India Transfer Pricing Penalties 2026: Sections, Amounts and How to Avoid Them

Transfer pricing penalties in India are unusual in one respect: most of them are calculated on the value of the transaction, not on the tax in dispute. A documentation failure on a large intra-group payment can therefore cost more than the adjustment that triggered the review, even when the pricing itself is eventually accepted.

The rules also moved in 2026. The Income-tax Act, 2025 and the Income-tax Rules, 2026 took effect from 1 April 2026, which renumbered the penalty provisions, and the Finance Act 2026 then changed the consequence of a late accountant’s report from a penalty into a fee. Older articles, including many that still rank, describe only the 1961 Act position.

This guide explains each default, the amount, the section under both Acts, the defences available, and the steps that reduce exposure. It is written for finance heads, tax teams and business owners with related-party transactions.

Quick Answer: What Are the Main Transfer Pricing Penalties in India?

Which Law Applies to Your Year?

Before looking at amounts, identify which Act governs the year you are dealing with. The Income Tax Department’s form mapping guide shows the forms under both Acts side by side, which reflects the transition.

1. Tax years that began before 1 April 2026 continue to be governed by the Income-tax Act, 1961. The accountant’s report for these years is Form 3CEB, and the penalty sections are 271AA, 271BA, 271G, 271GB and 270A.
2. From tax year 2026-27, the Income-tax Act, 2025 applies. The report is Form 48, and the corresponding provisions are sections 442, 428, 457, 459 and 439.
3. Penalty proceedings follow the law applicable to the year of the default, so both sets of provisions will remain relevant for assessments of earlier years for some time.

If you are comparing the two reports, the difference between Form 48 and Form 3CEB is explained separately, and the Income Tax Department’s Form 48 brochure states that Form 48 is the accountant’s report under section 172 of the 2025 Act, due at least one month before the return due date.

India Transfer Pricing Penalties at a Glance

The department’s general page on penalties under the Income-tax Act lists the headline rates for under-reporting and misreporting, and its transfer pricing guidance describes the compliance obligations that these penalties enforce.

Penalty for Failure to Furnish the Accountant’s Report: Form 3CEB and Form 48

Under the 1961 Act: section 271BA

Where a person required to furnish the accountant’s report under section 92E fails to do so, section 271BA allows a penalty of Rs 1,00,000. For tax years up to and including 2025-26, this is the provision that applies to a missing or late Form 3CEB.

Under the 2025 Act: a fee, not a penalty

The position for the new Act is different. According to the Income Tax Department’s text of section 428, a person who fails to furnish a report from an accountant as required by section 172 is liable to pay a fee of Rs 50,000 for a delay up to one month, and Rs 1,00,000 thereafter. The earlier penalty provision for this default, section 447, no longer appears in the list of provisions in the department’s current text of section 470, where it has been replaced by a deletion marker. Some commentary still states a flat Rs 1,00,000 penalty for Form 48, so check the official text before relying on a summary.

Why the distinction matters

Section 470 gives relief from penalty where reasonable cause is proved, and it lists the penalty provisions to which that relief applies. Section 428 is a fee provision and is not in that list. A late Form 48 should therefore be treated as a fixed cost of delay with a second tier that begins one month after the due date, and not as something to argue about afterwards.

Section 271AA and Section 442: Documentation and Reporting Failures

This is the provision that carries the largest exposure for most groups. It applies in three situations, and each is a separate default.

1. Failure to keep and maintain the prescribed information and documents. The obligation arises under section 92D of the 1961 Act and section 171 of the 2025 Act.
2. Failure to report a transaction that the taxpayer was required to report.
3. Maintaining or furnishing incorrect information or documents.

The Income Tax Department’s text of section 442 sets the penalty at 2% of the value of each international transaction or specified domestic transaction. The earlier equivalent is section 271AA, whose text is also available on the Income Tax Department website.

How the arithmetic works

The penalty is computed per transaction, on its value. As an illustration only, if a company has one intra-group service arrangement of Rs 40 crore and no compliant documentation, 2% of that value is Rs 80 lakh, regardless of the size of any transfer pricing adjustment. If the company has three such arrangements and none is documented, each is measured separately.

The fixed Rs 5,00,000 penalty

Section 442(2) separately allows the prescribed authority to impose a penalty of Rs 5,00,000 where a person fails to furnish the information and documents required under section 171(4). Under the 1961 Act, section 271AA(2) played the same role for the Master File requirement.

Section 271G and Section 457: Failure to Produce Documents on Request

Having documentation is not enough if it cannot be produced when called for. Under the Income Tax Department’s text of section 271G, where a person who has entered into an international transaction or specified domestic transaction fails to furnish the information or documents required, the Assessing Officer, the Transfer Pricing Officer or the Commissioner (Appeals) may direct a penalty of 2% of the value of the transaction for each such failure. Section 457 of the 2025 Act continues this approach.

