Section 442 · Penalties
Section 442 of the Income-tax Act, 2025 — Penalty for Failure to Keep, Maintain or Report Transfer Pricing Documentation
By CA Rajat Agrawal
Updated 05 Jul 2026
Chapter XXI
📜 What the law says — Section 442, Income-tax Act 2025
442. (1) The Assessing Officer or Commissioner (Appeals) may impose a penalty
of 2% of the value of each international transaction or specified domestic
transaction entered into by a person, if in respect of such transaction he—
(a) fails to keep and maintain any such information and document as
required by section 171(1);
(b) fails to report such transaction which he is required to do so; or
(c) maintains or furnishes an incorrect information or document.
(2) The prescribed income-tax authority referred to in section 171(4) may impose a
penalty of ` 500000 on a person, if he fails to furnish the information and document
required under the said section.
Penalty in respect of certain income.
In plain language
What Section 442 is about
Section 442 of the Income-tax Act, 2025 is the penalty provision for failures connected to transfer pricing documentation — that is, the information and documents a taxpayer must keep for its international transactions and specified domestic transactions (SDTs). It is the successor to Section 271AA of the old Income-tax Act, 1961, and it sits alongside the documentation duty now housed in Section 171 of the 2025 Act (the counterpart of the old Sections 92D and 92E). In plain words: if you deal with an associated enterprise abroad, or enter certain related-party domestic deals, the law expects you to build and preserve a paper trail proving your prices are at arm's length. Section 442 is what bites if you don't.
Who it applies to
- Any person — company, LLP, firm, individual or others — who has entered into an international transaction or a specified domestic transaction during the tax year.
- Typically this catches multinational groups, Indian subsidiaries of foreign parents, Indian companies with overseas subsidiaries, and businesses with cross-border related-party dealings (royalties, management fees, intra-group services, loans, goods).
- Specified domestic transactions can pull in purely Indian related-party deals where the aggregate value crosses the prescribed threshold (currently ₹20 crore under the existing framework).
The two penalties under Section 442
Section 442 provides for two distinct penalties, imposed by different authorities for different defaults:
- 2% of transaction value: The Assessing Officer or the Commissioner (Appeals) may levy a penalty equal to 2% of the value of each international transaction or specified domestic transaction, where the person (a) fails to keep and maintain the information and documents required under Section 171(1), (b) fails to report a transaction that was required to be reported, or (c) maintains or furnishes incorrect information or documents.
- ₹5,00,000 fixed penalty: The prescribed income-tax authority referred to in Section 171(4) may impose a penalty of ₹5,00,000 where a person fails to furnish the information and document called for under that sub-section (the master-file / group information type requirement).
Why "2% of value" is so severe
The penalty is not linked to the tax evaded and not linked to any profit adjustment. It is a flat 2% of the gross value of the transaction itself. Because international transactions can run into hundreds of crores, even a documentation slip on a single large transaction can produce a very large penalty. Note that the 2% can apply to each transaction, so multiple defaults stack up.
How it interacts with related sections
- Section 171 (documentation duty): Section 442 is purely the enforcement arm of Section 171. No documentation obligation, no Section 442 penalty.
- Accountant's report (Form 3CEB equivalent): A separate failure — not filing the transfer pricing accountant's report — is penalised under its own provision in the 2025 Act's penalty chapter, distinct from Section 442.
- Under-reporting / mis-reporting of income: If a transfer pricing adjustment also increases income, the general under-/mis-reporting penalty (the 2025 successor of Section 270A) can apply separately.
- Reasonable cause defence: Consistent with the general penalty scheme, a genuine reasonable cause shown to the officer can protect a taxpayer from levy.
Practical implications
- Maintain contemporaneous documentation — prepared by the return due date, not reconstructed later during audit.
- Keep records for the full retention period (eight years under the current rules) — an audit can arrive years after the transaction.
- Ensure the documentation is complete and accurate; furnishing incorrect information is itself a trigger, not just non-maintenance.
