Section 164 · Avoidance of tax
Section 164 of the Income-tax Act, 2025 — Meaning of Specified Domestic Transaction (SDT) & the ₹20 Crore Transfer-Pricing Threshold
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter X
📜 What the law says — Section 164, Income-tax Act 2025
164. For the purposes of this Chapter, the expression “specified domestic
transaction” in case of an assessee means any of the following transactions
(not being an international transaction),—
(a) any transaction referred to in section 122;
(b) any transfer of goods or services referred to in section 140(9);
(c) any business transacted between the assessee and other person as referred
to in section 140(13);
(d) any transaction, referred to in any other section under Chapter VIII
20
[***], to which provisions of section 140(9) or (13) of this Act or
section 80-IA(8) or (10) of the Income-tax Act, 1961 (43 of 1961) are
applicable;
(e) any business transacted between the persons referred to in section 205(4);
(f) any other transaction as may be prescribed,
and where the aggregate of such transactions entered into by the assessee in a tax
year exceeds a sum of twenty crore rupees.
Determination of arm’s length price.
In plain language
What Section 164 actually says
Section 164 of the Income-tax Act, 2025 defines a single, crucial phrase used throughout India's transfer-pricing law: the "specified domestic transaction" (SDT). It is the exact successor of Section 92BA of the old Income-tax Act, 1961, and it sits inside Chapter X (Sections 161 to 173), the chapter that houses all transfer-pricing rules effective from 1 April 2026.
The idea is simple. Transfer pricing was originally built to stop Indian companies shifting profits abroad to low-tax countries. But related parties inside India can also shuffle profits between themselves — for example, moving income from a taxpaying unit into a tax-holiday unit — to pay less overall tax. Section 164 identifies which purely domestic (non-cross-border) dealings are important enough to be dragged into the transfer-pricing net so that they must be priced at arm's length under Section 161.
The two-part test
- Nature test: the transaction must be one of the specified categories listed in Section 164 (see the table below), and it must NOT be an international transaction (those are governed by Section 163).
- Value test (the ₹20 crore filter): the transaction becomes an SDT only if the aggregate value of all such qualifying transactions in a tax year exceeds ₹20 crore. Below ₹20 crore, transfer-pricing compliance simply does not bite.
Which transactions are covered
Section 164 lists the categories, all cross-referring to other sections of the 2025 Act. In broad terms it captures:
- Related-party dealings tied to tax-holiday / deduction claims — transactions with connected persons where the profit could be inflated in a unit enjoying a deduction or a concessional-tax regime.
- Transfers of goods or services between an eligible business and other businesses of the same taxpayer (the "inter-unit transfer" situation).
- Business transacted between closely connected persons where an arm's-length adjustment provision applies.
- Any other transaction that may later be prescribed by rules — a flexibility clause for the government.
Note an important historical point: after 2017, purely intra-group payments between domestic related parties (old Section 40A(2)(b) transactions) were removed from the SDT net. The 2025 Act continues that narrowed scope — SDT today is chiefly about protecting tax incentives and deductions from being gamed, not routine domestic purchases.
Who it applies to
- Businesses claiming profit-linked deductions or tax holidays (units in SEZs, infrastructure/power undertakings, etc.).
- Companies opting for concessional corporate-tax regimes that carry an arm's-length safeguard.
- Any assessee whose qualifying domestic related-party transactions cross ₹20 crore in the year.
How it interacts with the rest of Chapter X
Section 164 is only the gateway. Once a transaction is an SDT, the machinery kicks in:
- Section 161 requires the income to be computed at arm's length price (ALP).
- Section 165 prescribes the methods (CUP, Resale Price, Cost Plus, Profit Split, TNMM, and other prescribed methods) to determine the ALP.
- Section 171 requires contemporaneous documentation / a transfer-pricing study.
- Section 172 requires a Chartered Accountant's report (the successor to Form 3CEB) to be filed by the return due date.
Practical implications
- If you cross ₹20 crore, you must benchmark the prices, maintain documentation, and file the accountant's report — missing this triggers penalties.
- The tax officer can re-compute your profits if inter-unit transfers were used to load profit into a tax-exempt unit, cutting your deduction.
- Keep a running tally of qualifying transactions through the year so the ₹20 crore line is not crossed unnoticed.
