पाठशाला Pathshala · नियम Niyam, Law and compliance · Lesson 23 · Scale

Transfer pricing and the foreign subsidiary

Once a company has an entity in Delaware or Singapore, every invoice, licence and loan between the two must be priced as if they were strangers. Set the price deliberately and document it every year.

Pathshala, The Founder Library · 11 October 2026 · 7 min read

Harbour cranes in silhouette against an orange sky over the sea in Singapore. — Photograph: Ravish Maqsood · Pexels

A Bengaluru team of forty engineers builds a product sold in the United States through a Delaware parent. For three years the parent sends money whenever payroll is due and nobody invoices anything. Then the Indian company is picked for scrutiny. The officer asks what the Indian company earned for its work. The answer, on paper, is nothing, and the officer proposes an answer of his own.

Transfer pricing is the rule that transactions between related entities in different countries must be priced as unrelated parties would price them. It matters to a startup the moment it has two entities: an Indian company with a US or Singapore subsidiary that sells abroad, or a foreign holding company with an Indian subsidiary that does the work. This lesson explains when the rules apply, how the price is set and tested, what must be documented each year, and the exchange control rules that sit beside the tax rules when money crosses the border.

A note on section numbers

The Income-tax Act 2025 replaced the Income-tax Act 1961 from 1 April 2026, and the Income-tax Rules 2026 were notified on 20 March 2026. Section and rule numbers have changed with it. The Income Tax Department’s own transfer pricing page, read on 10 October 2026, still explains the regime in the old numbering: sections 92 to 92F and Rules 10A to 10CA. This lesson uses that numbering where it cites a provision, so that a reader can follow the department’s explanation; ask your chartered accountant for the corresponding section of the 2025 Act before quoting one in a filing.

When the rules apply

The rules apply to an international transaction between two associated enterprises, at least one of them non-resident. The department’s page summarises the tests for association. One enterprise holds, directly or indirectly, 26 per cent or more of the voting power in the other. One has lent the other 51 per cent or more of the book value of its total assets. One guarantees 10 per cent or more of the other’s total borrowings. Common control of the board, dependence on the other’s intellectual property, and several other links also count. For a founder with a Delaware parent and an Indian subsidiary, the answer is simply yes: the parent owns the subsidiary.

An international transaction is defined broadly. It covers the purchase, sale or lease of goods and property, the provision of services, lending and borrowing, guarantees, the use of intangible property, and any arrangement to share costs. For a startup the usual list is short: software development or support services from India to the parent; a licence of the brand or the code from whichever entity owns it; recharges of shared salaries, cloud bills and tools; intercompany loans; and the issue of shares by the Indian company to the parent. Each is a priced transaction, even when nobody raised an invoice. Certain domestic transactions between related parties are also caught, as specified domestic transactions, once their aggregate exceeds ₹20 crore in a year, and the [related-party lesson](/library/related-party-transactions-founders-conflicts) covers their Companies Act side.

Setting the price: tested party, method, range

The arm’s length price is the price applied, or proposed, in a transaction between unrelated persons in uncontrolled conditions. The law offers five methods plus “any other method”: comparable uncontrolled price, resale price, cost plus, profit split and transactional net margin. In practice an Indian subsidiary that writes code or answers support tickets for its parent is a low-risk service provider, so it is the tested party, and the method compares its net mark-up on cost with the mark-ups earned by independent Indian companies doing similar work. Choosing the comparables is where most of the argument with the tax officer happens.

The comparables do not produce a single answer. Under Rule 10CA, as the department’s page explains it, where there are six or more comparable results the arm’s length range runs from the 35th to the 65th percentile. A price inside the range is accepted. A price outside it is moved to the median. With fewer than six data points the arithmetic mean is used, with a tolerance of 1 per cent for wholesale trading and 3 per cent otherwise. One protection matters more than the rest: an adjustment can only increase income taxable in India, never reduce it.

Try it below. The comparables are illustrative. Set the subsidiary’s cost and the mark-up it charges the parent, then shift the comparables as a different search or year might.

Take the figure’s starting point. The Indian subsidiary spends ₹12 crore and bills the parent at cost plus 8 per cent. The eight comparables put the range at 10.4 to 15.5 per cent and the median at 12.95 per cent. Eight per cent is below the range, so the price moves to the median, and the subsidiary is treated as having earned ₹59.4 lakh more than it booked, taxed in India in the year of the adjustment. The parent’s tax authority is under no obligation to allow a matching deduction, so the group can pay tax twice on the same profit unless it pursues relief under the tax treaty. Nothing about the business changed; only the mark-up was set without reference to the market.

Two lessons come out of the figure. A mark-up chosen at the bottom of last year’s range can fall out of this year’s when the comparables move, so price with a margin of safety rather than at the edge. And the cost of falling outside is not the gap to the bottom of the range but the gap to the median, which is larger. Add the secondary adjustment rules (section 92CE in the old numbering) and the limit on interest paid to an associated lender (section 94B), and the cheapest strategy is a defensible mark-up agreed in a written intercompany agreement before the year begins.

Transfer pricing is not a tax trick. It is the question of what the Indian company earned for its work, answered before an officer answers it for you.

The documents, every year

Four papers keep the arrangement defensible. An intercompany agreement for each flow, signed before the work starts, stating the service, the pricing basis and the invoicing cycle. Monthly or quarterly invoices that follow it, with the money actually received. A transfer pricing study each year: the functions, assets and risks of each entity, the method, the comparables search and the result. And the accountant’s report on international transactions that the law requires before the return is filed, which the department’s page lists under section 92E in the old numbering. Where a group expects long relationships, an advance pricing agreement with the Board, available for international transactions, fixes the method for several years in exchange for disclosure up front.

The exchange control side

Tax decides the price; FEMA decides whether the money may move. When a foreign parent puts money into its Indian subsidiary, the issue is foreign direct investment under the Reserve Bank’s Master Direction on Foreign Investment, with its pricing floor and reporting, which the [FEMA lesson](/library/fema-for-founders-when-a-foreigner-invests) covers. When an Indian company sets up a subsidiary abroad, the investment is overseas direct investment under the Master Direction on Overseas Investment, updated as on 1 April 2026. Form FC goes to the authorised dealer bank with its documents to obtain a unique identification number on or before the first remittance. An Annual Performance Report follows each year, certified by a chartered accountant where the foreign entity has no statutory audit. Dues receivable from the foreign entity are to be repatriated in freely convertible currency, and the Direction does not permit an investment that results in a structure with more than two layers of subsidiaries. Founders who flip to a foreign parent after an Indian company already exists should have the sequence of these steps planned by a lawyer before any share moves.

An aerial view of a container port lit up at night beside a city. — Tax decides the price of what crosses the border. FEMA decides whether the money may follow it. Photograph: Fatih Turan · Pexels

The annual transfer pricing calendar

In the first month of the financial year, list every flow between the entities and confirm each has a signed agreement and a pricing basis. Each quarter, raise and settle the invoices, so that cash and books match and money is not left owed across the border. At the half year, compare the mark-up so far with the last study’s range and adjust prospectively if it has drifted. After year end, commission the study, have the accountant’s report signed before the return deadline, and file the Reserve Bank’s overseas investment returns. Keep each year’s pack in the data room, because the first question in a cross-border acquisition is whether the transfer pricing has ever been challenged.

Nothing here is legal or tax advice; confirm the current rule with a chartered accountant or lawyer before acting.