US Parent-India Subsidiary: Transfer Pricing and Intercompany Agreements

US multinational groups often use subsidiaries to manage their India operations, delivering services such as captive service centers and shared service centers, product development support, and distribution and market-facing functions. While these business models are commercially sound, however, they are subject to scrutiny in India because they involve cross-border payments that directly affect the taxable profit of the Indian entity.

In practice, tax audits typically focus on whether the India entity’s profit margin is consistent with its actual functions performed, assets used, and risks assumed, as compared to the group’s documented transfer pricing positions. Audits also closely examine whether intra-group services and the use of Intellectual Property (IP) deliver demonstrable commercial benefits to the India entity and are adequately substantiated.

The compliance message is simple: the contract, the way the parties operate, and the supporting paperwork should match. Intercompany agreements should mirror how the business is run and be supported by records that demonstrate delivery. If the India entity is described as a limited-risk service provider, it should operate like one in practice, including decision-making, project control, staffing capability, and documented outputs. Where fees are charged, the group should be able to evidence delivery, trace costs to the service, and support arm’s length pricing.

Why intercompany charges are a frequent audit focus in India

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In India, tax authorities commonly review cross-border service fees, management charges, royalties, reimbursements, and intra-group financing to confirm there is a clear commercial rationale and an arm’s length outcome. Scrutiny can be higher where the India subsidiary is positioned as a routine or low-risk entity, but its actual operations suggest a wider role in decision-making, project control, or value creation.

In practice, paperwork alone is not enough. Agreements and supporting records should match day-to-day operations. This means being able to show what services were provided, who performed them, how costs were captured and allocated, and how the pricing was supported. Balanced and clear information across contracts, invoices, and transfer pricing (TP) documentation helps reduce adjustment and penalty risk.

Getting intercompany agreements right in India

A practical starting point for the US companies in India is to map all related party flows involving the India entity, including service fees, royalties, reimbursements, cost allocations, and financing. US groups should document what is being provided, who provides it, and the commercial rationale for each arrangement.

Next, confirm where key decisions are made and which entity controls the main risks, as this functional and risk profile should drive both the contract terms and the pricing policy. For routine support activities, keep scopes narrow, define deliverables, set a clear cost base and invoicing cycle, and retain evidence of performance. Where higher-value activity is involved, such as product development or intangible creation, review IP ownership and change control terms and ensure the contract matches day-to-day operations.

Finally, assign clear owners across legal, finance, and operations so agreements are applied consistently, supported in audit, and updated when the operating model changes.

India TP compliance in practice

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In India, transfer pricing compliance is anchored in the arm’s length principle and applies to a wide range of international transactions between related parties, including services, royalties, cost allocations, and financing. In practice, the key question is whether the pricing outcome is supported by a defensible method and consistent with the India entity’s functions and risk profile. Groups should maintain documentation and an evidence trail that links charges to agreements, deliverables, and cost workings, and shows how pricing was tested. Compliance is also operational. Filings, sign-offs, and internal governance should be in place so the business can respond quickly and consistently during audits.

From a statutory standpoint, India’s arm’s length methods are set out under Section 92C and Rule 10B, documentation expectations under Rule 10D, and the accountant’s report is filed in Form 3CEB under Section 92E. India has also continued to expand the use of certainty mechanisms, including Safe Harbour Rules and the Advance Pricing Agreement program, as part of a broader effort to manage audit risk and reduce prolonged transfer pricing disputes.

Sources: Income-tax Rules, 1962; Doing Business in India Guide

How US-India transfer pricing links up

The arm’s length standard is common across India and the US, but it is tested and documented differently. In the United States, Internal Revenue Code Section 482 and the Treasury Regulations allow the Internal Revenue Service to allocate income and deductions among related parties to reach an arm’s length result. The arm’s length price in India is tested using prescribed methods and comparability analysis, supported by documentation requirements. In practice, OECD transfer pricing guidance is often used as a reference point when framing the benefit rationale for intra-group services and analyzing returns for intangibles through Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) functions. Where adjustments create double-tax exposure, groups may look to foreign tax credit relief where available and to treaty dispute resolution through the Mutual Agreement Procedure, as well as Advance Pricing Agreements, including bilateral approaches.

Practical next steps for US groups

For US companies, priority steps to reduce transfer pricing and intercompany agreement risk in India include:

1. Mapping of all related-party transactions
2. Refreshing of intercompany templates so they reflect current operations
3. Setting of evidence standards for services and cost allocations
4. Confirmation of where IP development and control actually sit
5. Running of a dry-run benchmarking test to validate margins
6. Tightening of invoicing discipline
7. Planning of dispute pathways early for higher-risk flows

Groups should also maintain a short red flag checklist that triggers deeper review. Common risk indicators include loss-making captive entities, large or recurring management fees that lack clear deliverables, IP ambiguity (for example, where India teams contribute to value creation but contracts treat them as routine support), and unusual or volatile margins that cannot be explained by commercial changes.

Key takeaways

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Execution is driven by alignment. Intercompany agreements should reflect the India entity’s actual operations, who controls key risks, and where value is created. India transfer pricing outcomes depend on a defensible method supported by documentation and an audit ready evidence trail. Related party governance also matters in day-to-day implementation, not just on paper.

Aligning US and India transfer pricing positions early can reduce disputes and double taxation risk. For higher risk flows such as intellectual property, research and development, and intra-group financing, dispute prevention tools should be considered upfront.

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