India Entry Strategy: Why Transfer Pricing Starts Before the First Invoice

India is a fast-growing market and a priority for many multinational groups. Often, the first step is simple—sell to Indian customers and start earning India-linked revenue, even before setting up a local company. As business builds, the next step is usually to incorporate an Indian entity and create a formal presence.

This is also the stage where transfer pricing (TP) should be ideally planned, i.e before the first intercompany invoice is raised. Companies often tend to make the mistake of assuming that TP is only a year-end documentation exercise or it starts when an audit/assessment notice arrives. They fail to understand that TP challenges will be encountered much earlier, thus when the group decides the India operating model, it should decide who will perform key functions, and how the Indian entity will pay (or be paid by) other group companies. If these decisions are questioned later, restructuring “after the fact” can be costly and difficult to manage. A clearer Day 1 approach can avoid many of these issues.

One area that frequently comes under Indian transfer pricing scrutiny is management fees and intra-group service arrangements.

Many groups treat these charges as routine internal allocations and rely on standard intercompany agreements with broad/standard service descriptions. In many cases, invoices are raised and payments are remitted outside India/foreign remittances are done, but the documents do not clearly explain 

1. why India is paying, 
2. what services were received, and 
3. how the costs were allocated (Is the cost split based on turnover, headcount, or assets) 

As a result, tax authorities look beyond the invoice and examine the 

• commercial rationale;
• operational substance;
• where value is created;
• who makes key decisions, and 
• whether an unrelated third party would have paid for the same services.

In transfer pricing assessments, officers often determine the arm’s length price for these services as Nil if the company fails to substantiate

• that the services were actually provided,
• that India received a real business benefit, 
• that an independent party would have paid for them, and that the arrangement has commercial substance.

ASC has been handling transfer pricing matters, structuring and disputes for past several decades, and in our practical experience, most disputes typically come down to these areas:

• Benefit test: Can the company demonstrate what commercial or economic benefit the Indian entity received?
• Duplication of functions: Is India already performing the same work through its local team (for example, finance, HR, procurement, IT, admin support, etc.)?

• Shareholder activities: Are the costs mainly for the parent’s own needs (for example, board reporting, investor communications, group restructuring oversight) and therefore not chargeable to India?

• Evidence: Are there strong, contemporaneous records (deliverables, emails, meeting notes, time sheets, governance records, system access logs, etc.) to prove the services were actually rendered?

• Another common misconception is that a benchmarking study alone will “take care of” transfer pricing issues, if any arise in future. Benchmarking can support the price, but it cannot replace the basics—which is there should be a clear commercial rationale, a genuine service need, and evidence that the services were actually received. 

Over the years, Indian courts and tribunals have examined management fee arrangements in several cases, and broadly the decisions show that while taxpayers are expected to maintain proper evidence and commercial justification, tax authorities also cannot disregard genuine business arrangements without proper transfer pricing analysis

• In Gemplus India [TS-100-ITAT-2010 (Bang)], the Bangalore ITAT held that the taxpayer could not demonstrate the actual nature and volume of services received from its Singapore group company or show that the payments were commensurate with the benefits received. The Tribunal observed that the allocation of costs was not based on actual services rendered to India and upheld the adjustment.

• In Volvo India (P.) Ltd. [TS-993-ITAT-2016(Bang)], the Tribunal emphasized that the burden is on the taxpayer to prove that services were actually rendered by the associated enterprise. Where adequate evidence is not maintained, tax authorities may question the arrangement.

• In FCB Ulka Advertising Pvt Ltd [TS-600-ITAT-2019(Mum)], the Mumbai ITAT held that the TPO cannot determine the arm’s length price as “nil” without applying one of the prescribed transfer pricing methods, especially where the taxpayer had produced emails, presentations, advertising materials, allocation workings, and other supporting evidence to demonstrate receipt of services and business benefit.

• In Fugro Survey (India) Pvt. Ltd. Vs. DCIT [TS-367-ITAT-2025(Mum)-TP], the Mumbai ITAT accepted that emails, invoices, screenshots, agreements, program details, and related records can constitute valid evidence for management and R&D services. The Tribunal also reiterated that the TPO cannot decide allowability of expenditure under Section 37 while conducting a transfer pricing review.

