Penalty for failure to maintain documentation
Companies engaged in international or specified domestic transactions must maintain prescribed documentation. Failure to do so attracts a penalty under section two seventy one AA.

• Two percent of the value of each international or domestic transaction
  
• Applies even if the transaction is otherwise at arm’s length
  
• Records must include method, analysis, and comparables
  
• Must be updated annually and retained for eight years
  

Penalty for failure to furnish report in form three CEB
Every company covered under transfer pricing regulations must file form three CEB. This form must be certified by a chartered accountant and submitted before the due date.

• Penalty under section two seventy one BA is one hundred thousand rupees
  
• Applies if the report is not filed or delayed beyond the due date
  
• Filing must be in electronic format with valid digital signature
  
• Mandatory even if only one specified transaction is undertaken
  

Penalty for inaccurate documentation or incorrect information
Providing false or misleading documentation to the income tax department results in a strict penalty. This includes concealment or misstatement in transfer pricing records.

• Fifty percent of the tax payable on underreported income
  
• If underreporting is deliberate, penalty can rise to two hundred percent
  
• Section two seventy under reporting provisions apply in such cases
  
• Applicable when data is inaccurate or not verifiable
  

Penalty for underreporting of income due to transfer pricing adjustment
If transfer pricing leads to a tax adjustment, companies may be penalized for underreporting. The penalty is calculated on the additional income assessed.

• Fifty percent of tax payable on the difference between reported and assessed income
  
• If misreporting is established, penalty may increase to two hundred percent
  
• Applies when income is understated due to incorrect pricing
  
• Must be paid along with interest on the shortfall
  

Penalty for failure to furnish information during proceedings
During assessment or audit, companies must submit all relevant transfer pricing documentation. Refusal or delay in furnishing information leads to penal consequences.

• Ten thousand to fifty thousand rupees for each instance of failure
  
• Covered under section two seventy one G of the Income Tax Act
  
• Each notice ignored may result in a fresh penalty
  
• Continuation of non-compliance can lead to further scrutiny
  

Consequences on disallowance of expenditure
If expenses between related parties are not at arm’s length, the tax authority may disallow them. This increases taxable income and leads to higher tax liability.

• Adjustment increases profit and tax outgo for the relevant year
  
• No deduction is allowed for unjustified transfer pricing payments
  
• Loss of benefits under tax holiday or exemptions may follow
  
• May also lead to corresponding penalties and disallowance in books
  

Impact on tax refunds and assessments
Non-compliance affects the credibility of the taxpayer and may delay or reduce refunds. It increases the chances of audit and prolonged assessment cycles.

• Refunds may be held back until documentation is verified
  
• Assessment proceedings become lengthier and more detailed
  
• Transfer pricing cases are often selected for special scrutiny
  
• May also affect goodwill with regulatory and banking institutions