- Report every reportable transaction — omission is treated on par with non-maintenance.
💡 Example
Worked example 1 — the 2% penalty. Meridian India Pvt. Ltd. pays a ₹40 crore royalty to its US parent during the tax year but does not maintain the prescribed transfer pricing documentation under Section 171(1). During assessment the officer invokes Section 442. Penalty = 2% × ₹40,00,00,000 = ₹80,00,000 (₹80 lakh) — even though the officer may not have made any pricing adjustment at all. The penalty is on the transaction value, not on tax.
Worked example 2 — the ₹5 lakh fixed penalty. A large multinational group's Indian entity is required to furnish specific group/master-file information under Section 171(4) but misses it entirely. The prescribed authority levies the flat penalty of ₹5,00,000, regardless of the transaction sizes involved.
A relatable story. Kavya runs a growing software firm in Pune that started billing its newly-formed Singapore arm for ₹12 crore of services. Focused on delivery, she never prepared a transfer pricing study, assuming "it's my own company anyway." Two years later the assessment notice arrives. Because she failed to keep the Section 171 documentation, the officer proposes a Section 442 penalty of 2% × ₹12 crore = ₹24 lakh — a bill that dwarfs the cost of the study she skipped. The lesson she wished she had learned earlier: with related-party cross-border deals, the documentation is not optional paperwork, it is insurance.
| Default | Governing sub-section | Who imposes it | Penalty |
|---|
| Failure to keep & maintain prescribed documents | Section 171(1) | Assessing Officer / Commissioner (Appeals) | 2% of value of each transaction |
| Failure to report a reportable transaction | Section 171(1) | Assessing Officer / Commissioner (Appeals) | 2% of value of each transaction |
| Maintaining or furnishing incorrect information/document | Section 171(1) | Assessing Officer / Commissioner (Appeals) | 2% of value of each transaction |
| Failure to furnish information/document called for | Section 171(4) | Prescribed income-tax authority | ₹5,00,000 (fixed) |
Related sections
Section 171 — Documentation for international & specified domestic transactions Section 441 — Penalty for failure to keep and maintain books of account Section 444 — Penalty for failure to furnish reports/statements Section 446 — Penalty for failure to get accounts audited Under-reporting & misreporting of income penalty Old-law equivalent — transfer pricing documentation penalty
Frequently asked questions
Is the Section 442 penalty based on the tax I evaded?
No. It is 2% of the value of the international transaction or specified domestic transaction itself, not 2% of any tax or income adjustment. This makes it potentially very large even where no tax was actually lost.
What is the equivalent of Section 442 in the old Income-tax Act, 1961?
Section 442 broadly corresponds to Section 271AA of the 1961 Act, which imposed the 2% transfer pricing documentation penalty. The documentation duty it enforces (old Sections 92D/92E) now sits in Section 171 of the 2025 Act.
Who can levy the penalty under Section 442?
The 2% penalty can be imposed by the Assessing Officer or the Commissioner (Appeals). The separate ₹5,00,000 penalty for failing to furnish information under Section 171(4) is imposed by the prescribed income-tax authority.
Does the penalty apply per transaction or overall?
The 2% is computed on the value of each international transaction or specified domestic transaction, so multiple documentation failures across several transactions can compound the total penalty.
Can I avoid the penalty if I had a genuine reason?
Consistent with the general penalty framework, if you can demonstrate a bona fide reasonable cause for the failure to the satisfaction of the officer, the penalty may not be levied. But this is discretionary, so contemporaneous documentation is the safer course.
When must transfer pricing documentation be ready to be safe under Section 442?
The documentation should be prepared on a contemporaneous basis — in place by the return filing due date — and retained for the prescribed period (eight years under current rules), since audits often occur years later.
Is furnishing incomplete or wrong documents also penalised?
Yes. Section 442 covers not only failing to keep or report, but also maintaining or furnishing incorrect information or documents, so accuracy matters as much as merely having the file.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 05 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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