Transfer pricing from the US to India

US groups run some of their most important operations through Indian subsidiaries — captive software and IT centres, R&D labs, finance and back-office teams, and distribution arms. Because the intercompany charge decides how much profit sits in each country, it draws close attention from both the IRS and the Indian tax authorities. In fact the US-India corridor is one of the most heavily audited transfer pricing relationships in the world, so getting the price and the paperwork right from the outset matters.

1. Why this corridor is audited so hard

India runs a detailed, aggressively enforced regime, and the same transaction can be examined from both ends.

• Two active regulators. The IRS looks for profit shifting through service and IP arrangements; India scrutinises management fees, royalties and “inflated” service charges, especially where a captive is described as low-risk but behaves otherwise.
• Substance over form. Indian audits test whether the entity's profit margin matches its real functions, assets and risks (FAR) — and whether intra-group services and IP deliver a demonstrable benefit to the Indian entity.
• Currency. USD/INR movements shift measured margins and can force multi-year adjustments if your policy does not account for them.

2. The arm's-length principle on both sides

Both regimes require related-party dealings to be priced as between independent parties, and both draw on the OECD guidelines. The US applies IRC Section 482 and the best-method rule; India applies Chapter X (Sections 92 to 92F), with methods under Section 92C and Rule 10B and documentation under Rule 10D. The recognised methods are the same — CUP, resale price, cost plus, TNMM and profit split — and for intangibles both sides increasingly analyse the DEMPE functions (development, enhancement, maintenance, protection and exploitation).

3. Common structures and the methods that fit

• Captive IT / software centre — the most common structure. Usually cost-plus (or TNMM), with the Indian entity as a limited-risk provider working to the US parent's specification. Audits challenge the cost base and whether the markup reflects the market.
• R&D / product-development centre — cost-plus for genuine contract R&D where the US parent directs the work and owns the IP; profit split for true co-development. Expect scrutiny of IP ownership versus where value is actually created.
• BPO / shared services (finance, HR, procurement) — cost-plus or TNMM on operating margin, supported by a benefit test and evidence of what was actually delivered.
• Distribution or manufacturing — resale price, TNMM or cost-plus depending on the FAR profile; watch capacity, marketing intangibles and any business restructuring.
• Intra-group financing — CUP-based interest and guarantee fees with a documented credit analysis.

4. What the IRS expects

Section 482 governs, backed by the best-method rule. Keep contemporaneous documentation — a Master File and a US Local File — in place when the return is filed, so you can rely on the Section 6662 penalty protection; without it, transfer pricing penalties of 20% or 40% of the underpayment can apply. File Form 5472 for reportable transactions with foreign related parties (and Form 5471 where US persons own the foreign entity), plus Form 8975 / Schedule A for Country-by-Country reporting if the group's consolidated revenue exceeds the US threshold (about USD 850 million). Provide documentation within 30 days of an IRS request.

5. What India expects

India's regime is prescriptive and deadline-driven. Every Indian entity with international related-party transactions files Form 3CEB — a chartered accountant's report under Section 92E — with its income tax return, and maintains a Local File where those transactions exceed roughly INR 1 crore. Larger groups file a Master File (Form 3CEAA) where consolidated revenue exceeds about INR 500 crore, and Country-by-Country reports (Form 3CEAD) above about INR 6,400 crore, filed within 12 months of the year-end. Documentation is kept for eight years. Penalties are real: broadly 2% of transaction value for documentation failures (Sections 271AA and 271G), a fixed penalty for failing to file Form 3CEB (Section 271BA), steep per-day penalties for late CbC reports (Section 271GB), and adjustments plus penalties on under-reported income. India does, however, offer safe-harbour rules for qualifying routine captives and a mature APA programme.

6. Why intercompany agreements fail audits

Most disputes trace back to a mismatch between the contract, how the business actually runs, and the supporting records. Common failings: reused template agreements that do not describe the real services; missing clauses on IP ownership, withholding tax, currency and periodic price reviews; markups fixed years ago that no longer reflect the operating model; and separate US and Indian documentation that tells contradictory stories. If your Indian entity is described as a limited-risk service provider, it should look like one in practice — in decision-making, staffing, project control and documented outputs — and you should be able to trace costs to the service and evidence delivery.

7. The treaty, MAP and APAs

A real advantage of this corridor is that the US and India have a comprehensive tax treaty. If the IRS and the Indian authorities reach conflicting positions and both tax the same profit, you can use the Mutual Agreement Procedure to seek relief, and pursue an Advance Pricing Agreement — including a bilateral APA with both competent authorities — for forward certainty. Foreign tax credits may relieve residual double tax. These tools work, but they are slow and evidence-heavy, so consistent pricing and strong documentation remain your first line of defence.

8. A practical checklist

• Map every related-party flow to and from the Indian entity — services, royalties, reimbursements, cost allocations and financing.
• One consistent set of intercompany agreements that mirror the real FAR profile.
• A refreshed benchmarking study supporting each method and markup.
• Form 3CEB and a Local File in India by the deadline; Master/Local File and CbCR where thresholds are met on either side.
• Confirm where IP is genuinely developed and controlled, and model Indian withholding on royalties and technical fees.
• Consider a safe harbour or APA in India for higher-risk or high-value flows.

Get US-India transfer pricing help from StartEase.

Official references

• IRS: Transfer pricing (Section 482)
• Income Tax Department, India: Transfer pricing
• OECD: Transfer pricing guidelines

Important: This is general educational information, not legal, tax, accounting or exchange-control advice. Rules, rates and thresholds change and depend on your circumstances — confirm the current position with a qualified professional before acting.