Parent Subsidiary Intercompany Agreement in India – Complete Guide

Any transaction between a parent company and its subsidiary in India sits at the intersection of four regulatory frameworks simultaneously: the Companies Act 2013 (board approvals and disclosures), the Income Tax Act 2025 (transfer pricing), the Goods and Services Tax framework (reverse charge on imported services), and the Foreign Exchange Management Act 1999 (FEMA) for cross-border payment flows. A parent subsidiary intercompany agreement is the document that governs all of these transactions, and its absence, or defective execution, is the single most common cause of transfer pricing adjustments, GST demands, and Companies Act penalties in group structures operating in India. This guide covers every regulatory requirement, the key clauses such an agreement must contain, the approval sequence a group must follow before the first transaction flows, and the mistakes that practitioners see most frequently in live engagements.

What is a parent subsidiary intercompany agreement in India?

A parent subsidiary intercompany agreement is a legally binding contract between a holding company (the parent) and one or more of its subsidiaries, setting out the terms on which they will transact with each other. In India, the term covers a family of agreements: intercompany service agreements, IP licensing arrangements, cost-sharing agreements, intercompany loan agreements, and distribution agreements, depending on what flows between the entities.

These agreements are not optional governance hygiene. Under Indian law, a properly executed intercompany agreement is a mandatory requirement for each of four independent regulators. The transfer pricing officer at the Indian income tax department requires a signed agreement as part of the Local File documentation. The GST officer requires it to assess whether the value of an imported service from the foreign parent is at arm’s length or should be revalued. Companies Act requires board approval before any related party transaction and disclosure of material related party contracts in the Board’s Report. FEMA requires evidence of the contractual basis for every current account payment remitted or received across the Indian border.

What practitioners see repeatedly in engagements is that the agreement is treated as a formality, drafted months after invoices have already been raised. The regulatory consequence of that sequencing is severe. A Transfer Pricing Officer (TPO) auditing a group’s intercompany transactions will not accept a retroactive agreement as contemporaneous documentation. A GST officer reviewing import-of-services liability will find no agreement to support the value declared. The instinct to “sort the paperwork later” is the single most expensive compliance habit in any group structure operating in India.

Types of intercompany agreements used in Indian group structures

The type of agreement a group needs depends on the nature of the transaction. Most group structures in India operate across two or more of the following agreement types simultaneously.

Table 1: Types of parent subsidiary intercompany agreements and their primary regulatory trigger

Agreement type	What it governs	Primary regulatory trigger
Intercompany service agreement	Management fees, IT support, HR, finance, strategy services	Transfer pricing (Section 165, ITA 2025); GST RCM on import of services
IP licensing agreement	Royalties for patents, trademarks, brand, software	TP + GST RCM + FEMA royalty remittance route
Cost-sharing / cost allocation agreement	Shared costs for R&D, marketing, overheads	TP documentation; allocation key must be defensible
Intercompany loan agreement	Debt between parent and subsidiary	ECB framework (RBI); FEMA; TP for interest rate
Distribution or resale agreement	Parent supplies goods, subsidiary resells in India	TP (Resale Price Method or TNMM); GST on supply of goods
Manufacturing / contract manufacturing	Subsidiary manufactures for parent on cost-plus basis	TP (Cost Plus Method); safe harbour elections

Most Indian subsidiaries of foreign parents operate under a services agreement and, where the parent owns IP used by the subsidiary, a licensing agreement running simultaneously. The pricing terms in each agreement must be independently benchmarked. A single transfer pricing study cannot simply assign one margin across all transaction types.

What must a parent subsidiary intercompany agreement include?

A parent subsidiary intercompany agreement in India must be drafted to withstand scrutiny from four sets of regulators simultaneously. The clause structure below applies to a services agreement; equivalent provisions apply to licensing, loan, and cost-sharing arrangements with adaptations for the specific transaction type.

Table 2: Mandatory clauses in a parent subsidiary intercompany agreement

Clause	What it must cover	Why it matters
Parties and associated enterprise definition	Full legal names, registered addresses, relationship (AE as defined under Section 162, ITA 2025)	Establishes the regulatory context for TP documentation
Scope of services	Specific description of each service, deliverable standard, and exclusions	Vague scope is the primary basis on which CBDT challenges management fee deductibility
Pricing mechanism	Transfer pricing method (TNMM, CPM, CUP, etc.), margin or rate, review trigger	ALP compliance requirement; must match the TP study methodology
Payment terms and invoicing	Invoice frequency, currency, payment timeline, late payment treatment	GST self-invoice timing obligation; FEMA remittance documentation
Term and renewal	Start date (must pre-date first transaction), fixed or rolling term, renewal mechanism	Retroactive agreements are a major TP audit red flag
Termination provisions	Notice period, consequences of early termination, survival clauses	Required for risk allocation under OECD and CBDT guidelines
IP ownership	Who owns IP created under the agreement; work-for-hire or licensed-back	Determines royalty obligation and capital gains treatment on any later transfer
Risk allocation	Which party bears which risks (operational, credit, inventory)	Must be consistent with the functional analysis in the TP study
Confidentiality	Protection of proprietary information	Standard commercial requirement
Governing law and dispute resolution	Indian law typically governs where Indian subsidiary is the recipient	Affects enforceability and NCLT jurisdiction
Amendment procedure	Written amendment only, effective date clause	Prevents unilateral price changes that would distort TP benchmarking

