Related Party Transaction Valuation

Quick answer: Related-party transactions need arm's-length pricing evidence on three fronts: Section 188 of the Companies Act with audit-committee approval, transfer pricing for international and specified domestic transactions, and Sections 50CA and 56(2)(x) for share deals. An independent valuation report is the cornerstone defence across all of them.

Valuation for related party transactions. Section 188 Companies Act, SEBI LODR, transfer pricing. Arm's length certification. IBBI Registered Valuer.

Last reviewed: July 2026 by CA V. Viswanathan (FCA, ACS, CFE, IBBI Registered Valuer)

Why Related-Party Transactions Need an Independent Value

A transaction between a company and its promoters, directors, their relatives, or group entities is not prohibited — but it is presumed suspect until shown to be at arm's length. Three separate regimes police it: Section 188 of the Companies Act (board and, above thresholds, shareholder approval), the income-tax related-party rules (disallowance under Section 40A(2)(b) and specified-domestic-transaction benchmarking under Section 92BA), and, for listed companies, SEBI LODR Regulation 23 (audit-committee approval, materiality thresholds and shareholder approval). Each regime asks the same core question — is the price fair and comparable to what unrelated parties would agree? — and each is far easier to answer with a contemporaneous, independent valuation than to defend after the fact.

Section 188 and the Audit-Committee Gate

Under Section 188, specified related-party transactions require board approval, and where they exceed prescribed thresholds, prior ordinary-resolution approval of shareholders (with the interested member not voting). There is an important carve-out: transactions entered into in the ordinary course of business and on an arm's-length basis are outside the Section 188 approval requirement — but proving "ordinary course" and "arm's length" is precisely where a valuation or benchmarking file earns its keep. Separately, under Section 177, the audit committee must approve all related-party transactions (with an omnibus-approval mechanism for repetitive ones). The committee cannot discharge that duty on assertion alone; it needs an independent basis for the price.

The Income-Tax Echo — 40A(2)(b) and Specified Domestic Transactions

• Section 40A(2)(b): the assessing officer can disallow any expenditure to a related party to the extent it is excessive or unreasonable having regard to fair market value. A valuation that establishes the arm's-length price of the goods, services or assets is the direct defence.
• Section 92BA (specified domestic transactions): where the aggregate of specified related-party transactions crosses the monetary threshold (₹20 crore), domestic transfer-pricing documentation and arm's-length benchmarking (using the prescribed methods) become mandatory, with an accountant's report. This is the same discipline as international transfer pricing, applied to domestic group dealings.

The two tax provisions and the Companies Act arm's-length test can be satisfied by a single, well-constructed benchmarking and valuation file — which is how we scope these engagements.

Listed Companies — Materiality and SEBI LODR

For a listed company, Regulation 23 of SEBI LODR raises the bar. A related-party transaction is "material" — and requires prior shareholder approval — if it exceeds the specified materiality threshold (broadly, ₹1,000 crore or 10% of consolidated annual turnover, whichever is lower). All RPTs require prior audit-committee approval, subsidiaries' RPTs are pulled into the framework, and the company must maintain a board-approved RPT policy. The valuation supporting a material RPT is scrutinised by the audit committee, independent directors, the shareholders' explanatory statement and, potentially, proxy advisers — so it must be independent, method-disclosed and current.

Deliverables, Timeline and Fees

We deliver an arm's-length valuation or benchmarking report for the transaction, a note mapping it to Sections 177/188, 40A(2)(b) and (where relevant) 92BA, and audit-committee-ready documentation. For listed RPTs we prepare the materiality assessment and explanatory-statement support. Draft within 5–8 working days.

Our Approach

We combine deep regulatory expertise with AI-powered tools to deliver accurate, defensible, and timely results. Every engagement is led by CA V. Viswanathan, ensuring senior-level attention.

Contact Us

Chennai (HQ): G-131, Ground Floor, Phase 3, Spencer Plaza Mall, Anna Salai, Chennai. Phone: +91 99622 60333.

Bangalore: 7th Floor, Mahalakshmi Chambers, 29, MG Road, Bangalore. Phone: +91 95139 39333.

Mumbai: Workafella, AK Estate, SV Road, Goregaon West, Mumbai. Phone: +91 77000 89597.

What has changed in the law — reviewed October 2026

• Income-tax Act, 2025: assented to on 21 August 2025 and in force from 1 April 2026, it replaces the Income-tax Act, 1961 for tax year 2026-27 onward, and the Income-tax Rules, 2026 (notified 20 March 2026) replace the 1962 Rules. Section and rule numbers on this page are those of the 1961 Act and 1962 Rules, which continue to govern assessments, appeals and pending proceedings for assessment years up to 2026-27; for tax year 2026-27 onward the corresponding provisions of the 2025 Act apply, and our engagement letters quote both.