Intercompany Agreements in India — Why They Must Precede Transactions, Not Follow Them

The fundamental rule: agreements must precede transactions

India's transfer pricing regulations under Section 92 of the Income Tax Act require that international transactions between associated enterprises be at arm's length. The starting point for documentation is the intercompany agreement that governs the transaction.

When a transfer pricing audit finds that an agreement was signed after transactions started, or was backdated, the credibility of the entire transfer pricing documentation collapses and the AO will typically disallow the entire expense claimed by the Indian entity.

The four intercompany agreements every foreign-owned Indian company needs

First is the Management Services Agreement governing management fees for corporate functions including finance, HR, legal, IT, and strategy. Second is the Technology Licence Agreement governing royalty payments for use of the parent's intellectual property. Third is the Secondment Agreement if the parent seconds employees to the Indian subsidiary. Fourth is the Intercompany Loan Agreement if the parent provides loans to the Indian subsidiary.

What must be in the Management Services Agreement

The MSA must contain: a precise description of services (vague descriptions are rejected by Indian TP officers), arm's length price determination referencing the applicable transfer pricing method, benefit test documentation showing the Indian entity derived benefit from the services, governance provisions on who approves services and what records must be maintained, and term and termination provisions.

The MSA is the most scrutinised intercompany agreement in Indian TP audits.

Arm's length pricing — what rates are defensible in India

Management services: Cost plus 5-15% markup is typically accepted. Royalties for technology: 1-3% of net sales is the range Indian TP officers typically accept and rates above 3-5% consistently attract adjustment. Interest on loans: SOFR plus a credit spread, typically 3-6% per annum. IT services: Cost plus 10-20% for development and Cost plus 5-12% for support and maintenance.

The Form 3CEB — annual certification requirement

Every Indian company that has entered into international transactions with associated enterprises must file Form 3CEB — a report by a Chartered Accountant certifying that international transactions are at arm's length. This must be filed by November 30 along with the income tax return.

The CA signing Form 3CEB bears personal professional liability for the certification. This is not a box-ticking exercise.

Intercompany agreements that are TP-compliant, legally sound, and signed before transactions begin are a Day 1 requirement. Our team drafts agreements that have withstood Indian TP scrutiny. Book a consultation to review your current setup.