One clause that groups consistently miss is the effective date clause. The agreement must state a start date that is on or before the date of the first transaction. If the first management fee invoice is raised on 01 June 2026 and the agreement is signed on 15 July 2026 with an effective date of 01 June 2026, that is acceptable provided contemporaneous evidence (board minutes, email approvals, initial invoices) can corroborate that the arrangement was in place from June. What is never acceptable is creating the appearance that the agreement was signed earlier than it actually was. That constitutes fraud under Indian law regardless of how the arrangement was framed.

How does the Companies Act 2013 regulate intercompany agreements?

Section 188 of the Companies Act 2013 is the provision that governs contracts and arrangements between a company and its related parties. A subsidiary is a related party of its holding company under Section 2(76) of the Act. Before entering into an intercompany contract, an Indian company must satisfy the approval matrix under Section 188.

What approval is required under Section 188?

Section 188(1) requires board approval by a resolution passed at a duly convened board meeting for any related party transaction in the specified categories: sale, purchase or supply of goods or materials; selling or buying property; leasing of property; providing any services; and related party appointment to a place of profit. The interested director must not participate in the discussion or vote on the resolution.

A shareholder ordinary resolution is additionally required where transaction values exceed the following thresholds:

• Sale or supply of goods or materials: exceeding 10% of turnover
• Buying or selling property: exceeding 10% of net worth
• Leasing property: exceeding 10% of turnover
• Any services: exceeding 10% of turnover

Does the WOS exemption remove the need for an agreement?

This is the most widely misunderstood provision in the context of intercompany agreements. The second proviso to Section 188(1) provides that transactions between a holding company and its wholly owned subsidiary whose accounts are consolidated with the holding company do not require a shareholder resolution. The exemption covers only the shareholder resolution. It does not remove the board approval requirement, the TP documentation requirement, the GST compliance obligation, or the FEMA filing obligation. Groups that believe the WOS exemption means they can transact freely without documentation are operating on a mistaken reading of the law.

The arm’s length exemption under Section 188(1) removes the Section 188 approval requirement entirely for transactions that are both in the ordinary course of business and at arm’s length. Where both conditions are met, no board resolution under Section 188 is required (though the transaction must still be disclosed in Form AOC-2 and the Board’s Report if it is a material related party transaction under Ind AS 24 or AS 18). The burden of demonstrating that a transaction is at arm’s length rests with the company.

Penalties for non-compliance

Under Section 188(5), any director or employee who enters into or authorises a related party transaction in violation of Section 188 faces the following penalties:

• Listed company: Fine of ₹25 lakh, or imprisonment up to one year, or both
• Any other company: Fine of ₹5 lakh

The company itself faces separate penalties under Section 188(5). The violation is also reportable in the secretarial audit report, which creates downstream exposure in fundraising and M&A due diligence.

Under Section 189 of the Companies Act 2013, every company must maintain a register in Form MBP-4 recording the particulars of all contracts and arrangements entered into with related parties under Section 188. The register must be updated each time a new intercompany contract is executed or an existing one is modified. Form MBP-4 is not filed with the Ministry of Corporate Affairs (MCA) but must be available for inspection and is reviewed in secretarial audits. Groups that maintain clean Form MBP-4 records find that related party disclosures in the Board’s Report and the annual return in Form MGT-7 become significantly easier to prepare accurately.

Transfer pricing and the arm’s length requirement under the Income Tax Act 2025

Every transaction between associated enterprises (where the Indian entity and the foreign parent or subsidiary are the associated enterprises) must be priced at arm’s length. This is the central requirement of Indian transfer pricing law, and the parent subsidiary intercompany agreement is the primary documentary evidence that the arm’s length requirement has been met.

How are associated enterprises defined?

Under Section 162 of the Income Tax Act 2025 (reorganised from Section 92A of the Income Tax Act 1961, effective from Tax Year 2026-27, i.e., from 01/04/2026), two enterprises are associated enterprises if one holds 26% or more of the voting power in the other, or if common management or control exists. For a wholly owned subsidiary, every transaction with the parent is an international transaction subject to arm’s length pricing from the first rupee.

The arm’s length requirement is not limited to cross-border structures. Specified Domestic Transactions (SDTs) between Indian associated enterprises are also subject to transfer pricing where the aggregate value of domestic intercompany transactions exceeds ₹20 crore in a financial year. An Indian parent that charges management fees, provides shared services, or licenses IP to an Indian subsidiary above this threshold must maintain TP documentation and file Form 48 for those domestic transactions. Wholly domestic Indian group structures, particularly those that operate a common services company or a shared treasury function within India, overlook this requirement more often than any other single TP compliance point.

