Domestic Transfer Pricing in India — Specified Domestic Transactions Under Section 92BA

Domestic Transfer Pricing in India

India is one of the very few jurisdictions in the world that applies transfer pricing principles not just to cross-border transactions between multinational group companies but also to certain transactions between two resident Indian entities — what the Income Tax Act, 1961 calls "Specified Domestic Transactions" (SDTs). Introduced by the Finance Act, 2012 through Section 92BA, domestic transfer pricing targets a specific tax arbitrage problem: when a company has a unit or entity that enjoys a profit-linked tax holiday or exemption (such as an SEZ unit under Section 10AA, or an infrastructure company under Section 80-IA), there is an incentive to inflate the prices at which that exempt or low-tax unit transacts with related taxable entities, shifting profits from the taxable entity to the tax-exempt entity and reducing the overall tax outflow.

N D Savla & Associates, Chartered Accountants based in Mumbai, provides complete domestic transfer pricing compliance and advisory services. The compliance framework for SDTs is identical to that for international transfer pricing: the same Transfer Pricing Study documentation must be maintained under Rule 10D where SDT aggregate exceeds Rs. 20 crore; the same Form 3CEB must be filed; the same six methods (CUP, RPM, CPLM, PSM, TNMM, Other) determine arm's length pricing; and the same TPO assessment process applies.

The scope of SDTs was significantly narrowed by the Finance Act, 2017, which removed Section 40A(2)(b) transactions from the SDT definition. From FY 2017-18, the current SDT scope is limited to transactions involving entities claiming profit-linked deductions or exemptions under Chapter VI-A or Section 10AA.

The Tax Arbitrage Problem That Domestic TP Addresses

Consider the following scenario: Company X has both a taxable DTA (Domestic Tariff Area) division and an SEZ unit that is exempt from income tax for 5 years under Section 10AA. The SEZ unit manufactures products that it sells to the DTA division for use in the DTA division's sales to customers. If the SEZ unit charges Rs. 120 per unit to the DTA division when the fair market value is Rs. 80 per unit:

• The DTA division's cost is Rs. 120/unit (inflated by Rs. 40/unit)
• The DTA division's taxable profit is reduced by Rs. 40/unit
• The SEZ unit's profit is inflated by Rs. 40/unit — but this profit is exempt from tax
• Net effect: The group saves income tax on Rs. 40/unit, artificially reduced from the taxable DTA entity and shifted to the exempt SEZ entity

Section 92BA prevents this by requiring the SEZ–DTA division transaction to be at arm's length (Rs. 80/unit in the example). The SDT adjustment reverses the tax advantage of the artificial pricing while still allowing the two entities to transact freely at fair prices.

Who Is Affected by Domestic TP? — Section 92BA Framework

Domestic TP affects any group (including single companies with multiple units) that has:

• An SEZ unit claiming income tax exemption under Section 10AA (tax holiday for up to 15 years)
• An infrastructure or power company claiming 100% deduction under Section 80-IA (roads, ports, airports, power generation, industrial parks, natural gas distribution)
• A small-scale industrial undertaking claiming deduction under Section 80-IB
• A business in Uttarakhand or Himachal Pradesh claiming deduction under Section 80-IC
• A hotel or convention centre in specified areas claiming deduction under Section 80-ID
• A business in North-East India claiming deduction under Section 80-IE
• AND — that entity transacts with any other person where the aggregate value of all SDTs in the year exceeds Rs. 20 crore

Categories of Specified Domestic Transactions — Section 92BA

Domestic TP vs International TP — Complete Comparison

Practical Domestic TP Scenarios — How SDT Issues Arise

Scenario 1 — SEZ Pharmaceutical Company and DTA Parent

A pharmaceutical company has an SEZ manufacturing unit (exempt under Section 10AA) that produces Active Pharmaceutical Ingredients (APIs). The SEZ unit sells APIs to the DTA parent (taxable at 25%) at Rs. 1,200 per kg when the market price is Rs. 800 per kg. Annual API transactions: 30,000 kg = Rs. 36 crore (above the Rs. 20 crore SDT threshold). SDT analysis: The arm's length price is Rs. 800/kg. The SEZ unit has overcharged by Rs. 400/kg = Rs. 12 crore overcharge. TPO adjustment: Disallow Rs. 12 crore of the DTA parent's API cost; increase DTA parent's taxable income by Rs. 12 crore; DTA parent pays additional tax of Rs. 3 crore (at 25%). Method used: CUP (external CUP based on import prices and third-party domestic API prices).

Scenario 2 — Power Plant and Related Contractor

A power generation company (Section 80-IA holiday) awards operations and maintenance contracts to its sister concern at Rs. 15 crore per year. Independent O&M contractors for similar power plants charge Rs. 10 crore for equivalent services. SDT analysis: The sister concern is overcharging by Rs. 5 crore. The TP adjustment: The deductible O&M cost at the power company is limited to Rs. 10 crore; the sister concern's income from the power company is also limited to Rs. 10 crore in the SDT arm's length computation. The sister concern pays tax on Rs. 10 crore (not Rs. 15 crore) of income from the power company.

