India–US transfer pricing: what startups actually need to do

When transfer pricing applies

Transfer pricing rules apply to transactions between associated enterprises — for example a Delaware parent and its Indian subsidiary, or an Indian company and its US subsidiary. Both countries require those transactions to be priced at arm’s length: what unrelated parties would have agreed in similar circumstances.

• Software development or support done in India for the US entity.
• Sales and marketing services provided by the US entity for the Indian parent.
• Licences of IP or brand, intercompany loans and guarantees.
• Cost recharges — including ESOP costs and shared tools.

Common India–US models

More on the structures themselves: Delaware flip and US subsidiary of an Indian company.

Pricing methods

For service arrangements, the most common approach on both sides is a profit-level method — India’s Transactional Net Margin Method (TNMM) and the US Comparable Profits Method — testing whether the service provider earns a mark-up on its costs in line with comparable independent companies. Licensing, loans and tangible goods may call for other methods.

India’s 2026 safe harbour: the simpler route

In practice, an Indian development centre that earns at least the prescribed margin on its costs can accept the safe harbour and avoid a benchmarking dispute on that transaction in India. Two cautions: the US side still expects arm’s-length pricing under its own rules, and a higher Indian mark-up means more profit taxed in India and less in the US — model both sides before choosing.

India-side compliance

• Accountant’s report: filed annually — Form 3CEB for years up to FY 2025-26 and Form 48 under the Income-tax Rules, 2026 thereafter — before the income-tax return due date.
• Documentation: contemporaneous documentation of the functions, assets, risks and benchmarking is required above the prescribed transaction thresholds; larger groups also have master-file and country-by-country obligations.
• Intercompany agreements that match what actually happens.
• Remittances for services or royalties follow FEMA and withholding rules — see the India–US DTAA guide.

US-side compliance

• Section 482 gives the IRS power to adjust related-party pricing that isn’t at arm’s length.
• Documentation prepared by the time the return is filed helps protect against transfer-pricing penalties if the IRS makes an adjustment.
• Form 5472 reports transactions between a 25%-foreign-owned US company and its foreign related parties. See the Form 5472 guide.

Setting it up: a practical sequence

1. Map every flow between the two companies — services, IP, people, money.
2. Characterise each entity: who owns the IP, who takes the risk, who does routine work.
3. Choose the model and mark-up; check the Indian safe harbour and the US view together.
4. Sign intercompany agreements before invoicing starts.
5. Invoice regularly (monthly or quarterly), settle through banking channels, and keep supporting records.
6. Prepare annual documentation and file Form 48 in India and the related US forms.

Everything else on the calendar: US company compliance calendar.

Running an Indian subsidiary for a foreign parent? See Indian subsidiary compliance and repatriating profits from India.

Frequently asked questions

Please note: this guide is general information based on the rules as they stood on the review date above. Regulations and RBI/CBDT procedures change often — please get advice on your specific facts before acting.