What is the arm’s length price and how is it determined?

Section 165 of the Income Tax Act 2025 (reorganised from Section 92 of the 1961 Act) requires that income from international transactions between associated enterprises be computed with reference to the arm’s length price. The Central Board of Direct Taxes (CBDT) has prescribed six methods under Rules 77-85 for determining the arm’s length price:

• Comparable Uncontrolled Price (CUP): Direct comparison with prices charged in uncontrolled transactions for comparable goods or services
• Resale Price Method (RPM): Works backward from the subsidiary’s resale price to the parent
• Cost Plus Method (CPM): Marks up the subsidiary’s production or service costs
• Profit Split Method (PSM): Splits combined profits based on relative contributions of each party
• Transactional Net Margin Method (TNMM): Compares the subsidiary’s net margin against margins of comparable independent enterprises
• Other Method (notified by CBDT): Covers intangibles and business restructuring scenarios

For management fee and intercompany services arrangements, the TNMM is the most commonly applied method in India. The taxpayer selects the most appropriate method based on the nature of the transaction, functions performed, risks assumed, and assets employed, which together form the FAR analysis that must be documented in the Local File.

Table 3: Safe harbour margins for common intercompany transactions under the Income Tax Rules 2026 (effective Tax Year 2026-27, i.e., from 01/04/2026)

Transaction type	Safe harbour margin	Limit	Block period
IT services (software development, ITeS, KPO, contract R&D for software, consolidated into one category)	15.5% operating margin on operating costs	Up to ₹2,000 crore per year	5 consecutive tax years
Contract R&D for generic pharmaceutical drugs	24% operating margin on operating costs	Prescribed limit	3 consecutive tax years
Intercompany loans to non-resident AE	Benchmarked at arm’s length; safe harbour rate as prescribed	Up to applicable limit	3 consecutive tax years
Corporate guarantees to wholly-owned non-resident subsidiary	1% of guarantee amount	Applicable limit	3 consecutive tax years

The Income Tax Rules 2026 (notified by CBDT on 20/03/2026, effective 01/04/2026) made the most significant safe harbour reform since the regime’s inception. All IT service categories (software development, ITeS, KPO, and contract R&D for software) have been consolidated into one category with a uniform margin of 15.5% on operating costs and a threshold of ₹2,000 crore, up from the fragmented category structure and ₹300 crore threshold that applied for AY 2025-26 and AY 2026-27 under CBDT Notification No. 21/2025. The safe harbour for IT services is now elected for a 5-year block rather than annually, giving captive IT subsidiaries meaningful long-term planning certainty. The safe harbour election is made using Form 49 (replacing old Forms 3CEFA/3CEFB/3CEFC). Safe harbour does not waive TP documentation obligations under Sections 171 and 172 of the ITA 2025 — Form 48 must still be filed for all years of the block.

What is the difference between a transfer pricing policy and an intercompany agreement?

These are two distinct documents that must both exist and must be consistent with each other. A transfer pricing policy is an internal group document that sets the pricing framework for all intercompany transactions across the group, for example that all captive software development services are priced at cost-plus 18%. It describes what pricing applies and why, covering the entire group. An intercompany agreement is a bilateral legal contract between two specific entities within the group that implements that policy with binding commercial obligations. It specifies who owes what to whom, at what price, under what terms, and for what defined scope of services or goods.

A group that has a TP policy but no executed intercompany agreement has satisfied the planning requirement but not the legal or evidentiary requirement. During a TP audit, the TPO requires the signed bilateral agreement, not just the group policy. A TP policy also does not satisfy the Section 188 board approval requirement, the GST RCM documentation requirement, or the FEMA remittance basis requirement. Both documents are necessary, and neither substitutes for the other.

What documentation must accompany the intercompany agreement?

Documentation for Tax Year 2026-27 onwards (under the ITA 2025 and Income Tax Rules 2026 framework) consists of:

• Local File: FAR analysis, comparable data, economic analysis, a copy of the intercompany agreement, and invoices. Mandatory for all international transactions regardless of value.
• Form 48 (replacing Form 3CEB under the 1961 Act): Accountant’s report certifying the arm’s length price for international transactions under Section 172 of the ITA 2025, filed by 31 October of the tax year (one month before the 30 November ITR deadline for companies). Note: For FY 2025-26 (AY 2026-27), Form 3CEB and the 1961 Act provisions applied.
• Master File (Form 56, replacing old Form 3CEAA): Constituent entity information required for groups with consolidated revenue above ₹500 crore with at least one cross-border related party transaction above ₹50 crore.
• Country-by-Country Report (Form 3CEAD): Applies to groups with consolidated revenue above ₹6,400 crore.

What is the block assessment option under Rule 82?