Two practical points follow from the wording.

1. The penalty applies for each failure, so incomplete responses to several queries can multiply the exposure.
2. It can operate alongside the documentation penalty, because failing to maintain documents and failing to produce them are separate defaults.

The way to avoid this penalty is operational. Keep the file indexed, know who owns the response, and track the notice period. Our guide on replying to a transfer pricing show-cause notice sets out how to handle the response stage.

Master File and Country-by-Country Reporting Penalties

Large multinational groups face a distinct set of penalties for the international group report. The Income Tax Department’s text of section 459, which corresponds to section 271GB of the 1961 Act, provides the following for a reporting entity:

For multinational groups, the practical lesson is that daily penalties accrue until the default is cured, so a missed reporting deadline should be fixed immediately. For the underlying reporting framework, read our explainer on Country-by-Country Reporting in India, and see the OECD’s transfer pricing materials for the international standard on which the three-tier documentation is based.

Section 270A and Section 439: Under-Reporting and Misreporting

A transfer pricing adjustment can also lead to a penalty on the tax itself. Under the Income Tax Department’s text of section 439, the penalty for under-reported income is 50% of the tax payable on the under-reported income, and 200% where the under-reporting results from misreporting. Section 270A of the 1961 Act carries the same rates.

An illustration

Assume a transfer pricing adjustment results in Rs 2.5 crore of tax on the under-reported income. A 50% penalty would be Rs 1.25 crore. If the same under-reporting were treated as misreporting, the penalty at 200% would be Rs 5 crore. These figures are illustrative and the actual outcome depends on the facts and the order passed.

The exclusion that rewards good documentation

Both provisions carve out transfer pricing adjustments from under-reported income in defined circumstances. Under section 439(8), the under-reported income does not include an addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer where all of the following are met.

1. The addition is in conformity with the arm’s length price determined by the Transfer Pricing Officer.
2. The taxpayer had maintained the information and documents prescribed under section 171 (section 92D under the 1961 Act).
3. The taxpayer declared the international transaction.
4. The taxpayer disclosed all the material facts relating to the transaction.

This is the strongest commercial argument for contemporaneous documentation. A group that documents and discloses properly can face an adjustment without the percentage penalty on top. A group that does not may face both.

Failure to report a transaction can be treated as misreporting

Under the 1961 Act, the list of misreporting cases in section 270A includes failure to report an international transaction, a specified domestic transaction or a transaction deemed to be an international transaction. Confirm the corresponding list in section 439 for the year concerned. The risk is that an unreported transaction can attract 200% of the tax instead of 50%, which is why identifying every reportable transaction at the start matters so much. Our article on deemed international transactions explains where transactions with third parties can be caught.

Does a Transfer Pricing Adjustment Automatically Mean a Penalty?

No. An adjustment and a penalty are separate matters. A penalty requires its own proceedings, a finding of the relevant default and compliance with the procedure in the statute. The facts, the documentation, the disclosures and the exclusions all bear on the outcome.

Procedure and safeguards

Under the Income Tax Department’s text of section 471, no penalty order under the chapter can be made unless the assessee has been heard or given a reasonable opportunity of being heard, which the current text frames as a show-cause notice. Approval requirements apply above specified amounts. The same section provides that, for assessments where the draft order is made on or after 1 April 2027, a penalty under section 439 forms part of the assessment order itself.

Reasonable cause

Under section 470 of the 2025 Act, no penalty can be imposed under the listed provisions if the person proves reasonable cause for the failure. The list includes sections 442, 457 and 459. The 1961 Act has a similar protection in section 273B. The burden is on the taxpayer, and the term is not defined, so the explanation must be supported by evidence prepared at the time and not assembled later.

Common Triggers: How Transfer Pricing Penalties Arise in Practice

In practice, most penalty exposure comes from process gaps, not disagreement on pricing. These are the triggers that recur.

1. Related-party transactions that appear in the ledger but not in the accountant’s report.
2. Transactions with third parties that are deemed international transactions but were never assessed for reportability.
3. Documentation prepared after the filing date, or not at all, because the transaction was thought to be below a threshold.
4. Functional analysis copied forward from the previous year while the business model changed.
5. Benchmarking with no record of search strategy or rejection reasons.
6. Late or partial responses to information requests, usually because ownership of the response was unclear.
7. Late Form 3CEB or Form 48 because the engagement started too close to the due date.
8. Master File or CbCR deadlines handled by the parent without checking the Indian entity’s obligation.

Each of these is preventable with a calendar, an owner and a review. If you need support at the documentation stage, see SBC’s note on TP documentation support services.

How to Reduce Transfer Pricing Penalty Risk: A Practical Checklist

This sequence works for most groups and can be run each year as a review.

