What Are the Penalties for Transfer Pricing Non-Compliance in 2026?

Written by Jayasri P · Last updated 17 August 2026 · Statutory references current to the Income-tax Act 2025 as amended by the Finance Act 2026.

Most transfer pricing defaults attract a penalty of 2% of the value of each affected transaction under Section 442 or Section 457 of the Income-tax Act 2025. Failure to furnish the accountant’s report is no longer a penalty at all. The Finance Act 2026 omitted Section 447 and converted that default into a graded fee under Section 428(4).

Transfer pricing penalties in India are priced on the value of the transaction rather than on the tax at stake. That single design choice is why a documentation failure can cost more than the adjustment that prompted it, and why the exposure is real even where the pricing adopted is ultimately accepted.

Two things changed in quick succession. The Income-tax Act 2025 renumbered the entire penalty chapter, so every section number a practitioner has cited for a decade has moved. The Finance Act 2026 then went further and removed one of those penalties altogether, replacing it with a fee.

What changed for transfer pricing penalties in 2026?

The penalty provisions were renumbered by the Income-tax Act 2025, and one was then converted into a fee by the Finance Act 2026 with effect from 1 April 2026.

The last row is the one that has not reached most compliance calendars. Section 447 carried a flat penalty of ₹1,00,000 for failure to furnish the report required by Section 172. That section now stands omitted, and the obligation sits in a different chapter under a different name.

Which transfer pricing defaults still attract a penalty?

Three of the four still do, and each is priced differently.

Section 442(1) allows the Assessing Officer or Commissioner (Appeals) to impose a penalty of 2% of the value of each international transaction or specified domestic transaction where the taxpayer fails to keep and maintain the information and document required by Section 171(1), fails to report a transaction that should have been reported, or maintains or furnishes incorrect information.

Section 442(2) allows the prescribed income-tax authority to impose a penalty of ₹5,00,000 where a person fails to furnish the information and document required under Section 171(4).

Section 457 allows the Assessing Officer, the Transfer Pricing Officer referred to in Section 166, or the Commissioner (Appeals) to impose a penalty of 2% of the value of the transaction for each such failure where a person fails to furnish information or a document required under Section 171(2).

Why does a percentage of transaction value matter so much?

Because it detaches the exposure from the tax in dispute. A penalty computed on tax scales with the adjustment. A penalty computed on transaction value does not.

A group with a single intra-group service arrangement worth ₹40 crore faces a potential penalty of ₹80 lakh on that transaction alone under Section 442(1), whether or not any adjustment is ultimately sustained. Section 457 compounds this, because it applies for each such failure rather than once per assessment.

This is also why the three provisions can operate together. Failing to maintain the documentation, failing to produce it when called for, and failing to report a transaction are separate defaults with separate consequences. Our guidance on Indian transfer pricing compliances sets out the annual obligations from which each of these defaults arises.

Which default is now a fee rather than a penalty?

Failure to furnish the accountant’s report. The Finance Act 2026 omitted Section 447 with effect from 1 April 2026 and moved the consequence into Section 428, which deals with fees for default in furnishing returns, audited accounts and reports.

Section 428(4)(d) provides that a person who fails to furnish a report from an accountant as required by Section 172 is liable to pay, by way of fee:

The same sub-section treats the tax audit report under Section 63 the same way, at ₹75,000 for a delay up to one month and ₹1,50,000 thereafter.

The report itself is unchanged in substance. It is the erstwhile Form 3CEB, now numbered Form 48, and we set out that transition in our note on the move from Form 3CEB to Form 48.

Why does the change from penalty to fee matter in practice?

Because the relief available differs. Section 470 provides that no penalty shall be imposed under the provisions it lists, including Sections 441, 442, 446 and 448 to 463, where the person proves there was reasonable cause for the failure. The reference to Section 447 was removed from that list by the Finance Act 2026.

Section 428 is a fee provision and does not appear in the Section 470 list. A taxpayer weighing a late filing should therefore not assume that the reasonable-cause argument available against a documentation penalty is equally available against the fee.

The practical consequence is that a late Form 48 is now best treated as a fixed cost of delay rather than as something to be argued about afterwards, and the second tier arrives one month after the due date.

Does maintaining documentation protect against an under-reporting penalty?

It can, and this is the strongest commercial argument for maintaining a contemporaneous file.