Rule 82 of the Income Tax Rules 2026 (effective Tax Year 2026-27) introduces a multi-year block TP assessment framework. Under this option, an ALP determined by the Transfer Pricing Officer (TPO) for a given year applies to similar transactions for the two immediately following years, reducing the need for repeat benchmarking for stable recurring arrangements. This is particularly valuable for fixed-fee intercompany service contracts where the pricing model does not change year on year. The taxpayer applies for the option in the prescribed form; the TPO validates within one month of the application.

What penalties apply for transfer pricing non-compliance?

Under the ITA 2025 framework, penalties for TP documentation failures are significant:

• 2% of the transaction value for failure to maintain prescribed documentation
• 50% of the additional tax payable on an upward TP adjustment where the taxpayer fails to maintain documentation
• Interest on any TP adjustment amount at the prescribed rate for the period of under-reporting

Given that management fee and royalty arrangements between Indian subsidiaries and their foreign parents are among the most frequently audited categories, the cost of inadequate documentation almost always exceeds the cost of getting it right upfront.

What are the GST implications of parent subsidiary intercompany transactions?

When an Indian subsidiary receives services from its foreign parent (management consulting, IT support, shared service fees, brand licensing, or any other intercompany service), this constitutes an “import of services” under Section 2(11) of the IGST Act 2017. The Indian subsidiary must pay Integrated GST under the Reverse Charge Mechanism (RCM) on the value of the imported service, regardless of whether the parent charges the subsidiary or provides the service without consideration.

How does RCM apply to intercompany service payments?

Under Section 5(3) and 5(4) of the IGST Act read with Notification No. 10/2017-Integrated Tax (Rate), any service supplied by a person located outside India to a person in India is subject to GST under RCM. The Indian subsidiary must:

1. Self-assess the IGST liability at the applicable rate (18% for most management and technical services)
2. Issue a self-invoice for the imported service
3. Pay the IGST in cash through the GST portal (RCM liability cannot be offset with existing input tax credit)
4. Report the transaction in GSTR-3B under the RCM section
5. Claim the IGST paid as input tax credit in the same or subsequent return periods, provided the service is used for taxable supplies

Even where the foreign parent provides services to the Indian subsidiary at zero cost (for example, seconded employees, shared IT infrastructure, or group insurance), Schedule I of the Central Goods and Services Tax Act 2017 deems such supplies between related persons to be taxable supplies if made in the course or furtherance of business. The Indian subsidiary must still account for GST on the open market value of such services.

What changed under the Finance Act 2026?

The Finance Act 2026, which received Presidential assent on 30/03/2026, omitted Section 13(8)(b) of the IGST Act. This changes the place of supply for intermediary services from the location of the supplier to the location of the recipient (the default rule under Section 13(2) of the IGST Act).

Before 30/03/2026, foreign companies acting as intermediaries for Indian clients had their place of supply outside India, and their services were not treated as imports for GST purposes. Post-30/03/2026, such inbound arrangements qualify as imports of services, triggering RCM. Indian groups that receive facilitation, agency, or broker services from their foreign parent or a fellow subsidiary acting as an intermediary must now assess their RCM liability on these flows.

For outbound Indian entities acting as intermediaries for foreign clients, the amendment is beneficial: the place of supply is now outside India, making such services eligible for zero-rated export treatment and ITC refunds.

Does the GST value of an intercompany service have to match the TP price?

This is the dual-compliance trap that many groups fall into. Two sets of tax authorities can scrutinise the same intercompany transaction using different lenses: the TPO applies the arm’s length standard under transfer pricing rules, while the GST officer applies the valuation rules under Rule 28 of the CGST Rules 2017, which requires that transactions between related persons be valued at the open market value.

If the transfer price for a management fee arrangement is set at cost-plus 20% and the GST value is declared at cost-plus 15% (or at nil, treating the service as outside GST scope), the Indian subsidiary faces a GST demand on the difference between the declared value and the open market value, in addition to any TP adjustment on the income tax side. The intercompany agreement must specify a pricing basis that is consistently applied across both regulatory frameworks.

FEMA compliance for cross-border intercompany payments

Where either the parent or the subsidiary is a non-resident entity, every payment flowing between them (management fees, royalties, interest on intercompany loans, and dividend) must comply with the Foreign Exchange Management Act 1999 and the regulations issued by the Reserve Bank of India (RBI).

Management fees and royalties

Management fees and royalties paid by an Indian subsidiary to its foreign parent are current account transactions and are freely remittable through an Authorised Dealer (AD) bank. However, the tax compliance sequence that must be completed before the first remittance is critical, and missing it creates downstream problems that are difficult and expensive to remedy.

