Specified Domestic Transaction (SDT)

Specified Domestic Transaction (SDT) refers to certain transactions between related parties within India that are subject to transfer pricing provisions under the Income Tax Act.

These transactions must be conducted at arm’s length price (ALP) to ensure fair taxation.

1. What is Covered Under SDT

SDTs typically include:

• Transactions between related parties under Section 40A(2)(b)
• Transactions between units eligible for tax deductions (e.g., Section 80-IA, 80-IB, etc.)
• Inter-unit transfers within the same entity
• Any other specified transactions notified under the Act

2. Threshold Limit

• SDT provisions apply only if the aggregate value exceeds ₹20 crore in a financial year

Below this threshold, transfer pricing provisions for SDT do not apply.

3. Arm’s Length Principle

• Transactions must be priced as if they were between unrelated parties
• Ensures no profit shifting within domestic entities

4. Compliance Requirements

If SDT applies:

• Maintain detailed transfer pricing documentation
• Obtain audit report (Form 3CEB)
• Justify pricing methodology

5. Tax Implications

• If transactions are not at arm’s length → adjustments may be made
• Can lead to:
  • Increased taxable income
  • Additional tax liability
  • Penalties

6. Importance of SDT

• Prevents profit shifting within India
• Ensures fair tax reporting
• Brings transparency in related party transactions

7. Common Mistakes

• Ignoring SDT applicability due to domestic nature
• Not monitoring threshold limits
• Lack of proper documentation
• Incorrect pricing of related party transactions

Practical Insight

Most businesses think transfer pricing is only for international transactions.

That’s incomplete.

If your domestic transactions:

• involve related parties
• cross threshold limits

👉 SDT rules apply

And that’s where many businesses get caught off guard.

How N D Savla & Associates Can Help

At N D Savla & Associates, we help you:

• Identify SDT applicability
• Structure transactions at arm’s length
• Prepare transfer pricing documentation
• Ensure compliance and avoid penalties