Intercompany services agreement: a clause-by-clause outline for India and the US
What the agreement is for, the clauses it needs with a drafting note on each, and the six points that decide whether it supports your transfer pricing.
Summary
- An intercompany services agreement records what the Indian subsidiary does for its US parent and how it is paid.
- The clauses that carry most weight are risk, the cost base and markup, true-ups, payment timing, IP and GST.
- This is an outline, not a finished agreement: each client version needs a qualified lawyer and, if executed in India, stamping.
An intercompany services agreement is the contract between an Indian subsidiary and its US parent for the work the Indian team does. In the usual captive structure, India provides software development, engineering or IT-enabled services and bills the parent at cost plus a markup.
The agreement sets the price and describes who does what, which supports the transfer pricing analysis in both countries. It also gives the finance team the terms it needs for GST invoicing and payment.
What follows is an outline with drafting notes, not a finished agreement. Each client version must be drafted or reviewed by a qualified lawyer. Where it is executed in India, it must be stamped under the stamp law of the relevant state.
The outline, clause by clause
Clause outline for a cost-plus services agreement between an Indian subsidiary and its US parent. Schedules to attach: services, cost base and markup, invoicing calendar, authorised contacts.
| Clause | What it covers | Drafting notes |
|---|---|---|
| Parties and recitals | The Indian service provider and the US recipient | State that the Indian entity provides services on a limited-risk basis |
| Services | What the Indian entity does | Describe them in a schedule that matches the actual work; update it when the role changes |
| Standards and direction | How work is directed and reviewed | Reflect who really makes decisions, which supports the transfer pricing analysis |
| Cost base | Which costs are marked up | Define direct and indirect costs; list pass-through costs charged at cost |
| Markup | The percentage applied | Support it with a current benchmarking study used in both countries, or a safe harbour election |
| True-up | Year-end adjustment to the target margin | Set the timing; require a debit note (supplementary invoice) or credit note for GST |
| Invoicing and payment | Frequency, currency and payment terms | Keep payment within the FEMA realisation period; file the EDF within 30 days of the invoice month's end |
| Taxes | Withholding, GST and other taxes | Services exports are intended to be zero-rated under an LUT |
| Intellectual property | Who owns what the Indian team creates | All IP vests in the US company on creation; make the assignment worldwide and for the full term, and state that the rights do not lapse if unused |
| Permanent establishment protection | Limits on Indian staff's authority | Indian staff do not negotiate or sign contracts for the US company |
| Confidentiality and data | Protection of information | Cover India's DPDP Act and applicable US privacy laws |
| Secondments | Staff moving between entities | Cover separately or in a schedule, with recharge terms; remittances from India need Forms 145 and 146 (formerly 15CA and 15CB) where they apply |
| Records and audit | Access to records | Supports documentation in both countries; the IRS can ask for it with 30 days to respond |
| Transfer pricing adjustments | What happens if a tax authority adjusts the price | Allow corresponding adjustments where permitted, and a way to bring an accepted Indian adjustment above ₹1 crore into India within 90 days |
| Term and termination | Duration and exit | Address transfer of work and IP on termination |
| Liability | Limits on claims | Keep consistent with the Indian entity's limited-risk profile |
| Governing law and disputes | Which law applies and how disputes are resolved | Usually agreed with counsel; arbitration is common |
| General | Assignment, entire agreement, notices, amendments | Amendments in writing, signed by both entities |
The drafting points that matter most
Limited-risk characterisation
The recitals should describe India as a limited-risk service provider, and every other clause should agree. The standards clause, the liability cap and the termination terms all point the same way.
If Indian managers in fact make the key decisions, the paper won't hold.
A routine markup may then undercompensate India, and decision-making staff can raise permanent establishment questions for the US company.
Cost base and markup
Define direct and indirect costs, and list the pass-through costs charged without a markup. The markup should come from a current benchmarking study used in both countries.
Safe harbour is the alternative. For FY 2025-26, software and IT-enabled services qualify at 17% or 18%, up to ₹300 crore. From tax year 2026-27, one IT services category takes 15.5% on operating costs, up to ₹2,000 crore, elected for five years in Form 49.
True-ups
Most groups invoice monthly at an estimated markup and true up after the year-end. The clause should say when the true-up is calculated and which period it belongs to. India's year ends on 31 March, and a US parent's often on 31 December.
An upward true-up needs a debit note (supplementary invoice) and a downward one a credit note. Zero rating still depends on the export conditions, including payment in convertible foreign exchange or in INR where RBI permits.
Invoicing and payment within the FEMA realisation period
From 1 October 2026, services export proceeds must be realised within nine months of the invoice date, or twelve months if invoiced or settled in INR, unless the AD bank extends it. Services exports also need an EDF declaration within 30 days of the end of the invoice month. Set payment terms well inside those limits, and time a large true-up so it can still be paid within them.
IP ownership
IP should vest in the US company on creation, under an assignment that is worldwide, for the full term and does not lapse if unused (ask your lawyer about moral rights). That fits India's limited-risk profile, and it matters for Section 174 in the US. Where the parent bears the risk and owns the results, its payments for development done in India are usually foreign research, amortised over 15 years. Only US research is deducted immediately, under Section 174A.
GST
Services to the parent are meant to be zero-rated exports, supplied under a (LUT) without paying IGST. An LUT is valid for the financial year it is furnished in, so file a new one before the first export of each year.
Questions
What is an intercompany agreement?
A contract between two companies in the same group, setting out what one provides to the other and at what price. Tax authorities read it to check that the price matches what each entity actually does.
What should an intercompany agreement between parent and subsidiary include?
The services, cost base and markup, true-ups, invoicing and payment, taxes, IP ownership, confidentiality and limits on the subsidiary's authority.
Is an intercompany agreement needed for transfer pricing in India?
In practice, yes. Once international transactions pass ₹1 crore a year, the documentation includes the agreements, and Form 3CEB reports the transactions they govern.
What is a cost plus intercompany agreement?
One under which the service provider is paid its costs plus an agreed markup. It suits a limited-risk Indian subsidiary working only for its US parent.
The Corridor Health Check on the US–India cross-border desk asks whether your agreement matches how the business actually runs.
Current as at October 2026. General information, not tax or legal advice: get advice on your specific situation.
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