Before the first management fee or royalty payment is made, the following must be in place:

• Tax Residency Certificate (TRC): The foreign parent must obtain a TRC from its home jurisdiction’s tax authority confirming its residency for the financial year of the payment. The TRC must be produced before or at the time of the first payment.
• Form 41 (old Form 10F): The foreign parent must file Form 41 electronically with the Indian income tax department providing the information required under Section 159(8) of the ITA 2025 (old Section 90(5) of the ITA 1961). Without this, the Indian subsidiary cannot apply the reduced DTAA withholding rate and must deduct tax at the domestic rate of 20% plus surcharge and cess.
• Form 145 and Form 146 (old Form 15CA and Form 15CB): For payments to non-residents that attract Section 195 withholding (now governed under corresponding provisions of the ITA 2025), Form 145 (assessee’s declaration, replacing Form 15CA) and Form 146 (chartered accountant’s certificate, replacing Form 15CB) must be filed before the remittance. The AD bank will not process the remittance without these.

The practical consequence of missing TRC and Form 41 (old Form 10F) before the first payment is that the subsidiary deducts TDS at the domestic rate (20% plus surcharge and cess, aggregating to approximately 22.88%). The foreign parent can file for a refund in India, but the process takes 18 to 24 months and is entirely avoidable with one month of advance preparation.

Intercompany loans (ECB framework)

Where the foreign parent provides a loan to its Indian subsidiary rather than equity, the transaction falls under the External Commercial Borrowings (ECB) framework governed by FEMA 1999 and the Revised ECB Regulations notified by the RBI on 16/02/2026 (FEMA 3(R)(5)/2026-RB and A.P. (DIR Series) Circular No. 23 dated 18/02/2026). Key requirements under the revised framework include:

• Minimum average maturity: standardised at 3 years for most ECBs under the revised framework (manufacturing entities may have MAMP of 1-3 years up to USD 150 million outstanding)
• All-in-cost: the earlier ceiling of benchmark rate plus 500 basis points has been removed under the February 2026 revision. Pricing must now be based on prevailing market conditions, with the additional requirement that related-party ECBs be priced at arm’s length. This means the intercompany loan agreement and the TP documentation must both justify the interest rate selected.
• Borrowing limit: raised from USD 750 million to the higher of USD 1 billion outstanding or 300% of the borrower’s net worth
• Form ECB: must be filed with the RBI through the Authorised Dealer bank before drawdown to obtain the Loan Registration Number (LRN); monthly ECB-2 returns required as long as the loan is outstanding

TP applies to the interest rate on an intercompany loan: the rate must be arm’s length under Rule 79 of the Income Tax Rules 2026 (reorganised from Rule 10B of the 1961 Rules). Safe harbour for intercompany loans is available at SBI base rate plus 175 basis points for loans not exceeding ₹100 crore.

Annual FEMA reporting

Every Indian company with outstanding foreign liabilities or foreign assets (including equity from a foreign parent) must file the Foreign Liabilities and Assets (FLA) return with the RBI by 15/07/ of each year, reporting the position as at 31/03/ of the preceding financial year. Non-filing of the FLA return is a FEMA contravention subject to the Late Submission Fee (LSF) mechanism.

For Indian companies with foreign subsidiaries (outbound ODI), the Annual Performance Report (APR) must be filed by 31/12/ of each year covering the preceding financial year. The ODI transaction itself must be reported in Form FC (or its equivalent in the updated FEMA reporting framework) before the overseas investment is made.

When should you execute a parent subsidiary intercompany agreement?

The agreement must be executed before the first transaction between the parent and subsidiary occurs. This is not a regulatory formality that can be treated as post-hoc documentation. The CBDT’s position, reflected in transfer pricing audit practice and upheld by appellate authorities, is that the intercompany agreement must be contemporaneous with the transactions it governs.

The practical sequencing for a new group structure is as follows:

1. Incorporate the subsidiary and obtain its Certificate of Incorporation, PAN, and GST registration
2. Map every category of transaction that will flow between the parent and subsidiary (services, IP licensing, loans, cost allocation)
3. Draft and execute a separate intercompany agreement for each transaction category before any invoice is raised
4. Prepare the initial transfer pricing policy and select the ALP method for each transaction type
5. If opting for safe harbour, file Form 49 (old Forms 3CEFA/3CEFB/3CEFC) before the relevant tax year deadline
6. Process the first invoice and make the first payment only after Steps 1-4 are complete
7. Obtain TRC from the foreign parent and file Form 41 (old Form 10F) before the first cross-border remittance
8. File Form 145 and Form 146 (old Form 15CA and 15CB) for each outbound payment above the relevant threshold

Groups that are already transacting without a signed agreement need to execute agreements promptly with a clearly stated effective date that matches the actual start of transactions, supported by contemporaneous evidence (board minutes, email chains, early invoices, bank statements). The agreement should not be backdated. The effective date clause and supporting evidence together establish the transaction history without requiring the document itself to have been signed on an earlier date.

Common mistakes that cost companies time, tax, and penalties

1. Treating the WOS exemption as a blanket clearance

A wholly owned subsidiary does not need a shareholder resolution under the second proviso to Section 188(1) of the Companies Act for transactions with its holding company. That exemption is widely read as meaning the subsidiary can transact freely without any formal documentation. The board resolution is still required, TP documentation is still required, GST compliance still applies, and FEMA filings are still mandatory. The WOS exemption covers exactly one thing: the shareholder ordinary resolution. Everything else remains in place.

