Transfer pricing compliance in India involves more than determining whether intercompany transactions meet the arm’s length standard. Separate penalties may arise from failures relating to documentation, transaction reporting and responses to information requests. Understanding the distinction between these defaults is essential, particularly as the Income-tax Act, 2025 introduces a revised statutory framework from 1 April 2026.
Failure to Maintain or Report Information
Under Section 271AA of the Income-tax Act, 1961, a penalty of 2% of the value of each relevant international transaction or specified domestic transaction may apply where the taxpayer fails to maintain prescribed information and documents, fails to report a transaction or maintains or furnishes incorrect information.
For periods governed by the Income-tax Act, 2025, the corresponding provision is Section 442. The penalty remains linked to the value of the transaction, rather than merely the amount of any transfer pricing adjustment. <Cite refs={["turn956384search4"]}/>
Failure to Furnish Information or Documents
Section 271G of the 1961 Act provides for a penalty of 2% of the value of the relevant transaction for failure to furnish information or documents required under the transfer pricing provisions.
Under the 2025 Act, Section 457 provides for a corresponding penalty for failure to furnish information or documents required under Section 171(2). Section 171 allows the specified authority to require the information within ten days of the notice, with a possible extension of up to thirty additional days on application. Timely responses and properly documented extension requests are therefore important. <Cite refs={["turn956384search8","turn496483search2"]}/>
Failure to Furnish the Accountant's Report
Under Section 271BA of the 1961 Act, failure to furnish the accountant’s report required under Section 92E may attract a penalty of ₹1 lakh.
The corresponding provision was initially included as Section 447 of the Income-tax Act, 2025. However, Section 447 was subsequently omitted with effect from 1 April 2026 by the Finance Act, 2026. Accordingly, the applicable statutory position must be checked against the relevant tax year and any subsequent amendments. <Cite refs={["turn496483search39","turn496483search36"]}/>
Under-Reporting and Misreporting of Income
Section 270A of the 1961 Act provides for a penalty of 50% of the tax payable on under-reported income, increasing to 200% where the under-reporting results from misreporting.
Under the Income-tax Act, 2025, the corresponding provision is Section 439. Importantly, Section 439(8)(d) excludes an addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer from under-reported income, provided the taxpayer has maintained prescribed information and documents, declared the international transaction under Chapter X and disclosed all material facts relating to it. This protection is conditional and should not be treated as a blanket exemption from penalty proceedings. <Cite refs={["turn496483search0","turn956384search0"]}/>
Building a Robust Compliance Process
A practical compliance framework should include a documentation checklist mapped to the applicable rules, a filing calendar for the accountant’s report and transfer pricing documentation, and a designated process for responding to notices.
Reconciliation of international transactions reported in the accountant’s report with the transfer pricing study, financial statements and related-party disclosures is equally important. Consistency across these records helps reduce avoidable reporting and documentation gaps.
Conclusion
Transfer pricing penalties can arise independently of the final adjustment to income. Maintaining prescribed documentation, accurately reporting transactions and responding within statutory timelines are essential safeguards. With the Income-tax Act, 2025 and subsequent amendments changing the applicable provisions from 1 April 2026, taxpayers should also ensure that compliance is assessed under the correct statutory regime for each relevant year.
