Because five separate Indian regimes will read it. The transfer pricing officer uses the agreement to characterise the Indian entity and test the markup under section 161 of the Income-tax Act, 2025; the GST officer uses it to decide whether the service is an export under section 2(6) of the IGST Act and whether a cost is a pure-agent reimbursement; the bank and the RBI use it to classify the inward remittance and check realisation under FEMA; the withholding provisions of section 393 apply to anything the Indian company pays back; and section 188 of the Companies Act, 2013 requires related-party contracts to be approved and recorded. Without a signed agreement in place before the first invoice, each of these authorities will reconstruct the terms from conduct — rarely in the company's favour.
Key facts
| Provision | Old reference (to 31 Mar 2026) | New reference (from 1 Apr 2026) | Rate / threshold | Timing | Form |
|---|---|---|---|---|---|
| Transfer pricing — characterisation and documentation | s. 92, 92D; Rule 10D | s. 161, 171; Rule 84 | Agreement is a prescribed documentation item | In place by the return due date; ideally before first invoice | Form 48 |
| GST — export of services conditions | s. 2(6) IGST Act; Circular 161/17/2021-GST | Unchanged | Recipient outside India; payment in convertible foreign exchange; not a mere establishment of the same person | Invoice within 30 days of supply (s. 31 CGST Act) | LUT in RFD-11 |
| FEMA — export realisation | FEM (Export of Goods and Services) Regulations, 2015 | FEM (Export and Import of Goods and Services) Regulations, 2026, as amended | Proceeds to be realised within the prescribed period (9 months) | From invoice date | EDF (monthly, from 1 Oct 2026) |
| Withholding on outbound payments to the parent | s. 195 | s. 393(2), Table Sl. 17 | Rate under the Act or treaty | At credit or payment, whichever earlier | Forms 145/146 |
| Company law — related party contracts | s. 188 Companies Act, 2013; Rule 15 | Unchanged | Board approval; shareholder approval above thresholds unless arm's length in ordinary course | Before entering into the contract | MBP-1, AOC-2, s. 189 register |
What happens when there is no agreement
A new Indian subsidiary typically starts work for its parent weeks before anyone thinks about paper. Salaries are paid from a capital infusion, the first invoice goes out at month three, and the "agreement" is a two-page template signed a year later and back-dated in spirit if not in ink. Each regulator then fills the gap:
- The TPO characterises the Indian company from its conduct. If the Indian team was building the product with no written limitation of scope or risk, it looks like an entrepreneur, and the department may seek a return on the IP rather than a cost-plus margin.
- The GST officer asks what the ₹12 crore of inward remittances was for. Without a contract defining the service and its recipient, the export claim rests on bank advices and emails; a reimbursement booked as revenue, or revenue booked as a reimbursement, is taxed the wrong way.
- The bank classifies the inward remittance by purpose code on the basis of what the company tells it. Months later, an unexplained remittance may be treated as capital (requiring FC-GPR) rather than as service income — or the reverse.
- The statutory auditor needs a basis for revenue recognition under Ind AS 115 or AS 9. "Cost plus whatever the parent approves" is not a contract with enforceable rights.
- The board has entered a related-party contract without the section 188 approval and disclosure, which surfaces in the secretarial audit and in any later due diligence.
What the agreement must settle
The clause-by-clause checklist covers the detail. The essentials, in the order the regulators will look for them:
- Who the parties are and who the recipient is — the contracting entity on the parent side must be the one that pays, so the GST recipient test and the FEMA remitter line up.
- What is being provided — a scope that reflects what the Indian team actually does. Assigned work for a limited-risk provider; design authority and risk if the Indian entity genuinely has them.
- How price is computed — cost base defined, pass-throughs identified, markup stated, currency and conversion rate agreed, year-end true-up mechanism.
- Who owns what — assignment of IP to the parent if that is the arrangement, because the transfer pricing characterisation depends on it.
- Payment terms that fit FEMA realisation (nine months is the outer limit; 30 to 60 days is normal) and the GST export condition of receipt in convertible foreign exchange.
- Effective date, term, termination and governing law.
Timing: before the first invoice, not before the first dispute
The agreement should be executed before the subsidiary starts charging — ideally before it starts incurring cost on the parent's behalf — and the board should approve it under section 188 at the same meeting that approves the first intercompany pricing. Where work has already begun, an agreement with a defined effective date covering the start of operations, approved by the board with the reason for the delay minuted, is the right remedy; an undated or back-dated document is not. Stamp duty on an agreement executed outside India must be paid within three months of its first receipt in India under the Indian Stamp Act.
The agreement is one document; it serves three audiences
It is worth writing it so that a transfer pricing officer, a GST officer and a bank compliance officer can each find what they need without a covering explanation. In practice this means plain language, defined terms for "Costs", "Pass-through Costs" and "Services", a schedule that can be updated annually with the markup and budget, and a clause that says the parties will true-up to the arm's length position determined under Indian law.
Worked example
A UK software company incorporates an Indian subsidiary in April and hires eight engineers. The first invoice is raised in July for April–June cost plus 15%. In its first transfer pricing audit, three years later, the department notes that the only agreement on file is dated the following February. The company is able to show board minutes from May approving the engagement on cost-plus terms, a pricing memorandum from the same month and consistent invoicing — and the agreement's recital states that it records terms in effect from 1 April. The department accepts the characterisation. Had the May minutes not existed, the department would have been entitled to treat the first ten months as un-contracted work and argue for an entrepreneur-type return on the product the engineers built.
Common mistakes we see
- Starting work on a capital infusion and raising the first invoice months later with no agreement, leaving a period of un-contracted service that the TPO can characterise freely.
- Signing the parent's global template without an India schedule — no cost-base definition, no true-up, payment terms of 180 days that strain FEMA realisation.
- Naming the group's holding company as the counterparty while a sister company actually pays. The GST recipient, the FEMA remitter and the TP counterparty must be the same entity.
- Treating the agreement as a tax document only and skipping the section 188 board approval and the register of contracts.
- Back-dating. An agreement with a stated effective date earlier than its execution date, approved by the board with the reason recorded, is legitimate; a false execution date is not.
Frequently asked questions
Is an intercompany agreement legally required in India?
No single statute says 'you must sign one'. But Rule 84 of the Income-tax Rules, 2026 lists agreements among the documents to be maintained, section 188 of the Companies Act requires related-party contracts to be approved, and the GST export tests cannot be evidenced without one. In practice it is unavoidable.
Can the agreement be signed after work has started?
Yes, with a defined effective date covering the start of services and board approval that records the circumstances. Do not back-date the execution.
Does the parent's global intercompany agreement suffice?
Usually not on its own. It needs an India-specific schedule or addendum covering the cost base, markup, currency, true-up, IP assignment and payment terms that meet FEMA and GST conditions.
Who should sign for the Indian company?
A director authorised by board resolution, after the board has approved the related-party contract under section 188 and interested directors have disclosed their interest.
Does the agreement need to be registered or notarised?
Neither. It should be stamped under the applicable state stamp law (within three months of receipt in India if executed abroad) and retained with the board approval.
Should the agreement be in English?
Yes — all Indian regulators work in English and the e-filing systems accept English documents. A bilingual version is fine if the English text is stated to prevail.
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.
