 164 retains the strictly above ₹20 crore annual threshold. Check its own limbs and the applicable savings rules; do not assume that every reference in the old section carries across unchanged. |
The Finance Act, 2012 introduced section 92BA with a ₹5 crore threshold. The Finance Act, 2015 raised it to ₹20 crore from AY 2016–17. From AY 2017–18 the Finance Act, 2017 omitted clause (i), which previously covered expenditure paid or payable to persons specified in section 40A(2)(b). Do not assume that every proceeding for an earlier assessment year is invalid because the clause was later omitted; review the applicable judgment and procedural history for that year. For post-omission periods, an expense involving a specified person under section 40A(2)(b) does not trigger SDT reporting on that ground alone. The ordinary specified-person expense rule can still apply.
What to include under legacy section 92BA
| Clause | Covered non-international transaction |
|---|---|
| (ii) | Transactions referred to in section 80A, including the goods or services transfers in section 80A(6). |
| (iii) | Transfers of goods or services referred to in section 80-IA(8), including between a qualifying business and another business of the same taxpayer. |
| (iv) | Business transacted as referred to in section 80-IA(10). Examine the business arrangement and the statutory test for more than ordinary profits; a group relationship alone does not settle it. |
| (v) | Transactions under another Chapter VI-A provision or section 10AA to which section 80-IA(8) or (10) applies. For example, check section 10AA(9) and section 80-IAC(4). |
| (va) | Business transacted between persons referred to in section 115BAB(6), which concerns eligible new manufacturing companies. |
| (vb) | Business transacted between persons referred to in section 115BAE(4), which concerns eligible new manufacturing co-operative societies. |
| (vi) | Any other transaction that may be prescribed; check the applicable rules for the period. |
For the later periods discussed here the threshold is strictly more than ₹20 crore per taxpayer for the period. Exactly ₹20 crore does not cross it. Sum the qualifying transactions across covered limbs, once each, for that taxpayer; do not pool different legal taxpayers or add ordinary related party amounts simply because a counterparty uses a concessional rate. Do not apply a blanket net-of-GST rule: reconcile the value used for each transaction to the books and supporting documents and record the basis for any exclusion or adjustment. If ₹12 crore of qualifying captive power transfers and ₹10 crore of a separately qualifying domestic stream belong to one taxpayer, the aggregate is ₹22 crore.
Section 92B separately tests international transactions, including its deemed transaction provision, and does not impose this ₹20 crore threshold. Distinguish reportability from documentation relief or any other compliance rule. Where the SDT threshold is not crossed, a deduction provision may still require a market value or ordinary-profit computation. A reporting threshold does not validate the booked price.
Captive electricity: select a comparable that matches the transaction
In Jindal Steel & Power Ltd (6 December 2023), the Supreme Court considered the market value of captive power under section 80-IA on the facts before it. The consumer tariff was a better measure than the controlled price at which the taxpayer supplied surplus power to the State Electricity Board. For a later SDT, apply the prescribed arm’s length method and comparability tests. The judgment does not make every retail tariff a universal comparable. Compare consumption category, location, period, contract terms, load, network charges, duties and whether supply is firm or surplus. For example, ₹3.20 per kWh is about 62.35% below ₹8.50 per kWh; that difference alone does not establish the effect on the deduction.
Six worked examples for FY 2024–25
1. Captive power transferred to a cement division
Assume a 30 MW captive plant is entitled to a 100% section 80-IA deduction for the year and the taxpayer has not chosen a regime that denies it. The plant supplies 5 crore kWh to the cement division. At ₹9 per kWh the booked transfer is ₹45 crore, above the SDT threshold. At ₹4 per kWh the illustrative cost is ₹20 crore, leaving booked profit of ₹25 crore. Suppose contemporaneous evidence supports the industrial retail tariff of ₹8.20 as the CUP after comparability review; the ₹3.50 surplus power price is not comparable on these facts. The benchmark transfer value is ₹41 crore and the illustrative eligible profit ₹21 crore, so the deduction falls by ₹4 crore, subject to other statutory conditions. The ₹3.50 rate would imply ₹17.50 crore of transfer value; the example does not adopt it. Reconcile Form 3CEB, the deduction report and the return.
2. Section 115BAB manufacturer sells to its parent
Assume a manufacturer incorporated in 2021 validly elected section 115BAB and meets all conditions, including commencement of manufacturing by 31 March 2024. It sells ₹75 crore of printed circuit boards to its closely connected trading parent at a cost of ₹50 crore. The booked profit is ₹25 crore, or 50% of cost. Assume the business arrangement is covered by section 115BAB(6). The ₹75 crore stream exceeds ₹20 crore. Assume the properly constructed TNMM dataset yields a valid range of 10.50% to 14.00% and a median of 12.00%; the booked markup is outside the range. The illustrative benchmark profit is ₹6 crore, the benchmark price ₹56 crore and the excess profit ₹19 crore. Validate the dataset, prescribed range and selection of the median in a real case.
Assuming the Assessing Officer determines those amounts under section 115BAB(6), the ₹6 crore component at 15% plus 10% surcharge and 4% cess is taxed at 17.16%, or ₹1,02,96,000. The ₹19 crore excess is taxed under section 115BAB(1) at 30% plus 10% surcharge and 4% cess, or 34.32% and ₹6,52,08,000. Illustrative combined tax: ₹7,55,04,000 before credits and other items. This is the statutory rate on the excess under section 115BAB, not a section 115BBE tax or a penalty. A parent validly using section 115BAA has a separate rate of 25.168% on income to which its 22% base rate applies, with the assumed surcharge and cess.
