There is no single legal rate. The markup must be the arm's length return for the functions the Indian entity performs, the assets it uses and the risks it bears (section 161 of the Income-tax Act, 2025). For a low-risk IT, ITeS or KPO captive, the Income-tax Rules, 2026 offer a safe harbour of 15.5% on operating expenses; outside safe harbour, Indian benchmarking studies for routine service providers most often produce arm's length ranges in the low-to-high teens, with management-support and back-office functions typically at the lower end and specialised engineering or R&D at the upper end. A flat "cost plus 10%" inherited from the parent's global policy is below most Indian ranges and is the single most common cause of transfer pricing adjustments on captives.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Arm's length requirement | s. 92 | s. 161 | Markup must match functions, assets and risks | Each tax year | — |
| Safe harbour — IT services (low risk) | 17%–24% by sub-category; ≤ ₹300 crore | 15.5% on operating expenses; ≤ ₹2,000 crore | Five-year block | Form 49 by 30 June after year 1 | Form 49 |
| Safe harbour — low value-adding intra-group services | Rule 10TD | Rules 86–102 | Markup up to 5% on cost (cost-based, limited value); aggregate cap applies | — | Form 49 |
| Benchmarked markup (outside safe harbour) | TNMM, Rule 10B/10CA | TNMM, Rules 79/81 | 35th–65th percentile of comparables; median applied if outside | Study updated yearly | Form 48 |
| Accountant's report | Form 3CEB | Form 48 | Required regardless of markup | 31 October | Form 48 |
Start with what the entity does, not with a number
The question "what markup" is really "what is this entity". The Transfer Pricing Officer will characterise the Indian company on a spectrum:
| Profile | What it looks like | Typical pricing outcome |
|---|---|---|
| Routine, low-risk service provider | Executes work assigned by the parent; parent owns IP, sets priorities, bears market risk; Indian company paid on cost | Cost plus a benchmarked markup, or the 15.5% safe harbour for eligible IT services |
| Value-adding service provider | Indian team leads design or research, holds specialised know-how, influences product decisions, but IP still vests in parent | Higher end of the TNMM range; departments argue for premium comparables |
| Entrepreneur / IP owner | Indian company owns or co-develops IP, sells to customers, bears market risk | Cost-plus is inappropriate; residual-profit or profit-split analysis |
Most Indian subsidiaries of foreign technology and services groups sit in the first row, and the intercompany agreement should say so clearly — scope limited to assigned work, IP assigned to the parent, risk allocation stated — so that the pricing and the paper match.
Where the ranges come from
Outside safe harbour, the markup is supported by a TNMM benchmarking study: a search of Indian company databases for independent service providers with comparable functions, filtered for related-party transactions, turnover, persistent losses and export intensity, then a three-year weighted operating-profit-to-operating-cost margin for each. In our experience of these studies for routine software development and ITeS captives, the interquartile range commonly lands in the low-to-high teens, which is precisely why the 15.5% safe harbour was pitched where it was. Back-office finance, HR and procurement support tend to benchmark somewhat lower; specialised engineering, analytics and research support somewhat higher. The result varies year to year with the comparables set, which is the main argument for safe harbour where it is available.
The cost base decides as much as the percentage
Two companies at "cost plus 15%" can have very different Indian taxable income depending on what sits inside "cost". Points to settle in the agreement and apply consistently:
- All operating costs in — salaries, bonuses, ESOP charges, rent, depreciation, travel, software, allocated overheads. Excluding depreciation or ESOP cost to shrink the base is a frequent adjustment item.
- Pass-through costs out — only where the Indian company performs no function and bears no risk (for example, a vendor engaged and specified by the parent, recharged at cost). Document the reason in each case.
- Interest, tax, foreign-exchange gains or losses and extraordinary items are non-operating and are excluded from both the cost base and the margin computation.
- Year-end true-up — budget-based monthly billing almost never lands on the target margin. A true-up clause and a final invoice or credit note before the year closes keep the booked margin where the agreement says it should be.