2. Executing the agreement after invoices have been raised

The CBDT does not accept an intercompany agreement signed in October as contemporaneous documentation for transactions that began in April. Groups frequently raise management fee invoices for the first several months of a financial year and then approach their advisors to draft the agreement before the tax return deadline. In a TP audit, a TPO will note the dating inconsistency, and the agreement will carry little evidential weight. The penalty for inadequate TP documentation is 2% of the transaction value.

3. Vague scope in the service agreement

CBDT challenges to management fee deductibility almost always start with the scope clause. An agreement that describes services as “management support and advisory” without specifying what was delivered, by whom, at what frequency, and with what measurable outcome gives the TPO the basis to argue that no service was actually rendered or that the Indian subsidiary derived no identifiable benefit. Each service must be described with enough specificity that an independent reviewer can assess the value delivered.

4. TP price and GST value inconsistency

Setting the management fee at ₹50 lakhs per quarter for TP purposes and then treating the same flow as a cost recharge at nil value for GST purposes, because the group views it as an internal allocation rather than a service, results in dual exposure. The GST officer assessing import-of-services liability will apply Rule 28 of the CGST Rules and raise a demand on the open market value. The intercompany agreement and the pricing basis within it must be applied consistently across both tax frameworks from the outset.

5. Missing TRC and Form 41 before the first remittance

Groups that are diligent about the intercompany agreement frequently overlook the DTAA documentation sequence. The Indian subsidiary incorporates, the intercompany service agreement is signed, invoices flow for 12 to 18 months, and then the group attempts its first remittance to the foreign parent. At that point, the foreign parent does not have a valid TRC and Form 41 (old Form 10F) on the Indian income tax portal. The AD bank processes the remittance at the domestic rate (approximately 22.88% all-in). The refund claim process for the excess TDS takes 18 to 24 months. The TRC should be obtained and Form 41 filed electronically before the first payment, not at the point of the first remittance.

6. Not updating the agreement when the business relationship changes

An intercompany agreement executed at the time of incorporation with a scope limited to IT support does not cover the additional services, including finance, HR, and compliance, that the parent starts providing as the subsidiary grows. Running transactions outside the scope of the signed agreement, or at pricing that has moved materially away from the agreement’s formula, creates the same documentation gap as having no agreement at all. Agreements should be reviewed at the start of each financial year alongside the TP documentation refresh, and amended in writing before any scope or pricing change takes effect.

Case study: intercompany agreement remediation for a Bengaluru-based SaaS subsidiary

Situation: Series A SaaS company based in Bengaluru, wholly owned subsidiary of a US parent incorporated in Delaware. Twelve months of monthly management fee invoices raised and paid before an intercompany agreement was executed.

Challenge: No signed agreement for the twelve-month invoice period. Agreement drafted retrospectively in November with no board minutes establishing prior approval. GST on import of services (RCM) not discharged for any of the twelve months. TRC for the US parent not obtained; TDS deducted at 22.88% for all remittances. Transfer pricing study absent; Local File prepared at year-end with no contemporaneous documentation.

What Treelife did: Drafted an intercompany services agreement with a clearly stated effective date of the first transaction month, supported by email correspondence and board approval minutes that were contemporaneously recoverable. Prepared a Transfer Pricing study and Local File with contemporaneous evidence from invoice records and deliverable documentation. Discharged twelve months of pending GST RCM liability with interest; filed revised GSTR-3B returns. Obtained TRC from the US parent and filed Form 41 (old Form 10F) to establish DTAA eligibility. Filed revised Form 145/146 (old Form 15CA/CB) for the period of overpayment and initiated TDS refund claim.

Outcome: TP documentation gap remediated before the return filing deadline. GST RCM liability discharged with interest totalling ₹4.2 lakhs, avoiding penalties. TDS refund claim filed for ₹18.6 lakhs of excess withholding. Intercompany agreement and TP framework put on a structured annual renewal cycle for subsequent years.

FAQ’s on Parent Subsidiary Intercompany Agreement

Q: Is a parent subsidiary intercompany agreement legally mandatory in India?
A: There is no single provision that mandates an intercompany agreement by that name. What Indian law mandates is board approval for related party transactions under Section 188 of the Companies Act, arm’s length pricing documentation under Sections 162-173 of the Income Tax Act 2025, and GST compliance for import of services. A signed intercompany agreement is the primary document through which all of these requirements are satisfied. In practice, operating without one means failing all three frameworks simultaneously.

Q: Does Section 188 of the Companies Act 2013 apply to wholly owned subsidiaries?
A: Yes. A subsidiary is a related party of the holding company under Section 2(76) of the Companies Act. Section 188 applies to transactions between them. The second proviso to Section 188(1) grants a WOS an exemption from the shareholder resolution requirement (where the accounts are consolidated and placed before shareholders). Board approval is still required. Transactions at arm’s length in the ordinary course of business are exempt from the Section 188 approval mechanism entirely, but must still be disclosed in Form AOC-2 if material.

