An intercompany services agreement for an Indian IT or ITeS subsidiary has to do three jobs at once: fix the transfer pricing characterisation (limited-risk service provider, cost base, markup, year-end true-up) for section 161 of the Income-tax Act, 2025; satisfy the GST export tests of section 2(6) of the IGST Act (identified foreign recipient, consideration in convertible foreign exchange, invoicing within 30 days of supply); and meet FEMA realisation and reporting requirements. The nineteen clauses below are the ones we expect to find, and the ones whose absence we see most often in assessments.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Documentation of agreements | Rule 10D(1) | Rule 84 | Agreements are a listed documentation item | Contemporaneous | — |
| Safe harbour pricing (if elected) | Rule 10TD | Rules 86–102 | Cost plus at least 15.5% for eligible IT services | Five-year block | Form 49 |
| GST tax invoice timing — services | s. 31(2) CGST Act; Rule 47 | Unchanged | Within 30 days of supply | Each invoice | Export invoice under Rule 46 |
| GST credit / debit notes for true-ups | s. 34 CGST Act | Unchanged | — | Declared by 30 November following the financial year or the annual return, whichever earlier | GSTR-1 |
| Export realisation | FEM Export Regulations, 2015: 9 months | FEM (Export and Import of Goods and Services) Regulations, 2026, as amended: 9 months (12 months for INR-settled) | — | From invoice date; extension via AD bank | EDF |
| Related-party approval | s. 188 Companies Act; Rule 15 | Unchanged | — | Before execution | Board resolution; AOC-2 if not arm's length |
The checklist
| # | Clause | What it must do | Which regime reads it |
|---|---|---|---|
| 1 | Parties and recitals | Name the Indian company and the specific foreign entity that will receive and pay for the services. Recite the group relationship and that the Indian company is established to provide services to the group. State the effective date. | GST (recipient), FEMA (remitter), TP (AE) |
| 2 | Definitions | Define "Services", "Costs", "Pass-through Costs", "Markup", "Service Period", "Deliverables", "Confidential Information", "Personal Data". Precision here saves every later clause. | All |
| 3 | Scope of services | Describe the work: software development to specifications provided by the Principal; maintenance and support; quality assurance; IT infrastructure support. State that the Principal decides what is built and sets priorities. Attach a schedule that can be updated by statement of work. | TP (characterisation), GST (nature of supply) |
| 4 | Standard of performance and personnel | Indian company to use qualified personnel; personnel remain employees of the Indian company; no secondment unless separately agreed (secondment creates PE and GST questions of its own). | TP, PE risk |
| 5 | Cost base | "Costs" means all costs and expenses incurred by the Indian company in providing the Services, determined under Indian GAAP / Ind AS, including employee cost (salary, bonus, share-based payment charges, benefits), premises, depreciation and amortisation, software, communication, travel, training, recruitment, professional fees and allocated overheads — and excluding interest, income-tax, foreign-exchange gains and losses, and Pass-through Costs. | TP (safe harbour operating expense definition) |
| 6 | Direct and indirect costs; allocation keys | Where the Indian company also serves other group entities or third parties, specify the allocation key for shared costs (headcount, time records, floor area) and require time or headcount records to be kept. | TP, GST (apportionment) |
| 7 | Pass-through costs | Costs incurred on the Principal's instruction, for its benefit, where the Indian company adds no value and bears no risk — e.g. third-party cloud or licence fees contracted at the Principal's direction. Recharged at cost without markup, itemised separately on the invoice. Keep this category narrow and listed in a schedule. | TP (excluded from base), GST (pure agent conditions — Rule 33) |
| 8 | Remuneration — markup | Service fee = Costs plus a markup of X%. State X. If relying on safe harbour, X must be at least 15.5% on operating expenses. Provide that the markup will be reviewed annually against Indian transfer pricing requirements and amended by schedule. | TP |
| 9 | Invoicing in arrears; budgets | Monthly (or quarterly) invoices in arrears based on actual Costs, or on budget with a mandatory true-up. Invoice within 30 days of the end of the service period to meet section 31 of the CGST Act. Invoice to carry the GST export endorsement and LUT reference. | GST, FEMA |
