Chapter XXI - Penalties
Section 442
Section 442: penalty for transfer pricing documentation failures
Section 442 backs up the transfer pricing documentation requirements in Sections 171-172 with a penalty - a business that doesn't keep the required records, or misreports its international or specified domestic transactions, faces a penalty tied to the value of the transaction itself.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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.
Introduction
Section 442 has two distinct transfer-pricing documentation penalties. Subsection (1) can apply per international or specified domestic transaction when required information is not maintained, a transaction is not reported, or incorrect information is maintained or furnished. Subsection (2) concerns failure to furnish information requested under section 171(4).
Key takeaways
Transaction-level measure
The subsection (1) penalty is 2% of the value of each affected international or specified domestic transaction.
Separate request failure
Not furnishing information under section 171(4) may attract a ₹5,00,000 penalty under subsection (2).
Different authorities
The subsection (1) and (2) authorities are specified separately in the Act.
What triggers the penalty
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 that transaction the person fails to keep and maintain the prescribed information and documents, fails to report the transaction accurately, or furnishes incorrect information or documents.
Why the penalty is transaction-value-based
Unlike many penalties in this Chapter which are flat amounts or per-day fees, this one scales with the size of the transaction - since transfer pricing non-compliance risk (and potential tax leakage) scales with transaction value, particularly for large intra-group dealings between associated enterprises.
Applying Section 442 in practice
Separate failures. Subsection (1) addresses missing prescribed information, failure to report, or incorrect information for an international or specified domestic transaction; the potential penalty is 2% of the value of each affected transaction. Subsection (2) provides a separate ₹5 lakh penalty for failing to furnish information required under section 171(4).
Step-by-step flow for applying the penalty under Section 442
- 1
Did the person enter into an international transaction or a specified domestic transaction?
- No: Section 442(1) does not apply; go to step 4.
- Yes: Go to the next step.
- 2
For each transaction, is there a failure listed in Section 442(1)?
(a) failure to keep and maintain information and documents required by section 171(1); (b) failure to report the transaction where required; or (c) maintaining or furnishing incorrect information or documents.
- No: No penalty under Section 442(1) for that transaction; go to step 4.
- Yes: Go to the next step.
- 3
Compute the penalty for each defaulting transaction
The Assessing Officer or Commissioner (Appeals) may impose 2% of the value of each such transaction.
- 4
Was information or a document required under section 171(4) not furnished?
- Yes: The prescribed income-tax authority referred to in section 171(4) may impose a penalty of ₹5,00,000 under Section 442(2).
- No: No penalty under Section 442(2).
Practical checklist
Do
- Map each cited transaction to the information required by section 171(1).
- Keep the section 171(4) request and response proof separate from the ordinary documentation file.
- map each transaction, value, document requirement, report and information request before counting defaults. Section 470 reasonable cause should be considered.
Avoid
- Do not treat the ₹5,00,000 information-request penalty as a substitute for the transaction-level test.
Illustrative example
Worked example: documentation missing for one of two transactions
Hypothetical facts (illustration only, not a real taxpayer): Epsilon India Pvt. Ltd. enters into two international transactions in a tax year: an assumed ₹3 crore purchase and an assumed ₹1.5 crore service payment. It kept the information and documents required by section 171(1) for the service payment but not for the purchase.
Transaction-wise test
Only the purchase has a failure under Section 442(1)(a).
Penalty on the purchase
2% of ₹3 crore = ₹6,00,000.
If both were incorrect
If the information for both transactions were incorrect under clause (c), the penalty could be 2% of each: ₹6,00,000 + ₹3,00,000 = ₹9,00,000.
Separate failure to furnish
If the company also failed to furnish information required under section 171(4), the prescribed authority may impose a further ₹5,00,000 under Section 442(2).
Outcome
- On the stated facts the Section 442(1) penalty may be ₹6,00,000.
- Section 442(1) is applied to each transaction separately, by value, and Section 442(2) is a separate fixed penalty.
Frequently asked questions
How is the Section 442 penalty calculated?
As 2% of the value of each international transaction or specified domestic transaction affected by the documentation/reporting failure - not a flat fee.
What kind of failure triggers this penalty?
Failing to keep and maintain the prescribed transfer pricing information and documents, failing to report a transaction accurately, or furnishing incorrect information or documents about it.
Need help applying this provision to your situation?
Get help with transfer pricing documentation complianceLast updated 10 October 2026