Q: What is the penalty for not maintaining transfer pricing documentation in India?
A: Under the Income Tax Act 2025 framework (effective Tax Year 2026-27), the penalty for failure to maintain prescribed TP documentation is 2% of the transaction value under Section 174 (TP-specific penalty provision). Where the TPO makes an upward adjustment and the taxpayer has failed to maintain documentation, an additional penalty of 50% of the tax on the adjusted income applies under the general under-reporting penalty provision (Section 457). Interest is also charged on the adjustment amount at the prescribed rate.

Q: What is the safe harbour margin for an IT services intercompany agreement in India?
A: Under the Income Tax Rules 2026 (effective Tax Year 2026-27, i.e., from 01/04/2026), all IT services have been consolidated into one category with a uniform margin of 15.5% operating margin on operating costs, and a transaction threshold of ₹2,000 crore per year. This covers software development, ITeS, KPO, and contract R&D for software. The safe harbour is elected for a 5-year block using Form 49 (old Forms 3CEFA/3CEFB/3CEFC). For FY 2025-26 (AY 2026-27) under the old CBDT Notification No. 21/2025, the margin for IT/ITeS services was 17-18% and the threshold was ₹300 crore. The 15.5% and ₹2,000 crore thresholds apply from Tax Year 2026-27 onwards.

Q: What GST applies when an Indian subsidiary pays management fees to its foreign parent?
A: The payment constitutes an import of services under Section 2(11) of the IGST Act. The Indian subsidiary must discharge IGST at 18% under RCM, issue a self-invoice, pay the tax in cash, and report the transaction in GSTR-3B. The subsidiary can claim ITC on the IGST paid in the same or subsequent return period, subject to standard ITC eligibility conditions under Section 17(5) of the CGST Act.

Q: Does GST apply if the foreign parent provides services to the Indian subsidiary at no charge?
A: Yes. Schedule I of the CGST Act deems the import of services between related persons to be a supply even where no consideration is charged, provided the service is imported in the course or furtherance of business. The Indian subsidiary must self-assess GST on the open market value of the service under Rule 28 of the CGST Rules.

Q: What changed for intercompany management fee payments under the Finance Act 2026?
A: The Finance Act 2026 omitted Section 13(8)(b) of the IGST Act effective 30/03/2026, shifting the place of supply for intermediary services from the supplier’s location to the recipient’s location. For Indian subsidiaries receiving services from foreign parents who act as intermediaries (booking agents, brokers, facilitators), such inbound services now qualify as imports of services and trigger RCM for the first time. Indian entities providing outbound intermediary services to foreign clients now qualify for zero-rated export treatment.

Q: When must the TRC and Form 41 (old Form 10F) be in place for cross-border intercompany payments?
A: Both must be in place before the first remittance to the foreign parent. The TRC confirms the foreign parent’s residency for the financial year of the payment. Form 41 (the renumbered Form 10F under the IT Rules 2026) is filed electronically by the foreign parent with the Indian income tax department. Without both, the Indian subsidiary must deduct TDS at the domestic rate (approximately 22.88% all-in for most categories of payment to US entities), rather than the reduced DTAA rate (typically 10-15%).

Q: Does an intercompany loan from a foreign parent to an Indian subsidiary require RBI approval?
A: ECB from a foreign parent to an Indian subsidiary does not require prior RBI approval under the automatic route, but it requires filing of Form ECB with the RBI through the Authorised Dealer bank before drawdown. Monthly ECB-2 returns must be filed as long as the loan is outstanding. The interest rate must be within RBI’s all-in-cost ceiling and arm’s length for transfer pricing purposes. Minimum average maturity requirements apply.

Q: Can an intercompany agreement be backdated if transactions have already occurred?
A: No. An agreement cannot be backdated. That is, it cannot be made to appear as having been signed on a date earlier than actual signing. What is permissible is executing an agreement today with a clearly stated effective date corresponding to the first transaction date, supported by contemporaneous evidence (board minutes, email approvals, early invoices) that the arrangement was in place from that earlier date. Backdating a signature date is a potential fraud under Indian law and is also a major audit red flag.

Q: What is the block TP assessment option and how does it help intercompany agreements?
A: Under Rule 82 of the Income Tax Rules 2026 (effective Tax Year 2026-27), a taxpayer can apply to have the arm’s length price determined by the TPO for a given year extended to similar transactions in the two immediately following years. For groups with stable, recurring intercompany arrangements (fixed-fee management services or IT support), this reduces annual benchmarking costs and reduces the risk of year-on-year TP disputes. The TPO must declare the application valid within one month of filing.

Q: What documents must accompany a TP-compliant intercompany agreement?
A: The intercompany agreement is one component of a broader documentation package. For Tax Year 2026-27 onwards, the full package under the ITA 2025 and IT Rules 2026 framework includes: Local File (FAR analysis, comparables, economic analysis, a copy of the signed agreement, invoices), Form 48 (accountant’s TP certification, due 31 October of the tax year, one month before the 30 November ITR deadline), and for large groups, a Master File (Form 56, replacing old Form 3CEAA) and Country-by-Country Report (Form 3CEAD). The Local File must be contemporaneous and ready for production within 30 days of an income tax department request.