| 10 | Currency, conversion and payment terms | Invoices in USD/EUR/GBP (or INR if the parties prefer — permissible, but note the export conditions). Specify the conversion rate for translating INR Costs (e.g. RBI reference rate on the last day of the month). Payment within 30–60 days by wire transfer; proceeds to be realised within the FEMA period. | FEMA, GST (consideration in foreign exchange) |
| 11 | Year-end true-up | Within a stated period after the financial year end, actual Costs and margin to be computed; a final invoice or credit note to be raised so that the margin for the year equals the agreed markup (or the arm's length margin determined under Indian law). Credit notes to be issued before the GST section 34 cut-off. | TP, GST |
| 12 | Limited-risk clause | The Principal bears market risk, utilisation/capacity risk, service-liability risk and credit risk; the Indian company is remunerated on Costs irrespective of the commercial outcome of the Principal's products. The Principal directs and supervises the work. | TP (insignificant-risk test for safe harbour) |
| 13 | Intellectual property | All work product, including software, code, documentation and inventions created in performing the Services, is assigned to the Principal on creation; the Indian company retains no rights. Moral-rights waiver from personnel through employment contracts. (If the Indian company is intended to own IP, say so — the pricing model changes.) | TP (ownership of intangibles) |
| 14 | Confidentiality | Standard mutual confidentiality, survival beyond termination, carve-outs for regulators and auditors. | Commercial |
| 15 | Data protection | Roles under the Digital Personal Data Protection Act, 2023 and, where the Principal is in the EU/UK, processor obligations and standard contractual clauses. Security standards, breach notification, sub-processor approval. | Data protection law |
| 16 | Records, audit and cooperation | Indian company to maintain cost records, time records and allocation workings for the retention period under Indian tax law; each party to cooperate with the other's tax audits and to provide information needed for Form 48, the master file and foreign filings. | TP, company law |
| 17 | Term and termination | Initial term with automatic renewal; termination on notice (90–180 days); consequences — payment for Costs incurred through termination, hand-over of work product, treatment of redundancy costs (an independent provider would expect to be compensated for termination-related costs — say so). | TP (risk allocation) |
| 18 | Governing law and disputes | Indian law is simplest for an Indian subsidiary's agreement that Indian regulators will read; arbitration seated in India or a neutral venue. Foreign governing law is acceptable but does not change how Indian tax law characterises the arrangement. | Commercial |
| 19 | Execution formalities | Board approval under section 188 recorded; authorised signatories; stamp duty under the applicable state law (paid within three months of receipt in India if executed abroad); counterparts; electronic signature acceptable with the stamping completed. | Company law, stamp law |
Three clauses that need the most thought
Cost base (clause 5)
The single most litigated item. Write the inclusions out in full and tie them to the Indian accounting standards. If the parent bears the ESOP cost for Indian employees and does not recharge it, say so expressly — otherwise the department may impute it into the base. If the parent recharges it, it is in the base and marked up.
True-up (clause 11)
Monthly billing on budgeted cost never lands exactly on the target margin. Without a true-up, the booked margin drifts (typically downward, as year-end bonuses and provisions arrive). The true-up clause should set a date, a mechanism (supplementary invoice or credit note), and an express link to the arm's length margin under Indian law so that a transfer pricing adjustment can be reflected contractually rather than as a bare tax entry. Watch the GST deadline for credit notes.
IP assignment (clause 13)
Transfer pricing follows economic ownership. If the Indian company is to be a cost-plus provider, the parent must own what the Indian team builds, by contract and in conduct (the parent decides, funds and controls). If the Indian company in fact retains IP — common in founder-led Indian companies that later flip — the cost-plus model is wrong and a different pricing approach is needed.
