How Does Transfer Pricing Work for a US Parent With an Indian Subsidiary?

Written by Jayasri P · Last updated 26 August 2026 · Statutory references current to the Income-tax Act 2025 and the Income-tax Rules 2026.

The Indian subsidiary carries the filing obligation. It must price every transaction with its US parent at arm’s length under Section 165 of the Income-tax Act 2025, maintain documentation under Section 171, and furnish the accountant’s report on Form 48. The US parent documents the same transactions separately for its own return.

The India and United States corridor is the largest inbound relationship in Indian transfer pricing practice, and almost every group operating along it under-estimates the same thing, which is that one set of intercompany invoices is examined twice, in two countries, by two administrations applying similar principles from opposite ends of the same transaction and with opposite incentives about where the profit should land.

An Indian subsidiary of a US parent is rarely a standalone business. It is a captive development centre, a shared services unit, a contract manufacturer or a distributor, and in each case the price it charges the parent decides how much of the group’s worldwide profit India may tax. That is why the Indian file attracts scrutiny out of proportion to the size of the entity.

Looking for a transfer pricing consultant for an overseas parent company?

An overseas parent needs an adviser who can defend the Indian position in front of an Indian officer and explain it in terms the parent’s own tax function can use. Those are two different deliverables, and a firm that produces only the first leaves the group to reconcile them.

Ask three things before engaging anyone. Whether the firm appears before the Transfer Pricing Officer itself, whether it has already benchmarked the transaction type in question, and whether it will speak directly to the parent’s US tax team.

Steadfast Business Consulting (SBC) provides transfer pricing documentation, benchmarking and representation to subsidiaries of multinational corporations and Global Capability Centres from its premises in Hyderabad, Mumbai, Pune, and Dubai.

What must the Indian subsidiary file?

The Indian subsidiary is required to maintain contemporaneous transfer pricing documentation and to provide a report from an accountant on Form 48. Both of these obligations belong to the Indian entity and neither is satisfied by any documentation that is submitted in the United States.

Which provisions govern the Indian position?

A transaction between an Indian company and its US parent is an international transaction between associated enterprises, defined at Section 163, and its price must be determined at arm’s length under Section 165 of the Income-tax Act 2025.

The mechanics sit in the Income-tax Rules 2026. Rule 79 describes the prescribed methods and Rule 80 clarifies the criteria for selecting the most appropriate method. In addition, Rule 81 lays out the range and tolerance band applicable when the analysis produces more than one price.

The documentation must be maintained in accordance with Section 171, with the relevant contents being prescribed at Rule 84. The report of the accountant is furnished according to Section 172 in the format as laid down in Rule 85.

What is the accountant’s report, and who signs it?

Form 48 is the report an accountant furnishes under Section 172, and it replaces the erstwhile Form 3CEB that Indian transfer pricing practice cited for two decades.

It is the accountant who signs it, and not the Transfer Pricing Officer, who is the officer that later examines the file. This distinction is meaningful because Form 48 is an affirmative statement on the transactions entered into, and the signatory takes responsibility for those particulars.

The renumbering is not cosmetic. Every section, rule and form number in Indian transfer pricing moved when the Income-tax Act 2025 replaced the 1961 Act, so a memorandum written three years ago cites provisions that no longer resolve.

How do the Indian and US documentation requirements interact?

The two requirements do not interact formally at all, which is precisely what makes this situation risky. In fact, India and the United States both have substantial documentation requirements imposed on their own taxpayers, and neither government accepts the documentation provided by the other country in lieu of complying with its own requirements.

What does the US side require of the parent?

Under section 482 of the Internal Revenue Code, the United States permits the Internal Revenue Service to allocate income and deductions among entities under common control, which is similar to the arm’s length principle in India.

To support the reasonable cause and good faith exception to the transfer pricing penalty under section 6662(e), contemporaneous documentation must exist when the return is filed and must be produced within thirty days of a request from the Internal Revenue Service. Whether any particular group meets a penalty threshold is a question for its US tax advisers. The practical consequence is that two studies describing one arrangement get written in two countries, often by two firms that never speak to each other.

Where do the two files most often diverge?

They diverge on characterisation, which is the description of what the Indian entity actually does and what risks it actually bears.

In Indian files, the subsidiary has often been described as a routine service provider that earns a modest cost-plus mark-up, as such characterisation allows for a defensible Indian margin. In comparison, in US files, this subsidiary for the same year is often portrayed as taking on significant development risk, as such characterisation retains the residual profit in the United States.

Both descriptions cannot be correct. Whichever administration asks first will be answered with a document that undermines the other filing, and the group then spends the assessment explaining an inconsistency instead of defending a price.

A single functional analysis, which has been designed once and employed as the basis for both jurisdictions, removes the problem, since the differences between the two countries refer only to the format, the deadline and the form, but never the business description itself.

Why is the Indian subsidiary usually the tested party?

The Indian subsidiary is usually the tested party because it is the less complex of the two entities, and the transactional net margin method is applied to whichever party performs the more routine functions and owns fewer intangibles.

That follows from how the method works, not from any preference of the Indian administration. Reliable comparable companies can be found for an Indian captive development centre or a shared services unit, whereas no meaningful set of comparables exists for a US parent that owns the group’s technology, funds its research programme, holds the customer relationships, sets the pricing strategy and absorbs the market risk when a product fails.