Scenario 3 — North-East Manufacturing Unit

A consumer goods company has a manufacturing unit in Assam (claiming 100% deduction under Section 80-IE for 10 years). The Assam unit manufactures goods and sells to the company's DTA distribution division at Rs. 500 per unit when the market price is Rs. 350 per unit. Annual transactions: 80,000 units = Rs. 40 crore (above Rs. 20 crore threshold). Domestic TP adjustment: Arm's length price = Rs. 350/unit. DTA division's deductible cost = Rs. 28 crore (not Rs. 40 crore). Additional taxable income in DTA division: Rs. 12 crore. Net tax saving prevented: Rs. 12 crore × 30% = Rs. 3.6 crore.

Documentation for SDTs — Rule 10D and Form 3CEB

Where the aggregate value of SDTs exceeds Rs. 20 crore in a financial year, the same Rule 10D documentation requirements apply as for international transactions. The twelve categories of Rule 10D(1) information must be maintained, and the documentation must be contemporaneous — prepared before the income tax return due date. See our Transfer Pricing Documentation guide for the complete Rule 10D framework.

The Transfer Pricing Study for an SDT covers: description of the business and the related domestic entity; description of the SDTs; functional analysis of both entities; method selection; comparable search using domestic Indian databases; benchmarking analysis; and conclusion on arm's length pricing. For SDTs, the benchmarking is typically simpler than for international TP because domestic Indian comparables are directly applicable, there is no DTAA analysis or BEPS considerations, and CUP is more frequently applicable for SDT commodity and goods transactions.

Form 3CEB for SDTs: Form 3CEB under Section 92E must be filed for SDTs in the same way as for international transactions. The CA certifies that all SDTs have been disclosed and are priced at arm's length. Form 3CEB is filed on the income tax portal at incometax.gov.in before the income tax return due date (30 November of the assessment year). The penalty for not filing Form 3CEB (Section 271BA: Rs. 1,00,000) applies equally to SDT non-compliance.

The Finance Act 2017 Amendment — Removal of Section 40A(2)(b) from SDTs

The most significant change to India's domestic TP framework came through the Finance Act, 2017, effective from FY 2017-18. Prior to this amendment, Section 92BA(i) included in the SDT definition any expenditure in respect of payments to persons referred to in Section 40A(2)(b) — covering director salaries, related-party rents, professional fees to group entities, and management fees.

After the Finance Act 2017 amendment, none of these are SDTs. Payments to Section 40A(2)(b) persons continue to be subject to Section 40A(2)'s "excessive or unreasonable" standard (the AO can disallow excess), but this is no longer a TP-level assessment with the full TPO mechanism, Rule 10D documentation, and DRP. The Section 40A(2) assessment is a simpler "reasonableness" test conducted by the AO during regular assessment, without the formal TP framework.

Assessment, DRP, and Appeals for SDTs

The assessment, dispute resolution, and appellate framework for SDTs is identical to that for international TP:

• TPO assessment: Where the AO selects the SDT case for scrutiny, the AO may refer the SDT pricing to the Transfer Pricing Officer under Section 92CA. The TPO assessment process is the same as for international TP.
• DRP availability: Companies facing SDT adjustments are eligible assessees under Section 144C(15)(b) and can file DRP objections within 30 days of the Draft Assessment Order.
• ITAT and High Court: ITAT appeals from DRP directions in SDT cases follow the same procedure as for international TP — see our Transfer Pricing Appeals guide.
• No MAP for SDTs: MAP is a treaty-based mechanism for resolving double taxation in cross-border transactions. Since SDTs involve only resident entities in India, there is no cross-border double taxation and MAP does not apply.
• APA for SDTs: Unilateral APAs under Section 92CC are available for SDTs, providing advance certainty on the arm's length price for specified domestic transactions.

Why N D Savla & Associates for Domestic Transfer Pricing Compliance?

• SDT Identification and Compliance Calendar. We begin each financial year by identifying all of the client's transactions with related domestic entities that fall within the Section 92BA SDT categories. We compute the aggregate to determine whether the Rs. 20 crore threshold is crossed, and if so, initiate the SDT documentation process.
• SDT Benchmarking Using Indian Domestic Databases. We conduct benchmarking analyses using Indian databases (Prowess, Capitaline) to identify domestic comparables for SDT transactions — more relevant than international databases for domestic Indian transactions.
• Form 3CEB Certification. We certify and file Form 3CEB within the income tax return deadline, covering all SDTs alongside any international transactions in the same Form 3CEB.
• TPO Assessment Defence. Where SDT cases are selected for scrutiny and referred to the TPO, we provide full representation before the TPO, respond to information requests, and present the benchmarking analysis with supporting data.
• DRP and ITAT Representation. For SDT adjustments that proceed to DRP objections or ITAT appeals, we provide the same senior representation as for international TP disputes.

Frequently Asked Questions — Domestic Transfer Pricing