Specified Domestic Transactions under Transfer Pricing: Scope & Compliance

When transfer pricing was first introduced in India in 2001, the focus was almost entirely on cross-border transactions between Indian entities and their foreign associated enterprises. A decade later, the Finance Act 2012 significantly expanded the TP regime to cover Specified Domestic Transactions (SDTs) — related-party transactions between Indian entities that could be used to shift profits to lower-tax units within the same domestic group.

Understanding when SDT provisions apply, what documentation is required, and how domestic transfer pricing differs from international TP is increasingly important for business groups operating across multiple Indian entities.

What Are Specified Domestic Transactions?

Section 92BA of the Income-tax Act defines Specified Domestic Transactions to include:

• Transactions between two entities where one holds a tax holiday under Sections 10AA (SEZ units), 80-IA, 80-IB, 80-IC, 80-ID, or similar profit-linked deductions

• Transactions between a company and its directors or specified persons under Section 40A(2)(b)

• Business transacted between units of the same taxpayer — for example, between an SEZ unit and a domestic tariff area (DTA) unit of the same company

• Any other transaction as may be prescribed by the CBDT

The rationale is straightforward: a business group could arrange transactions between an entity enjoying a tax holiday (zero or low tax) and a fully taxable entity to inflate profits in the holiday unit and deflate them in the taxable unit, reducing the overall tax burden without any real economic substance to the arrangement.

The Threshold: When Do SDT Rules Apply?

SDT provisions apply only where the aggregate value of all specified domestic transactions entered into by the taxpayer during the year exceeds the prescribed threshold — currently Rs. 20 crore. Below this threshold, normal transfer pricing documentation requirements under SDT do not apply, though the general provisions of Section 40A(2) continue to govern disallowance of unreasonable payments to related parties.

Importantly, the Rs. 20 crore threshold is on the aggregate of all SDTs — not on any individual transaction. A business with multiple smaller intercompany arrangements could easily cross the threshold without any single transaction being particularly large.

Arm's Length Standard Applies to SDTs

Once the threshold is crossed, the arm's length standard under Section 92 applies in full — the same methods (CUP, RPM, CPM, TNMM, PSM) and the same documentation obligations under Rule 10D apply to covered domestic transactions as to international ones. Form 3CEB must also cover SDTs, and the certifying CA must report the nature, value, and method applied.

Common SDT Scenarios in Practice

• SEZ unit supplying goods or services to a DTA group entity: The SEZ unit, enjoying full tax exemption, could potentially be the recipient of profits inflated above arm's length rates. The TP analysis must establish that the pricing of intercompany supplies reflects what unrelated parties would agree to.

• Allocation of shared costs across group companies: Head office expenses, IT infrastructure costs, or management service fees allocated between a profitable entity and a tax-holiday unit require benchmarking.

• Inter-unit transactions within the same entity: Where a company has both a taxable unit and a Section 10AA-eligible SEZ unit, and goods or services flow between them, SDT provisions may apply.

• Real estate and infrastructure groups: Entities within a group availing Section 80-IB deductions on housing projects may have intercompany transactions covered under SDT.

Key Difference: No Transfer Pricing Officer for SDTs

One important procedural distinction: SDT cases are assessed by the Assessing Officer directly, not referred to the Transfer Pricing Officer (unlike international TP cases under Section 92CA). Appeals lie with CIT(A) and thereafter ITAT in the normal course. This means the assessment dynamic is somewhat different from international TP, though the substantive analysis — arm's length pricing and documentation — is identical.

Documentation Requirements

For SDTs above the Rs. 20 crore threshold:

• Contemporaneous documentation under Rule 10D is mandatory

• Form 3CEB must be obtained and filed covering all SDTs

• The benchmarking methodology and comparable selection must be documented with the same rigour as for international TP

• Penalties for non-compliance (Section 271AA, 271G, 271BA) apply equally

Planning Considerations

For groups that structure intercompany arrangements across tax-holiday and taxable entities, building sound transfer pricing into the arrangement from day one — rather than relying on informally negotiated rates — is essential. An arrangement that looks commercially reasonable without analysis may not survive TP scrutiny, and the consequences of a domestic TP adjustment can be significant given the profit-differential between holiday and taxable units.

Have intercompany transactions between Indian group entities, including SEZ or Section 80-IA units? PGT & Associates assists with SDT compliance, documentation, and Form 3CEB certification. Reach our team at pgtandassociates.com/contactus.