Q: What disclosures must be made in the Board’s Report for intercompany transactions?
A: Under Section 188(2) of the Companies Act, every related party transaction approved under Section 188(1) must be disclosed in the Board’s Report in Form AOC-2, with justification for entering into the transaction. Under Ind AS 24 (Related Party Disclosures) and AS 18, all material related party transactions, including those exempt from Section 188 on arm’s length grounds, must be disclosed in the financial statements. For listed companies, SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations 2015 require Audit Committee pre-approval and quarterly disclosure of all related party transactions.

Q: Can an Advance Pricing Agreement replace the need for an intercompany agreement?
A: No. An Advance Pricing Agreement (APA) under Section 92CC of the ITA 1961 (reorganised under the ITA 2025 framework) is a binding agreement between the taxpayer and CBDT on the ALP or the methodology for determining it for up to five prospective years, with rollback available for up to four preceding years. An APA determines the pricing basis; it does not replace the intercompany agreement that governs the commercial terms of the transaction. Both must exist independently.

Q: Does transfer pricing apply to transactions between an Indian parent and its Indian subsidiary?
A: Yes, where aggregate domestic intercompany transactions between Indian associated enterprises exceed ₹20 crore in a financial year, Specified Domestic Transaction (SDT) provisions apply. The Indian entities must maintain TP documentation, select an arm’s length pricing method, and file Form 48 (old Form 3CEB for periods before Tax Year 2026-27) for those domestic transactions. An intercompany agreement is equally necessary for a domestic group structure as for a cross-border one. The Section 188 Companies Act approval requirements also apply regardless of whether the counterparty is resident or non-resident.

Regulatory references

• Companies Act 2013: Section 188 (Related Party Transactions), Section 189 (Register of Contracts, Form MBP-4), Section 177 (Audit Committee), Section 2(76) (Related Party definition), Section 2(87) (Subsidiary definition)
• Companies (Meetings of Board and its Powers) Rules 2014: Rule 15 (conditions for Section 188 approvals, WOS exemption)
• Income Tax Act 2025 (effective 01/04/2026): Sections 161-173 (Transfer Pricing); Section 162 (Associated Enterprises); Section 165 (Arm’s Length Price); Section 167 (Safe Harbour); Section 171 (TP documentation); Section 172 (Accountant’s report, Form 48); Section 174 (TP penalty); SDT provisions (Section 164) for domestic intercompany transactions
• Income Tax Rules 2026 (notified by CBDT on 20/03/2026, effective 01/04/2026): Rules 77-85 (TP methods and documentation); Rule 82 (Multi-year block TP assessment); Rules 86-102 (Safe Harbour); Form 48 (replacing Form 3CEB); Form 49 (replacing Forms 3CEFA/3CEFB/3CEFC for safe harbour election); Form 56 (replacing Form 3CEAA for Master File constituent entity report); Form 41 (replacing Form 10F); Form 145 (replacing Form 15CA); Form 146 (replacing Form 15CB)
• Income Tax Act 1961 (applicable to FY 2025-26 and prior periods): Sections 92-92F (TP), Section 92CB (Safe Harbour), Section 92CC (APA), Section 90(5) (Form 10F), Section 195 (withholding on non-resident payments), Form 3CEB, Forms 3CEFA/3CEFB/3CEFC, Form 15CA, Form 15CB
• CBDT Notification No. 21/2025 dated 25/03/2025: Safe Harbour Rules extension for AY 2025-26 and AY 2026-27 under the 1961 Act, with IT services threshold raised to ₹300 crore (superseded by IT Rules 2026 for Tax Year 2026-27 onwards)
• IGST Act 2017: Section 2(11) (Import of Services), Section 5(3)/(4) (Reverse Charge), Section 13(2) (Place of Supply default rule)
• Finance Act 2026: Omission of Section 13(8)(b) of the IGST Act effective 30/03/2026
• CGST Act 2017: Schedule I (Supply between related persons without consideration); Section 17(5) (Blocked credits)
• CGST Rules 2017: Rule 28 (Valuation in related party transactions)
• Notification No. 10/2017-Integrated Tax (Rate) dated 28/06/2017: RCM on services from non-resident to resident
• FEMA 1999 and RBI Revised ECB Regulations: FEMA 3(R)(5)/2026-RB dated 09/02/2026, published 16/02/2026; A.P. (DIR Series) Circular No. 23 dated 18/02/2026 (removes all-in-cost ceiling; MAMP standardised at 3 years; borrowing limit raised to higher of USD 1 billion or 300% of net worth)

External sources

• Ministry of Corporate Affairs
• Income Tax India
• Central Board of Indirect Taxes and Customs (CBIC)
• Reserve Bank of India