3. Routine purchases and director remuneration
A company buys ₹120 crore of forgings from a domestic sister company and pays ₹8 crore of promoter-director remuneration. Assume neither stream falls in a surviving section 92BA category. Their ₹128 crore total does not enter the SDT threshold, and those payments alone do not require Form 3CEB. Check specified-person expense rules and clause 23 of Form 3CD if applicable; assess any other transfer pricing trigger independently.
4. Common overheads for an SEZ unit
Assume an eligible SEZ software unit and a domestic tariff area unit have ₹40 crore revenue each. The ₹12 crore common head office cost was all charged to the domestic unit, leaving booked margins of 48% and 18%, respectively: ₹19.20 crore and ₹7.20 crore of profit. If a supported 50:50 allocation reflects actual benefit, moving ₹6 crore of cost to the SEZ unit results in ₹13.20 crore profit for each, with combined profit unchanged at ₹26.40 crore. Apply the section 10AA deduction fraction and phase separately; its reduction need not be ₹6 crore. Identify genuine internal transfers of services and value them if section 80-IA(8) applies via section 10AA(9). The accounting allocation alone does not establish a separately reportable SDT or that the ₹20 crore threshold is crossed.
5. Startup sells services to a promoter-linked NBFC
An eligible startup claiming section 80-IAC provides ₹24 crore of software and analytics services to an NBFC under common promoter ownership. Its reported profit margin of 65% of revenue implies ₹15.60 crore of operating profit. Verify startup eligibility independently of recognition, and assess the arrangement under section 80-IA(10), applied through section 80-IAC(4). If this business falls within that test, the ₹24 crore exceeds the threshold and is reportable under section 92BA(v). Examine the scope of services, functions, assets, risks and comparables. Common ownership and a high margin are reasons to investigate; they do not by themselves prove that excess profits were arranged.
6. Aggregate two streams only if both qualify for that taxpayer
A taxpayer has ₹13.50 crore of qualifying section 80-IA inter-unit transfers and purchases ₹8.50 crore of sub-assemblies from a subsidiary using section 115BAB. If the purchase is independently established as business referred to in section 115BAB(6) for the reporting taxpayer, the aggregate is ₹22 crore and both qualifying streams are included. If that limb is not satisfied for the taxpayer, its stated qualifying aggregate is ₹13.50 crore. The subsidiary tests its own facts and aggregate separately. The election alone does not establish the purchaser’s obligation.
Documentation and filing
Use a transaction register with the period, taxpayer, counterparty, statutory limb, gross book value, benchmark, adjustments and reporting references. Keep segmental ledgers, contracts, transfer records, allocation drivers, tariff schedules and source documents. Distinguish a management control, such as an internal transfer note, from a statutory invoice requirement. Reconcile the books, Form 3CEB Part C (or Form 48 for the new framework), the deduction report such as Form 10CCB or Form 56F for the relevant legacy claim, and Form 3CD where applicable. Explain differences in coverage; these forms are not intended to show identical populations. Use the prescribed version of the form and the applicable filing date for the year.
Practical FAQs
Does ₹25 crore of managing director salary trigger SDT reporting?
Not on amount or relationship alone for a post-omission year. Check the surviving limbs, any separate international transactions and the ordinary specified-person expense rules.
Is a matching adjustment automatic in the counterparty’s return?
No. A restriction of the deduction or tax on excess profit does not automatically produce a matching refund or downward adjustment for the counterparty. Do not import the foreign excess-money and repatriation rules into an ordinary domestic computation; assess section 92CE and rule 10CB separately where a qualifying cross-border primary adjustment is involved.
Is there a safe harbour for SDTs?
The legacy rules 10TH to 10THD cover specified eligible transactions and taxpayers, including eligible regulated electricity supplies and qualifying milk or milk product procurement by co-operatives from members. Check the exact conditions and election. A private group does not qualify merely because it makes an internal transfer of power or uses section 115BAB.
Do the tax audit report and deduction report replace Form 3CEB?
No. For legacy periods, section 271BA provides for a ₹1 lakh penalty for failure to furnish the accountant’s report. Sections 271AA and 271G address distinct documentation, reporting or production failures and can prescribe a 2% amount for the applicable failure; 2% of ₹30 crore is ₹60 lakh. Check the exact provision, facts, process and reasonable-cause relief under section 273B. Do not assume that the penalties are automatically cumulative.
What if both sister companies use the same concessional rate?
A matching rate does not create a statutory exemption. Assess the arrangement and the persons referred to in section 115BAB(6) and the qualifying annual aggregate for each taxpayer.
Do interest-free loans or free guarantees always create an SDT?
No automatic result follows. Determine whether the particular financing or guarantee is part of business transacted under a surviving limb, whether the arrangement produces excess profits where required, and whether the aggregate threshold is crossed. Document actual terms and the most appropriate comparables before quantifying any adjustment.
Sources
- Income Tax Department: Income-tax Act, 1961 (including sections 10AA, 80A, 80-IA, 80-IAC, 92BA and 115BAB)
- Gazette: Finance (No. 2) Act, 2024, surcharge and cess for the historical example
- Income Tax Department: Form 3CEB
- Income Tax Department: Income-tax Act, 2025, as amended by the Finance Act, 2026
- Gazette: Income-tax Rules, 2026 and Form 48
- Income Tax Department: legacy transfer pricing and safe harbour guidance
- Supreme Court: Jindal Steel & Power Ltd, judgment of 6 December 2023