US–India transfer pricing: how to price the work your India team does
How a captive Indian subsidiary is usually paid, what India and the IRS each expect, and the GST and FEMA side effects of a year-end true-up.
Summary
- India subsidiaries of US tech companies are usually paid costs plus a markup, matched to what independent companies earn.
- India and the IRS both test that markup, and their files must tell the same story.
- A year-end true-up is also a GST and FEMA event.
The question every US company with an India team has to answer
If your US company has engineers, analysts or support staff in an Indian subsidiary, the Indian entity bills the US parent for that work. The price on those invoices decides how much profit each country gets to tax.
That's transfer pricing. India wants the Indian entity to earn enough. The IRS wants the US company's deduction to be reasonable. Your job is to set a price both can accept, and to document why.
How most US–India tech structures work
The common model is a captive service provider. The Indian subsidiary does software development, engineering or IT-enabled services only for its group. The US parent owns the intellectual property, carries the commercial risk and sells to customers.
Because it carries limited risk, the Indian entity is usually paid its costs plus a markup. If the India team costs ₹10 crore and the markup is 15%, it invoices ₹11.5 crore and keeps ₹1.5 crore as profit.
The markup isn't a negotiation between you and yourself.
It has to reflect what independent companies doing similar work earn. The intercompany services agreement is where it is written down.
What India expects
India requires related-party transactions abroad to be priced at arm's length. Captive service providers are usually tested with the transactional net margin method (TNMM): operating profit on operating costs, against comparable independent Indian companies.
- An annual accountant's report: Form 3CEB, listing every international transaction with an associated enterprise, due 31 October 2026 for FY 2025-26. From tax year 2026-27 it is Form 48 under section 172 of the Income-tax Act, 2025.
- Contemporaneous documentation once international transactions exceed ₹1 crore a year: a benchmarking study, a functional analysis and the agreements, ready by the report's due date.
- A master file: a short Part A form from every Indian company in an international group; the full file and country-by-country report only above the revenue thresholds.
Safe harbour rules accept a fixed markup instead of a benchmark. 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. Compare it with your benchmark first.
If the tax department finds the markup too low, it raises the Indian entity's income. Where an accepted adjustment exceeds ₹1 crore, the money must reach India within 90 days. If not, it is treated as a loan to the parent with interest, unless a one-time additional tax is paid.
What the IRS expects
Section 482 of the US Internal Revenue Code applies the same arm's length standard. The markup is usually supported with the comparable profits method, testing the Indian entity as the simpler party with no valuable intangibles.
To avoid penalties on an adjustment, the documentation must exist when the US return is filed, and be handed over within 30 days of a request. Transactions with the subsidiary also go on Schedule M of Form 5471.
The simpler US services cost method isn't available for development or engineering work, because it excludes research, development and engineering. And where the parent bears the financial risk and owns the results, its payments for India development are usually foreign research under Section 174, amortised over 15 years. Only US research is deducted immediately, under Section 174A.
The two-country problem
The hardest part isn't either country's rules. It's making the two sides agree.
If India's report supports a 17% markup and the US documentation defends 8%, one of them is wrong, and both tax authorities can see the numbers. The fix is one benchmarking approach, one functional analysis and one intercompany agreement, used in both countries.
Where the amounts are large, a bilateral advance pricing agreement can fix the method for up to five years. Disputes can go to the mutual agreement procedure under the India–US tax treaty.
Year-end true-ups have side effects
Many companies invoice monthly at an estimated markup and true up at year-end. That's sensible, but the adjustment touches more than tax:
- GST: an upward true-up needs a debit note (supplementary invoice), a downward one a credit note. The export conditions, including payment in convertible foreign exchange (or in INR where RBI permits), must still be met.
- FEMA: from 1 October 2026, services export proceeds must be realised within nine months of the invoice, or twelve if invoiced or settled in INR, unless the AD bank extends it. An EDF declaration is due within 30 days of the end of the invoice month. Plan a large true-up so the money arrives in time.
- Timing: India's financial year ends on 31 March. A calendar-year US parent needs a rule for which period each true-up belongs to.
When cost-plus stops working
The captive model assumes routine work under US direction. That's changing: many India centres now own products, make decisions and create valuable intellectual property. When that happens:
- A routine markup may undercompensate India, inviting adjustments.
- Indian staff making key decisions can create permanent establishment risk for the US company in India.
- Staff seconded from the US parent raise their own transfer pricing and GST questions.
Revisit the model whenever the India team's role changes, not only when the documentation is due.
Other costs that need a policy
Recharges of shared US costs, such as software licences or management time, are international transactions in India, and so are loans and guarantees. Each needs to be reported and priced. ESOPs granted by the parent without a recharge are less settled: practice is divided, so take a documented position.
Five questions to settle this year
- Is there a signed intercompany agreement that matches how the business actually runs?
- Is the markup supported by a current benchmark or a safe harbour election?
- Do India's Form 3CEB and the US Form 5471 tell the same story?
- Is the true-up planned for GST, realisation and the EDF declaration?
- Has the India team's role changed since the policy was written?
Questions
What is the cost plus method in transfer pricing?
Cost plus describes how a captive provider is paid: its costs plus a markup that independent companies doing similar work would earn. In India that markup is usually tested with the transactional net margin method (operating profit on operating costs) rather than the separate cost plus method.
What is the transfer pricing documentation threshold in India?
Detailed documentation applies once international transactions exceed ₹1 crore in a year. Form 3CEB is due whatever the value.
Do India's safe harbour rules cover software development services?
Yes. For FY 2025-26 at 17% or 18%, for transactions up to ₹300 crore. From tax year 2026-27 at 15.5% on operating costs, up to ₹2,000 crore.
What is a transfer pricing true-up adjustment?
A year-end invoice or credit note that brings the actual margin to the agreed markup. It also changes the export value for GST and FEMA.
For how the rules fit together across both countries, see the US–India cross-border desk. Its Corridor Health Check works through these questions for your group.
Current as at October 2026. General information, not tax or legal advice: get advice on your specific situation.
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