Worked example
A US company's Indian subsidiary provides development and support. Agreement terms: Costs plus 16%, monthly invoicing on budget, true-up within 60 days of year end, cloud costs incurred on the Principal's instruction recharged at cost.
| Year-end computation | ₹ crore |
|---|---|
| Actual Costs (employee 14.2; premises and depreciation 2.1; other 1.3) | 17.60 |
| Pass-through cloud costs (recharged separately, no markup) | 0.95 |
| Service fee due = 17.60 × 1.16 | 20.42 |
| Invoiced during year on budget (12 × 1.62) | 19.44 |
| True-up supplementary invoice (raised 20 May, within 30 days of determination) | 0.98 |
| Total export invoices for the year (incl. pass-through) | 21.37 |
The true-up invoice is a zero-rated export under the LUT, reported in the May GSTR-1, and the dollar proceeds are realised within the FEMA period. Form 48 reports the ₹20.42 crore service transaction and the ₹0.95 crore reimbursement separately. Without the true-up clause, the booked margin would have been 10.5% and the company would face a ₹0.98 crore transfer pricing adjustment with no contractual basis to recover it from the parent.
Common mistakes we see
- Scope written as 'such services as the Principal may require from time to time' with nothing on who decides what is built — which leaves the limited-risk characterisation unsupported.
- Cost base silent on share-based payment, depreciation or allocated overheads, so each year's auditor and TPO argue about what is in and what is out.
- Pass-through schedule used as a dumping ground for ordinary operating costs to shrink the markup base.
- No true-up clause, or a true-up clause with no date — the GST credit-note window closes before the transfer pricing computation is done.
- Payment terms of 120–180 days inherited from the group template, which collide with FEMA realisation and create an interest-bearing receivable for transfer pricing purposes.
- IP clause missing or granting the Indian company a licence 'for its business', which the department reads as the Indian company owning or exploiting intangibles.
- Agreement signed by the same individual on both sides without the board approval and interest disclosure that section 188 and section 184 of the Companies Act require.
Frequently asked questions
Should the intercompany agreement specify a fixed markup percentage?
Yes, with a mechanism to amend it annually by schedule and a true-up to the arm's length margin determined under Indian law. A stated percentage with a review clause is more defensible than 'arm's length as agreed'.
Can we invoice in Indian rupees?
Yes. Export of services under GST requires payment in convertible foreign exchange or in Indian rupees where permitted by the RBI; FEMA permits INR invoicing and settlement through permitted channels, with a 12-month realisation period for INR-settled exports from October 2026. Most groups still invoice in the parent's currency.
What payment terms are acceptable?
Thirty to sixty days is normal and defensible. Terms longer than the credit period independent vendors would give create a deemed loan for transfer pricing and must stay within the FEMA realisation period.
Does the agreement need a limited-risk clause if we are not opting for safe harbour?
Yes if the pricing is cost-plus. The clause allocates risk to the parent, which is what justifies a modest cost-plus return under TNMM. Without it the department may argue for a higher return.
Who should own the IP created by the Indian team?
Whoever the pricing model assumes. For a cost-plus service provider, the parent, by assignment on creation. If the Indian company is intended to own the IP, the remuneration model must change and should be designed with transfer pricing advice.
Is a statement of work needed in addition to the agreement?
Helpful but not mandatory. SOWs let the scope and headcount change without amending the master terms; keep them consistent with the pricing clause and the cost-base definition.
How should the agreement deal with Indian transfer pricing adjustments?
Provide that the parties will adjust the service fee, by supplementary invoice or credit note, to reflect any arm's length price finally determined under Indian law, and that the parent will pay any amount so determined — which also supports repatriation under section 170 if a secondary adjustment arises.
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
- RBI Master Directions — Reporting under FEMA; External Commercial Borrowings; Overseas Investment; Export of Goods and Services; LRS
- 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.
