The moment your Indian subsidiary starts transacting with its overseas parent — paying for shared services, licensing IP, or receiving a management fee — transfer pricing rules apply. Getting this wrong doesn't just risk a tax adjustment; it invites the kind of scrutiny that can slow down everything else.
What Is Transfer Pricing?
Transfer pricing is the set of rules governing how transactions between related entities — your Indian subsidiary and its foreign parent, for instance — are priced for tax purposes. The core requirement is simple to state and harder to document: related-party transactions must be priced as if the parties were unrelated.
The Arm's Length Principle
This is the standard Indian transfer pricing law is built on. If your Indian entity pays its US parent for software licensing, that price needs to reflect what an unrelated licensee would pay in the open market — not an arbitrary internal number that happens to reduce Indian tax liability.
Transactions That Typically Attract Scrutiny
- ✓Intercompany service fees and cost allocations
- ✓Royalty and licensing payments for IP or brand use
- ✓Intercompany loans and guarantees
- ✓Purchase or sale of goods between related entities
- ✓Management and technical service fees
Documentation You Need
India requires a benchmarking study supporting your pricing, along with Form 3CEB — a mandatory accountant's certificate filed alongside your income tax return for any qualifying related-party transaction. Larger groups may also need a Master File and, in some cases, a Country-by-Country Report.
Getting It Right From Day One
If your Indian subsidiary will transact with its parent in any of the ways above, build a transfer pricing review into your setup process, not just your annual tax filing. It's far cheaper to document correctly upfront than to defend an assessment later.