Definition of specified domestic transactions
Specified domestic transactions are certain transactions between related parties within India that are subject to transfer pricing regulations. These transactions are governed by section ninety two BA of the Income Tax Act.

• These transactions are similar to international related party dealings
  
• They aim to prevent tax avoidance within domestic entities
  
• Threshold for applicability is twenty crore rupees in aggregate
  
• Arm’s length pricing and documentation are required
  

Types of specified domestic transactions covered
The law identifies specific categories of transactions between related domestic entities. These include expenses, revenue, or dealings with tax preference or profit-linked units.

• Payments to related parties under section forty A two
  
• Transactions between different units of the same company
  
• Transfers to units eligible for tax holidays under sections ten AA or eighty IA
  
• Business arrangements with closely held entities or relatives
  

Applicability of transfer pricing provisions
If the value of specified domestic transactions exceeds the threshold, transfer pricing rules apply. The company must determine and report the arm’s length price.

• The arm’s length principle ensures fair pricing among related entities
  
• Transfer pricing methods prescribed for international transactions apply here
  
• Reporting requirements and audits are conducted similarly
  
• Pricing must be defensible through comparable benchmarks
  

Documentation and compliance requirements
Companies engaged in specified domestic transactions must maintain detailed records. These documents must justify the pricing and structure of the transactions.

• Documentation includes functional analysis and pricing methodology
  
• Comparability studies must be done for benchmarking purposes
  
• Form three CEB must be certified by a chartered accountant
  
• Records must be maintained for eight years from the relevant assessment year
  

Exclusions and exceptions from applicability
Not all domestic related party transactions are covered under specified domestic transactions. Only transactions explicitly listed in the Act fall under this scope.

• Routine purchases or sales from unrelated entities are not included
  
• Transactions below the prescribed threshold are excluded
  
• Purely charitable or non-profit dealings may be outside the scope
  
• Exemptions apply to companies without tax holiday or preferential income
  

Purpose and intent of regulating domestic transactions
The objective is to prevent tax base erosion and profit shifting between taxable and exempt entities within India. It ensures transparent intra-group pricing.

• Promotes fair distribution of profits and expenses among entities
  
• Prevents manipulation between units with different tax benefits
  
• Ensures tax holiday units do not divert profits artificially
  
• Supports integrity and equity in domestic tax administration
  

Penalties for non-compliance with regulations
Failure to comply with transfer pricing rules for specified domestic transactions results in penalties. Authorities may reject books and impose tax adjustments.

• Penalty for not maintaining documentation is two percent of transaction value
  
• Additional tax liability may arise from pricing adjustments
  
• Interest on underreported income is levied under section two thirty four B
  
• Disallowance of expenditure can affect overall tax liability