1. Build a complete inventory of related-party transactions and reconcile it to the general ledger.
2. Test for deemed international transactions and specified domestic transactions, and record the conclusion for each.
3. Confirm which Act and which form apply to the year, and set the due date for the accountant’s report with a buffer of several weeks.
4. Prepare the functional analysis from current facts, not the prior-year file.
5. Select the method and complete benchmarking, keeping the search logic, screens and rejection reasons.
6. Finalise documentation by the prescribed date and keep it indexed to agreements, invoices and financial statements.
7. Reconcile the accountant’s report to the documentation and the books before signature.
8. Check Master File and CbCR applicability, including any parent-level filing and the Indian entity’s own obligation.
9. Assign a named owner for notice responses and track every deadline.
10. Review the file after any restructuring, financing change or new intercompany arrangement.

Illustrative Scenarios

These examples are simplified and are not client case studies.

Frequently Asked Questions

What are the main transfer pricing penalties in India?

The main penalties are 2% of the transaction value for documentation, reporting or information failures, Rs 5,00,000 for specified information failures, daily penalties for CbCR defaults, and 50% to 200% of tax on under-reported or misreported income. A late accountant’s report is penalised under the 1961 Act and attracts a fee under the 2025 Act.

What is the penalty for not maintaining transfer pricing documentation?

The penalty is 2% of the value of each international transaction or specified domestic transaction, under section 271AA(1) of the 1961 Act and section 442(1) of the 2025 Act. It also applies to failing to report a transaction or maintaining incorrect information.

What is the penalty for not filing Form 3CEB or Form 48?

For tax years up to 2025-26, section 271BA provides a penalty of Rs 1,00,000 for Form 3CEB. For Form 48 under the 2025 Act, section 428 provides a fee of Rs 50,000 for a delay up to one month and Rs 1,00,000 thereafter.

What replaced section 271BA?

Section 271BA of the 1961 Act corresponds to a penalty provision in the 2025 Act that has since been omitted. The consequence for failing to furnish the report now sits in section 428 as a fee. Confirm the current text on the Income Tax Department website.

What is the penalty under section 271G, and what replaced it?

Section 271G provides a penalty of 2% of the value of the transaction for each failure to furnish required information or documents. Section 457 of the 2025 Act continues the provision.

Can section 271AA and section 271G both apply?

They address different defaults: failing to maintain or report, and failing to furnish when called for. Whether both apply depends on the facts and the findings in the proceedings.

Does a transfer pricing adjustment automatically lead to a penalty?

No. Penalty proceedings are separate, require a hearing, and depend on the specific default and the available exclusions. Maintaining prescribed documentation, declaring the transaction and disclosing material facts can exclude an arm’s length adjustment from the under-reporting penalty.

What is the penalty for a transfer pricing adjustment under section 270A or 439?

Where the adjustment results in under-reported income that is not excluded, the penalty is 50% of the tax payable on it, or 200% if the under-reporting is due to misreporting.

Is there a penalty for failing to file the Master File or CbCR?

Yes. Information failures of the Master File type attract Rs 5,00,000 under the relevant provision, and CbCR failures attract daily penalties under section 271GB or section 459, with Rs 5,00,000 for specified inaccuracies.

Can reasonable cause avoid a transfer pricing penalty?

Often yes, for the penalty provisions listed in section 470 of the 2025 Act and covered by section 273B of the 1961 Act. The taxpayer must prove reasonable cause with contemporaneous evidence. The Form 48 fee under section 428 is not among the provisions listed in section 470.

Which Act applies to the accountant’s report for FY 2025-26?

Periods before 1 April 2026 continue under the 1961 Act, so the report for FY 2025-26 is Form 3CEB. Tax year 2026-27 onwards uses Form 48 under the 2025 Act.

How can companies reduce transfer pricing penalty risk?

Identify every reportable transaction, prepare contemporaneous documentation, reconcile the accountant’s report to the books, track every notice and filing deadline, and review the file after any change in the business.

Conclusion: Treat Transfer Pricing as a Year-Round Control

Transfer pricing penalties can arise at several points: when a transaction is missed, when documents are not kept, when a request is answered late, when the accountant’s report is filed late, and when an adjustment is made without support. The exposure is usually driven by process, not by the pricing view taken.

Groups with significant related-party dealings should review their controls each year, confirm which Act applies, and keep their evidence current. If you would like a review of where your documentation and reporting stand, you can contact the SBC team, and you can read more about the firm’s transfer pricing services.

For the full statutory text, the Income Tax Department publishes the Income-tax Act, 2025 as amended by the Finance Act, 2026, and this article’s detailed cross-reference to every section sits in SBC’s separate guide to transfer pricing non-compliance penalties.