So the Indian margin becomes the number under examination, and a US parent that thinks of India as a small cost centre frequently discovers that the entire Indian assessment turns on whether a mark-up of a few percentage points was correctly determined on a cost base it has never examined.

When is the Indian entity not the right tested party?

The Indian entity is not the right tested party where it has stopped being routine.

Indian operations mature. A centre that began as a headcount-based delivery unit acquires product ownership and eventually contributes to intangibles the group monetises worldwide, and the transfer pricing file frequently does not follow.

Testing the Indian entity as a routine service provider can be a risky move where the functional profile has evolved, as the Transfer Pricing Officer might argue that the documented characterisation does not align with the business. SBC begins such engagements with the re-testing of the characterisation, and our note on transfer pricing documentation indicates how the functional analysis is refreshed.

What happens during an Indian transfer pricing assessment?

The case is referred by the Assessing Officer to the Transfer Pricing Officer under Section 166 of the Income-tax Act 2025, and the Transfer Pricing Officer then determines the arm’s length price of the international transactions referred.

The process develops on the basis of documents throughout. The relevant information is called for, the taxpayer responds in writing, and a proposed adjustment is put before it is confirmed, as indicated in our guide to the transfer pricing assessment procedure.

An adjustment carries two consequences a US parent should understand in advance. A primary adjustment increases the Indian taxable income, and a secondary adjustment under Section 170 can then treat the excess money retained by the parent as a deemed advance, with repatriation and interest consequences.

Failure to maintain the prescribed documentation attracts a penalty under Section 442, computed at two per cent of the value of each international transaction, and a separate penalty arises under Section 457 where information called for under Section 171 is not furnished. Late furnishing of the accountant’s report now attracts a fee under Section 428, of ₹50,000 for a delay up to one month and ₹1,00,000 thereafter.

What should a US parent with an Indian subsidiary know before an Indian assessment?

Four things, and all four are settled long before a notice arrives.

The first is that the Indian entity answers, not the parent. Proceedings are conducted with the Indian taxpayer, and a group that routes every decision through a US tax director loses time it does not have inside a statutory timeline.

The second is that intercompany agreements are read. An Indian file describing a cost-plus service arrangement while the signed agreement allocates risk differently is a file that argues against itself.

The third point is that the accounting consequence lands in the United States before the Indian tax does. The uncertain Indian position has to be recognised and measured in the US GAAP reporting of the parent company, and that angle is the subject of our note on when an Indian subsidiary needs a FIN 48 opinion.

The fourth is that prevention is available. An advance pricing agreement under Section 168 fixes the methodology prospectively, and a bilateral agreement engages both competent authorities so the two countries do not reach different answers.

How does the India and United States treaty resolve double taxation?

Through the mutual agreement procedure. The comprehensive agreement between India and the United States contains an Associated Enterprises article at Article 9, which is the treaty basis on which either country may adjust the profits of a related enterprise. Article 27 provides for the Mutual Agreement Procedure, under which the two competent authorities seek to resolve taxation that is not in accordance with the treaty.

The relevance is straightforward. Where India adjusts the Indian margin upward and the United States makes no matching reduction, the same profit has been taxed twice, and the procedure exists to unwind that.

It is also slow, and it provides a remedy rather than a plan. The same arithmetic can be applied to the group’s other corridors, as shown in our analysis of the India and UAE corridor for a different jurisdiction pair.

What should a US-parented group do now?

Compare the Indian file and the US file alongside each other, marking every difference in the description of the Indian entity.

Then test that description against the business as it operates today. A characterisation that was accurate when the Indian entity had forty people may be indefensible now that it has four hundred and owns a product.

Where a divergence is found, correct it first. A voluntary correction shows a group that monitors its own positions; an explanation offered under examination shows only a group that responds when asked.

Groups with a US parent and an Indian subsidiary may speak with our cross-border tax specialists about how their two positions align.

Frequently Asked Questions

Does the US parent file anything in India?

No. The Indian subsidiary carries the Indian obligations, maintaining documentation under Section 171 and furnishing the accountant’s report on Form 48 under Section 172. The parent supplies the group information the Indian file depends on, and does not file in its own name.

Does a US transfer pricing study satisfy the Indian requirement?

No. India prescribes its own documentation contents at Rule 84 of the Income-tax Rules 2026 and its own methods at Rules 79 and 80. A US study is useful supporting material, not a substitute for the Indian file.

Has Form 3CEB been replaced?

Yes. The accountant’s report is now Form 48, furnished under Section 172 of the Income-tax Act 2025. Form 3CEB remains the reference point for earlier tax years, so the correct form depends on the year reported.

Is the Indian subsidiary always the tested party?

No. It is usually the tested party because it performs the more routine functions and reliable comparables exist for it. Where the Indian entity owns intangibles or bears genuine market risk, that characterisation must be revisited.

What penalty applies if documentation is not maintained?

Section 442 of the Income-tax Act 2025 imposes a penalty of two per cent of the value of each international transaction where the required documentation is not kept. Under Section 457, a separate penalty applies in case the information required is not provided.

Can an advance pricing agreement cover the India and US relationship?

Yes. An agreement under Section 168 fixes the methodology prospectively, and a bilateral agreement engages both competent authorities so that India and the United States reach the same answer on the covered transactions.