💡 Example
Worked example 1 — crossing the threshold. Surya Power Ltd runs two units: an ordinary trading unit that pays full tax, and an eligible power-generation undertaking claiming a 100% profit-linked deduction. The trading unit "sells" electricity/services to the eligible unit for ₹24 crore during FY 2026-27, when a fair market (arm's length) value is only ₹18 crore. Because the aggregate exceeds ₹20 crore, this is a specified domestic transaction under Section 164. Under Section 161, the profit of the eligible unit is recomputed at the ₹18 crore arm's length figure — cutting the inflated deduction by ₹6 crore and increasing taxable income accordingly.
Worked example 2 — below the threshold. Neelkanth Infra Pvt Ltd transfers goods worth ₹14 crore between its eligible and non-eligible units in the year. Since the aggregate does NOT exceed ₹20 crore, Section 164 is not triggered: no Form 3CEB / accountant's report is required and no arm's length recomputation applies (though the officer can still test reasonableness under the general deduction rules). Had the transfers reached ₹20.5 crore, the entire set would have become SDTs and full transfer-pricing compliance would apply.
A relatable story. Think of two brothers, Raj and Ravi, running businesses under one roof. Raj's shop enjoys a tax holiday; Ravi's does not. If Ravi "sells" his stock to Raj cheaply and Raj resells it at a fat margin, the profit magically lands in the tax-free shop. Section 164 is the referee that says: "If you two are trading more than ₹20 crore a year, price it like strangers would — no sweetheart deals to dodge tax." It does not stop the brothers from dealing; it only insists the price be honest.
| Aspect | Position under Section 164, Income-tax Act 2025 |
|---|
| Old-law equivalent | Section 92BA of the Income-tax Act, 1961 (substance retained) |
| Chapter / neighbours | Chapter X — Transfer Pricing (Sections 161 to 173) |
| Monetary threshold | Aggregate of qualifying transactions must exceed ₹20 crore in the tax year |
| Nature of transaction | Domestic only — must NOT be an international transaction (that is Section 163) |
| Core target | Related-party / inter-unit dealings linked to tax holidays, profit-linked deductions and concessional-tax regimes |
| Pricing standard | Arm's length price (Section 161), computed by methods in Section 165 |
| Documentation | Contemporaneous TP study (Section 171) |
| Report | Chartered Accountant's report — Form 3CEB equivalent (Section 172), by return due date |
| Routine trade purchases (old 40A(2)(b)) | NOT covered — excluded from SDT since 2017; the 2025 Act keeps the narrow scope |
Related sections
Section 161 — Computation of income from international and specified domestic transactions at arm's length price Section 162 — Meaning of associated enterprises Section 163 — Meaning of international transaction Section 165 — Methods for determining arm's length price Section 171 — Maintenance and keeping of transfer-pricing documentation Section 172 — Report from an accountant (Form 3CEB) for TP transactions
Frequently asked questions
What is a specified domestic transaction under Section 164?
It is a purely domestic (non-cross-border) related-party or inter-unit transaction of a type listed in Section 164 — typically tied to a tax holiday or profit-linked deduction — where the aggregate of such transactions exceeds ₹20 crore in the tax year. Once it qualifies, it must be priced at arm's length under Section 161.
What is the threshold for domestic transfer pricing in the 2025 Act?
The threshold is ₹20 crore. Section 164 applies only when the aggregate value of all qualifying domestic transactions in a tax year exceeds ₹20 crore; below that, transfer-pricing compliance does not apply.
Which old section does Section 164 replace?
Section 164 of the Income-tax Act, 2025 is the successor of Section 92BA of the Income-tax Act, 1961. The definition and the ₹20 crore threshold are carried forward in substance.
Are ordinary purchases from a sister concern (old Section 40A(2)(b)) still specified domestic transactions?
No. Payments to related persons under the old Section 40A(2)(b) were removed from the SDT scope from FY 2017-18, and the 2025 Act continues that narrowed scope. SDT now focuses mainly on transactions affecting tax holidays and profit-linked deductions.
What compliance do I have to do if my transactions are SDTs?
You must benchmark the prices using a prescribed method (Section 165), maintain contemporaneous documentation (Section 171), and file a Chartered Accountant's report — the Form 3CEB equivalent — by the income-tax return due date (Section 172).
What happens if I do not file Form 3CEB or maintain documentation?
Non-compliance attracts transfer-pricing penalties and the tax officer can recompute your profits at arm's length, disallowing any inflated deduction. Penalties can be a percentage of the transaction value plus penalties on the tax on any adjustment, so timely filing is essential.
Is the ₹20 crore checked per transaction or for the whole year?
It is the aggregate of all qualifying specified domestic transactions during the tax year, not per individual transaction. Once the yearly total crosses ₹20 crore, the whole set of qualifying transactions is subject to transfer-pricing rules.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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