Cross-border transactions between an Indian company and its foreign associated enterprises are common in international business.
The Foreign Business entering Indian Market comes with a growth and profit perspective.
Here the financial transaction is bound to happen between the Indian company and its foreign associated enterprise which can be classified under:
- Service Fee
- Royalty
- Loan and interest on Loan
- License Fee Etc.
The transactions between the related parties are tested on various parameters to get the Arm’s length price in the given market and the business scenario.
The obligation to determine Arm’s Length Price is of prime importance for each and every international transaction between Associated Enterprises irrespective of their value. There is no minimum threshold defined under the act in consideration to determination of ALP (Arm’s Length Price)
1. Regulatory Attention:
The transactions are regulated so that the companies do not take undue benefit of BEPS and avoid taxation in the country or countries where the business/ businesses are situated.
Any outbound payment to a related party of Associated Enterprise attracts the attention of regulators in India.
The Regulators are distinct and provide the separate guidelines for their independent checks.
| Regulator | Checking/ Control Area | Governing Law |
|---|---|---|
| Income Tax Department | To see that the transaction is at arms length. The profit is correctly attributed and taxed in India. Filing yearly from 3CEB (Form 48 from tax year 2026-27) for tax year ending 31st March. |
Income Tax Act, 2025 from tax year 2026-27 onwards and applicability of new forms. |
| Reserve Bank of India Through AD Bank |
Permissibility of transaction. Payment classification between current and capital transaction The transaction is within the prescribed limit. Documentation Includes – Form A2, Invoice / Agreement, tax certification etc. RBI’s Pricing Guidelines for share valuation and ECB pricing. |
Foreign Exchange Management Act, 1999 |
| Ministry of Corporate Affairs | Identification of Related Party and Transactions between them. Disclosure requirement of related party under the Act. Board/ Shareholder Approval Disclosure of Interest by the company. Audit Committee approval where required. Proper disclosure as per the Act. |
Companies Act, 2013 |
| GST | The payment is correctly valued. To see if GST has been paid under Reverse Charge Mechanism. Input Tax Credit under GST if applicable. Time of supply of service/ goods. |
CGST / IGST Act, 2017 |
| Custom Valuation | Custom Valuation where the imported goods are linked to royalty/ license fees. | Customs Act, 1962
|
Each regulator is distinct and separate clearance is warranted for outbound payments to avoid Interest and Penalties and also the same can result in fund blockage.
2. Transaction Nature and Assessment Trigger:
The transaction between an Indian company and its foreign associated enterprise needs proper assessment and evaluation in terms of characterization, tax withholding , pricing etc.
The allocation/ apportionment of expense between the related party needs proper evaluation
| Type of Payment | Trigger |
|---|---|
| Service Fee (Management Fee/ Shared Service Fees) | The Group allocates a portion of its expense: Head Office Expense. IT Expense Legal Expense Strategic Planning and Implementation cost |
| Royalty/ License Fee | Parent company owned Technology, know how etc used by an Indian related company or vice versa |
| Trade Mark/ Brand Fee | Parent company owned Trade Mark, logo etc used by an Indian related company. |
| Interest on Loan, External Commercial Borrowings | Loan / Borrowing from Parent Company/ Group company. |
| Guarantee | Indian Company borrowing guaranteed by foreign parent company. |
3. Common International Transactions and their Pricing Approach
Companies have to do the FAR Analysis (Function, Asset, Risk) to determine the Transfer Pricing Method which should be adopted most appropriately for certain International Transactions.
Function – The significant economic activity the company/ business is into.
Asset – The assets company is using to achieve its function.
Risk – The Business risk undertaken by the entity in performing its function
Listing out in tabular form a commonly used method for payment to its subsidiary as an example, still the FAR analysis is required prior for selecting a Transfer Pricing Method.
| Transaction | Common Method Used | Notes |
|---|---|---|
| IT / ITES / BPO services | TNMM/ Cost-Plus Method | Net margin benchmarking against comparable independent service providers. |
| Management/ Shared Services | CUP/ Cost-Plus Method/ TNMM | Method depends on the comparable uncontrolled fee arrangement. The service is subject to “benefit test”. |
| Royalty/ Brand License | CUP/Profit Split Method | Depends on the facts and available comparables |
| Inter Company Loans / ECB | CUP Method | Benchmarked on currency, tenor, security, credit rating and comparable third party borrowing terms.
SOFR plus an appropriate credit spread. |
| Corporate Guarantee | CUP/Interest Saving Approach/Safe Harbour Rule | Not bundled into the pricing of the Underlying Loan. |
4. Tax Withholding and Tax Treaties
The withholding tax is governed by the Income-tax Act. The DTAA can reduce the rate or change the characterization of the nature of payment. The correct treatment depends on
- Actual Nature of Service Rendered
- Characterization under Income Tax Act and the applicable withholding rate.