Section 439 imposes a penalty of 50% of the tax payable on under-reported income, rising to 200% where the under-reporting is in consequence of misreporting. A transfer pricing adjustment is capable of falling within that charge.

What does Section 439(8) actually exclude?

Section 439(8) excludes from under-reported income any amount represented by an addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the assessee had maintained the information and documents prescribed under Section 171, declared the international transaction, and disclosed all material facts relating to it.

Read together with Section 442, the position is coherent. A group that documents properly and discloses fully can face an adjustment without also facing the under-reporting penalty on it. A group that does not document faces both the 2% penalty and the exposure that the exclusion would otherwise have removed.

What happens once an assessment has already begun?

The defaults above are established during proceedings, so the response differs from ordinary compliance work.

Is there a time limit on imposing a penalty?

Section 471 requires that no penalty order is made unless the assessee has been heard, and the Finance Act 2026 inserted a requirement that the opportunity be given by way of a show-cause notice. Section 472 bars a penalty order after six months from the end of the quarter in which the relevant proceedings conclude.

The sequence that produces these notices is set out in our note on the transfer pricing assessment procedure, from the reference to the Transfer Pricing Officer under Section 166 through to the appellate stages.

Which firms handle transfer pricing documentation and Form 3CEB filing?

A firm handling documentation and the Form 48 filing should be able to show that the file is built to survive the specific defaults above, not merely to exist.

What should you ask before appointing one?

Ask when the functional analysis begins relative to the due date, because Section 442(1) is a documentation penalty and contemporaneity is what answers it. Ask how the firm records which transactions were reported and which were assessed as not reportable, because failure to report is a separate limb of the same provision. Ask who responds when the Transfer Pricing Officer calls for information under Section 171(2), because that is where Section 457 bites and it applies for each failure.

Steadfast Business Consulting (SBC) provides transfer pricing documentation and compliance services covering functional analysis, benchmarking, Form 3CEB preparation and representation once a matter is under examination. SBC has been recognized as Notable Transfer Pricing Firm 2024 – ITR World Tax.

What should you check before the next filing cycle?

Confirm the due date for the report under Section 172 and work backwards, because the first fee tier under Section 428(4) attaches to a delay of any length and the second attaches one month later.

Which transactions are most often missed?

Reconcile the transactions reported in the file against the transactions actually entered into during the year. Failure to report is a limb of Section 442(1) in its own right, and it is the limb most often discovered during an assessment rather than before one.

Check that the documentation prescribed under Section 171 is complete and dated, since that is what both the Section 442(1) penalty and the Section 439(8) exclusion turn on.

Groups reviewing their exposure before the next cycle may ask our transfer pricing team for a review of where their documentation and reporting currently stand.

Frequently Asked Questions

What is the penalty for not maintaining transfer pricing documentation?

Section 442(1) of the Income-tax Act 2025 provides for a penalty of 2% of the value of each international transaction or specified domestic transaction where the required information and document under Section 171(1) is not kept and maintained.

Is there still a penalty for not filing Form 3CEB?

No. The Finance Act 2026 omitted Section 447 with effect from 1 April 2026. Failure to furnish the report, now Form 48, attracts a fee under Section 428(4) of ₹50,000 for a delay up to one month and ₹1,00,000 thereafter.

What replaced Section 271BA?

Section 271BA of the Income-tax Act 1961 became Section 447 of the Income-tax Act 2025, which was then omitted by the Finance Act 2026. The obligation now sits in Section 428(4) as a fee rather than a penalty.

Can transfer pricing penalties be avoided for reasonable cause?

Section 470 provides that no penalty shall be imposed under the provisions it lists, including Sections 442 and 457, where reasonable cause for the failure is proved. Section 428 is a fee provision and is not among the provisions listed.

Does a transfer pricing adjustment also attract an under-reporting penalty?

Not necessarily. Section 439(8) excludes an addition made in conformity with the arm’s length price determined by the Transfer Pricing Officer, where the documentation prescribed under Section 171 was maintained, the transaction was declared, and all material facts were disclosed.

How long does the department have to impose a penalty?

Section 472 bars a penalty order after six months from the end of the quarter in which the relevant proceedings are completed, the revision order is passed, the appeal order is received, or the penalty notice is issued. — Sources: Income-tax Act 2025 as amended by the Finance Act 2026, Income Tax Department · Transfer Pricing, Income Tax Department