Why 'cost plus 10%' keeps getting adjusted
Ten per cent is a common figure in group transfer pricing policies written from the perspective of the parent's jurisdiction, where routine services are often priced at 5% to 10%. Indian comparables sets for the same functions produce higher margins because they are drawn from Indian service exporters operating at Indian cost structures and margins. The department's position for two decades has been that a 10% markup on an Indian captive is below arm's length, and the Tribunal record broadly supports that for IT and ITeS functions. If the group policy says 10%, the Indian entity needs either a study that genuinely supports it or a decision to price higher for India.
Worked example
A Netherlands parent sets a global policy of cost plus 10% for all captive service centres. Its Bengaluru subsidiary provides product engineering with 120 engineers; operating cost ₹60 crore.
| Approach | Markup | Revenue | Comment |
|---|---|---|---|
| Group policy | 10% | ₹66.0 crore | Below Indian range; adjustment likely |
| Benchmarking (median) | 16.2% | ₹69.7 crore | Defensible but re-run yearly; range 13.1%–19.0% |
| Safe harbour | 15.5% | ₹69.3 crore | Certain for five years; MAP unavailable |
The gap between group policy and the Indian arm's length median is ₹3.7 crore of revenue a year — roughly ₹93 lakh of Indian tax at 25.17%. The practical decision for the parent is whether the Dutch deduction for the higher charge is worth more than the Indian certainty; for most groups with a 25% Indian rate and a comparable home-country rate, pricing at or near the Indian median and electing safe harbour is the lower-friction outcome.
Common mistakes we see
- Importing the parent's global markup without testing it against Indian comparables.
- Pricing different functions (software development, customer support, finance back-office) at a single blended markup. Each should be benchmarked, or safe-harboured, on its own.
- Excluding ESOP costs borne by the parent from the Indian cost base when the Indian company has agreed to recharge them. If the cost is in the Indian books, it is in the base.
- Letting monthly budget billing stand without a year-end true-up, so the booked margin ends up at 11% against an agreed 15%.
- Charging a markup on pass-through costs 'to be safe'. It inflates the Indian income and creates a GST and withholding question at the parent's end.
Frequently asked questions
Is cost plus 10% acceptable for an Indian captive?
Rarely for IT, ITeS or engineering functions. Indian benchmarking sets usually produce ranges above 10%, and the department has consistently adjusted captives priced at that level. It may be supportable for very routine administrative support with a study to show it.
What markup does the safe harbour require?
15.5% on operating expenses for eligible IT services with insignificant risk, under Rules 86 to 102 of the Income-tax Rules, 2026, for transactions up to ₹2,000 crore.
Should the markup be on total cost or only direct cost?
On total operating cost, including allocated overheads and depreciation, unless a cost is a genuine pass-through on which the Indian company bears no risk.
Can the markup change during the year?
The agreement can provide for a year-end true-up so that the final margin for the year matches the target. Changing the percentage itself mid-year requires an amendment and a reason the department will accept.
Does a higher markup create a problem in the parent's country?
It can. The parent deducts the charge, and its tax authority may consider an Indian markup above its own view of arm's length to be excessive. Groups generally reconcile this through a shared benchmarking position or an APA.
How often must the benchmarking study be refreshed?
Every tax year. The Rules require contemporaneous documentation; a fresh search or at least a financial update of the comparables set is expected annually.
Sources
Primary sources only. Statutory text is read from the official publication; where a provision has been renumbered, the pre-2026 reference is given alongside so older material can be reconciled.
- Income-tax Act, 2025 and Income-tax Rules, 2026 — Income Tax Department, Tax Laws & Rules
- FAQs and guidance notes on forms under the Income-tax Rules, 2026 — Income Tax Department
- e-Gazette of India — Finance Act, 2026; Income-tax Rules, 2026; FEMA notifications
Last reviewed on 1 November 2026 by Suchit Jhunjhunwala, FCA, VMS Jhunjhunwala & Co. Law stated as at that date; the Income-tax Act, 2025 and Income-tax Rules, 2026 apply from 1 April 2026.
