The intercompany agreements that cause trouble in India are usually not missing — they are drafted for another country's rules. The recurring faults are: a scope that contradicts the limited-risk pricing; a cost base left undefined; no year-end true-up; payment terms beyond the FEMA realisation period; the wrong group entity named as recipient, which breaks the GST export test in section 2(6) of the IGST Act; services flowing in both directions in one document, which obscures withholding under section 393 of the Income-tax Act, 2025; and reimbursements described in a way that fails the pure-agent conditions of Rule 33 of the CGST Rules. Each has a one-clause fix.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Transfer pricing — conduct vs contract | s. 92, 92F; Rule 10D | s. 161, 173; Rule 84 | Department may re-characterise based on conduct | — | — |
| GST — export of services | s. 2(6) IGST; s. 13(2); Circular 161/17/2021 | Unchanged; s. 13(8)(b) omitted from 30 Mar 2026 | All five conditions | — | LUT |
| GST — pure agent | Rule 33 CGST Rules | Unchanged | Four conditions | — | — |
| FEMA — realisation of export proceeds | 9 months (2015 Regulations) | 9 months; 12 months INR-settled (2026 Regulations as amended) | — | From invoice date | EDF |
| Withholding on inbound services | s. 195 | s. 393(2), Sl. 17 | 20% / treaty rate | At credit or payment | Forms 145/146 |
| Related-party approval | s. 188 Companies Act | Unchanged | — | Before execution | Board resolution |
The twelve, with fixes
| # | Mistake | Consequence | Fix |
|---|---|---|---|
| 1 | Scope says "development services as directed" but the Indian company also hosts product leadership, sets roadmaps or sells to customers | TPO re-characterises as entrepreneur; seeks return on intangibles | Either align conduct to the limited-risk scope or change the pricing model to reflect the functions actually performed |
| 2 | "Costs" undefined, or defined as "direct costs" | Markup base disputed every year; margin drift | Full operating-cost definition tied to Indian GAAP/Ind AS; explicit exclusions |
| 3 | No true-up clause | Booked margin ≠ agreed margin; adjustments with no contractual recovery | Dated true-up mechanism with supplementary invoice/credit note and a link to Indian arm's length determination |
| 4 | Payment terms 120–180 days | Deemed interest-bearing loan for TP; pressure on the 9-month FEMA realisation period | 30–60 days; interest on overdue balances at an arm's length rate |
| 5 | Counterparty is the group holding company; a different entity pays | GST recipient test and FEMA remitter mismatch; export status questioned | Make the paying entity the party, or name it as recipient and payer |
| 6 | Inbound and outbound services in one agreement | Withholding on the inbound leg missed; GST reverse charge missed; netting of payments without Forms 145/146 | Separate agreements per direction; gross settlement |
| 7 | "Reimbursements at cost" with no pure-agent framing and no separate invoice line | Reimbursements swept into the value of supply; inconsistent with TP pass-through treatment | Pure-agent clause mirroring Rule 33; itemised on invoice; narrow schedule |
| 8 | IP clause grants the Indian company a licence or is silent | Department asserts Indian economic ownership of intangibles | Assignment to principal on creation, if cost-plus is the model |
| 9 | Termination without compensation for stranded costs | Inconsistent with limited-risk characterisation (independent providers negotiate this) | Principal bears redundancy and wind-down costs on termination |
| 10 | Invoicing "annually" or "as agreed" | Breach of the 30-day invoicing rule under section 31 of the CGST Act; revenue recognition problems | Monthly or quarterly invoicing in arrears within 30 days of period end |
| 11 | Agreement executed abroad and never stamped in India; no board approval | Evidentiary weakness; section 188 non-compliance in secretarial audit | Stamp within 3 months of receipt in India; board approval minuted; register of contracts updated |
| 12 | Secondment language buried in a services agreement ("personnel will be deployed at the Principal's premises under its supervision") | Service PE and FTS questions for the foreign entity; GST on manpower supply | Keep services and secondments in separate, deliberately drafted agreements |
Why these errors recur
Group templates are drafted from the perspective of the parent's jurisdiction, where intercompany services are often a minor compliance item. India is the opposite: the intercompany service fee is usually the Indian company's entire revenue, so every word of the agreement is scrutinised by an assessing officer whose task is to find income. The fix is not a longer document; it is an India schedule that answers the Indian questions and a review of the template by someone who has sat through an Indian transfer pricing assessment.
A short self-audit
- Can a stranger identify, from the agreement alone, who pays, for what, how the price is computed and when?
- Does the scope match the LinkedIn profiles of the Indian leadership team?
- Does the booked margin for the last three years equal the agreed markup?
- Does the receivable age exceed the contractual credit period?
- Is there a separate agreement for anything the Indian company pays the group?
- Is the agreement stamped, approved and in the section 189 register?
Worked example
An Indian subsidiary's agreement names the Irish holding company as counterparty; invoices are paid by the US operating company; payment terms are 150 days; reimbursements of a third-party licence are added to the service fee and marked up; the Indian CTO is listed on the group website as head of product. In assessment: the GST officer questions export status because the Irish "recipient" never paid; the TPO imputes interest on receivables beyond 60 days and marks up the IP-owner question; the licence reimbursement is treated as service revenue. The remedy, applied for the following year: the US company becomes the counterparty; terms move to 45 days; the licence is recharged at cost as a pure agent on a separate line; the CTO's role is re-described and the agreement's scope updated to match; stamp duty is paid in Karnataka and the board minutes the approval under section 188.
Common mistakes we see
- Assuming the parent's legal team has 'done the agreement' when it has done the parent's agreement.
- Fixing the paper without fixing the conduct — a limited-risk clause does not survive a product team that visibly runs the roadmap from India.
- Correcting the agreement prospectively and leaving the open years undocumented. Record the reasons and, where possible, cover earlier periods through a board-approved effective date.
Frequently asked questions
What is the most expensive drafting mistake?
A scope and IP clause that do not match what the Indian team does. It converts a cost-plus margin dispute into an argument about returns on intangibles, which is an order of magnitude larger.
Can long payment terms really be a transfer pricing issue?
Yes. Receivables outstanding beyond the credit period independent parties would give are treated as an international transaction, and arm's length interest is imputed.
Why does the recipient matter for GST?
Export of services under section 2(6) of the IGST Act requires the recipient to be located outside India and the consideration to be received in convertible foreign exchange. If the contractual recipient never pays and a different entity does, both limbs are open to challenge.
Is a one-page amendment enough to fix an old agreement?
Often yes for the definitions, true-up and payment terms. Changes to scope, IP or counterparty are substantive and should be done by a restated agreement with board approval.
Should secondments be in the services agreement?
No. Secondment of parent employees to India raises permanent establishment, fees-for-technical-services and GST questions that need their own agreement and analysis.
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
- CGST Act, IGST Act, CGST Rules and GST circulars — CBIC
- FEMA notifications — Reserve Bank of India
- Companies Act, 2013 and rules — Ministry of Corporate Affairs
Last reviewed on 1 November 2026 by Vidushi 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.