- DTAA applicability
- “Make Available” condition
- Whether the foreign parent has a Permanent Establishment (PE) in India.
- Beneficial ownership and the payee’s treaty eligibility
- Supporting Documents like TRC (Tax Residency Certificate, Form 10F (New Form 41) & No PE Declaration.
5. Remittance Certificate – Form 15CA/15CB (Form 145/146)
| Period | Remitter’s Declaration | CA Certificate |
|---|---|---|
| Upto FY 2025-26 | 15CA | 15CB, where applicable |
| Tax Year 2026-27 onwards | Form 145 | Form 146, where applicable |
Form 146 (CA certification) is required where the remittance is chargeable to tax, aggregate taxable remittances exceed ₹5 lakh during the tax year, and no certificate from the prescribed Assessing Officer has been obtained.
Below that threshold, or where the remittance falls in a specified non-taxable/exempt category, the certification requirement does not apply.
6. Various Documentation Requirements
- Intercompany Agreement covering the specific payments
- Invoice consistent with the agreement and the characterisation adopted
- Transfer-pricing benchmarking / working papers supporting the pricing
- TRC, Form 10F (New Form 41) and a no-PE declaration, where treaty relief is claimed;
- Form 145 (remitter’s declaration) and Form 146 (CA certificate), where applicable;
- Board / Audit Committee approval under the Companies Act, where section 188 applies; and
- Authorized Dealer documentation for the FEMA remittance.
7. Year End Annual Filings
| Filing | Applicability | New Form (Tax Year 2026-27 onwards) |
|---|---|---|
| Accountant’s Report | Taxpayer having international transaction irrespective of the value of transaction | Form 48 (Earlier Form 3CEB) |
| Master File | Consolidated group revenue exceeds ₹500 crore, and either international transaction exceeds ₹50 crore or intangible-property transactions exceed ₹10 crore |
Form 56 (Earlier Form 3CEAA)
Part A of form 56 is mandatory for every constituent entity of an international group without any threshold limit of transaction value. |
| CBCR Report (Country by Country Report) | Consolidated group revenue exceeds ₹6,400 crore | Form 59 (Earlier Form 3CEAD) |
8. Common Risk Areas
| Risk Area | Caution |
|---|---|
| Benefit test failure | Management / shared-service fees charged without concrete evidence that the Indian entity actually received and needed the service |
| Unbilled use of parent’s brand or trademark | Free use of the parent’s logo, brand or technology is often left out of the pricing analysis entirely; it should be examined as a transaction in its own right — depending on ownership of the intangible, benefits received, marketing functions performed, and whether an independent party would have paid for comparable rights |
| Thin capitalization | Excess interest expense on related-party or related-party-guaranteed debt disallowed where it breaches the prescribed interest-limitation rule |
| Secondary adjustment | Where a primary TP adjustment increases taxable income, the excess amount not repatriated is treated as a deemed advance to the parent, with notional interest taxed in India until repatriation |
| GST reverse charge missed | Attention stays on withholding tax; RCM on the imported service is overlooked, especially where the transaction is unbilled or between related parties |
| Treaty benefit claimed without documentation | Lower treaty rate applied without a valid TRC, Form 10F (New Form 41) or no-PE declaration on file |
9. Advance Pricing Arrangements (APA)
An Indian subsidiary can enter into a unilateral or bilateral APA with the CBDT, fixing the pricing methodology for future transactions. An APA may be valid for up to five years and can include a rollback covering up to four preceding years, giving multi-year certainty in one process.
10. Safe Harbour Rules
Where the transaction falls within a notified safe-harbour category, the prescribed authority is bound to accept the taxpayer’s declared price, removing the need for a full benchmarking exercise.
11. Conclusion
A cross-border payment from an Indian subsidiary to its foreign parent is never a single-regime question. Transfer pricing, withholding tax, FEMA, GST and the Companies Act each test the same payment on different grounds, and clearing one does not clear the others. Building the checks into the process before the payment is made — rather than reconstructing the position at assessment or audit — is the difference between a routine remittance and a multi-regulator dispute.
Disclaimer: This article provides general information and does not constitute legal, tax or regulatory advice. The treatment of a cross-border payment depends on the agreement, nature of services, applicable tax treaty, transfer-pricing analysis and prevailing regulatory provisions.
For an initial discussion, write to us at rajnish@sgaindia.co.in.
About the Author
CA Rajnish Shukla is the Founder Partner of M/s Shukla Gupta & Arora – Chartered Accountants, with over two decades of experience in taxation, regulatory compliance and business advisory. He advises foreign-owned and internationally operating businesses on India market entry, entity structuring, taxation, FEMA, transfer pricing and ongoing compliance.