• In Virinchi Ltd Vs. DCIT [TS-564-ITAT-2025(HYD)-TP], the Hyderabad ITAT deleted a transfer pricing adjustment where the taxpayer had maintained invoices, man-hour records, time sheets, and benchmarking under TNMM for services rendered through its overseas group entity. The Tribunal held that the arm’s length price could not be arbitrarily determined as “nil” merely because certain additional documents were not furnished, particularly where the arrangement was part of an ongoing commercial project and similar transactions had been accepted in earlier years.

Management and routine support services are often charged on a cost-plus basis. In some cases, intra-group services are tested under TNMM due to the fact that such services/ activities are closely linked and cannot be evaluated separately and thus broadly, if the overall margins are in line with the industry, companies argue that the related-party charges are also reasonable.

Intercompany agreements are often prepared using vague/brief standard templates and include only brief service descriptions. In today’s audit environment, that is usually not enough. The agreement should clearly describe 

• the exact nature of services;
• the allocation method;
• cost pools (direct vs. indirect costs);
• the mark-up policy (if any);
• the documents/deliverables that will be maintained as evidence (reports, dashboards, software access); 
• and an explicit exclusion for shareholder activities. 

Vague references such as “management support” or “administrative support” are typically insufficient.

Accordingly, companies expanding in India should build transfer pricing into the operating model from the start, rather than treating it as a year-end compliance exercise. Management teams should be able to answer a few practical questions: 

• Does the structure reflect where value is created?
• Is the allocation policy commercially reasonable and defensible?
• Can we explain why the Indian entity needs these services?
• Do we have contemporaneous evidence (not created only during an audit)? 
• Are GST/withholding tax implications and permanent establishment (PE) risks understood? 
• Are shareholder activities clearly identified and excluded from charges to India?

Where the Indian entity pays management fees or service charges to overseas group companies, one issue that is often misunderstood is that the foreign company itself may also have tax and compliance obligations in India. Many groups assume that once withholding tax is deducted (or a treaty position is applied), the overseas entity does not need to do anything further in India. In practice, Indian tax authorities may still examine whether the foreign company is required to file a tax return in India, whether the income should be treated as fees for technical services (FTS), royalty, or business income, and whether the arrangement creates any permanent establishment (PE) exposure in India. In some situations, transfer pricing compliance requirements may also apply to the overseas entity. These issues are often not considered properly during the structuring stage and usually come up later during tax assessments or audits.

Provision of Management services:-

There may also be a scenario where the Indian entity itself provides management, technical, support, or coordination services to overseas group companies. This is especially seen in GCC and shared service models where India teams support global operations in areas such as finance, procurement, analytics, technology, HR, legal, and operational management.

In many such cases, companies mainly focus on applying a cost-plus markup and preparing a benchmarking study. However, the bigger issue is whether the structure properly reflects what the Indian entity is actually doing, who is making decisions, and how much value is really being created from India. India operations often grow and move from routine execution work to being more strategic and managerial function. In such scenarios, tax authorities examine whether the Indian entity is being adequately compensated for the role it plays within the global group.

Broadly, transfer pricing rules and safe harbour frameworks usually categorize such services into two broad categories. 

• The first category is low value or routine support services — things like basic HR support, accounting, payroll, admin work, or coordination activities. For these kinds of services, OECD guidance generally recongnizes a simple cost-plus 5% markup approach.

• The second category covers higher-value services such as IT services, technology support, analytics, and other knowledge-based or specialized support functions commonly performed by GCCs and shared service centres. Earlier, India’s safe harbour rules generally accepted markups in the range of around 17% to 24% for certain categories of IT, ITeS, KPO, and related service arrangements, which now stands reduced and revised to 15.5% for eligible IT and technology-enabled services.

This is why the actual nature of the services becomes very important. A company cannot simply call something “management support” and apply a lower markup. Tax authorities now look at what work is actually being done, who is making decisions, how much value is being created from India, and whether the services are routine support activities or more strategic and high-value functions. In practice, this classification often directly impacts the transfer pricing position and the markup that can be justified.

Conclusion

In summary, companies should not treat transfer pricing as a year-end compliance item. It should be built into the India entry and operating structure from Day 1—so the legal agreements, people/functions on the ground, cost allocations, and evidence trail all align with how the business actually runs. 

A practical way to start is to 

1. map who does what and where value is created,
2. define which services are genuinely needed and how they will be charged, 
3. set clear allocation keys and governance, and 
4. create simple, routine documentation as the work happens. 

Doing this early will help reduces audit risk and avoids last-minute fixes later and help in smooth business operations.