Separate service evidence, pricing and deductibility
For a related-party management fee, identify the actual service and the beneficiary, establish the arm’s-length price using the most appropriate prescribed method, and assess deductibility and withholding separately. For years governed by the Income-tax Act, 1961, see Chapter X and the 1962 Rules; for tax years under the Income-tax Act, 2025, use that Act and the 2026 Rules. The OECD guidelines provide useful analytical guidance but do not replace Indian law.
| Evidence question | Useful records |
|---|---|
| Commercial rationale | Business case or service request explaining the gap addressed, decision and expected benefit. This is an evidentiary framework, not four freestanding statutory tests. |
| Actual delivery | Keep agreements, invoices, work products, ticket logs, correspondence, meeting records and timesheets as available. Services can be delivered remotely. Match the provider, work, period and beneficiary. |
| Benefit | Ask whether an independent enterprise would pay for the activity or perform it itself. Expected benefits count; a rupee saving or eventual profit is not essential. Mere group membership or incidental benefit does not ordinarily justify a charge. |
| Duplication | Compare local employees, suppliers and group functions. Separate overlap from complementary work, temporary transition and a commercially justified second opinion. |
Build and reconcile the cost pool
Charge services directly where the beneficiary and cost can be reliably traced. For shared services, reconcile the pool to ledgers, exclude unrelated and shareholder-only costs, and document a reasonable key for each service. The parent’s own board or shareholder meetings, listing, consolidated reporting and fundraising for its own shareholdings generally belong with the parent. Group audits can mix owner oversight with operational help; allocate on evidence rather than a fixed 50%. Assess patent defence in light of who benefits and what the licence covers. Separate pass-through costs and any agency or other function that merits a markup.
| Service | Possible allocation driver |
|---|---|
| IT infrastructure | Active users, workstations or measured use |
| Recruitment or training | Headcount or actual hires and training participants |
| Marketing support | Relevant segment sales or campaign usage |
| Procurement | Value or volume of purchases covered |
| Legal or regulatory support | Hours or matters by beneficiary |
Choose a method and document the comparison
| Method | When it may work |
|---|---|
| Comparable uncontrolled price | Comparable internal or external fee with adjustments for differences in scope, terms, risk, volume or geography. |
| Cost plus | Reliable cost base and comparable gross markup for similar functions and risks. No universal 3% to 5% range applies. |
| Transactional net margin method (TNMM) | Where closely linked transactions are appropriately aggregated or reliable segmental comparison is possible. An entity-level margin does not on its own substantiate a distinct charge. |
| Other prescribed method | Comparable quotations or valuation evidence may help determine what would have been paid in similar uncontrolled circumstances; check scope and terms. |
India’s elective safe harbour for eligible inbound low value-adding intra-group services has specific conditions. Under Rule 89 of the Income-tax Rules, 2026, the aggregate for the tax year must not exceed ₹10 crore including a markup no greater than 5%; an accountant must certify the pooling method, exclusion of shareholder and duplicate costs and reasonableness of allocation keys. Verify service eligibility and the election procedure. The preceding regime uses Rule 10TD for the years to which it applies. A foreign statutory auditor’s certificate is not a general prerequisite for every management fee.
In Cushman and Wakefield (India), the Delhi High Court distinguished the TPO’s pricing role from the assessing officer’s deduction inquiry. It discussed EKL Appliances: a TPO cannot substitute personal views of business necessity or profitability for the statutory arm’s-length analysis. Evidence of what was actually supplied still matters. A nil valuation or deduction denial needs a sound legal and evidentiary basis.
Worked examples
1. Shared IT: 500 of 2,500 users
The Indian allocation is 20% of a €1 million pool, or €200,000. At ₹90 per euro that is ₹1.80 crore; a 5% markup gives ₹1.89 crore. Compared with a ₹3.20 crore standalone quote, the illustrative difference is ₹1.31 crore. Compare what each price covers; an SAP licence quote alone may not match a bundle including security and round-the-clock support. Reconcile underlying vendor charges and distinguish local engineers’ work.
2. Shareholder costs and patent defence
| Cost | Group pool | India at 20% |
|---|---|---|
| Supply-chain ERP | ₹12 crore | ₹2.40 crore |
| Parent board and AGM | ₹5 crore | ₹1 crore |
| Listing and investor relations | ₹3 crore | ₹60 lakh |
| Patent defence solely for the parent on the assumed facts | ₹5 crore | ₹1 crore |
| Total | ₹25 crore | ₹5 crore |
Exclude ₹2.60 crore from the proposed charge on the stated facts. The ₹2.40 crore ERP portion still requires support and benchmarking. If the full ₹2.60 crore increases taxable income for a company validly under section 115BAA, the illustrative incremental tax at 22% × 1.10 × 1.04 is ₹65,43,680. Analyse any secondary adjustment separately; a disallowance does not automatically trigger section 92CE.
3. ₹3.50 crore consultancy with no work evidence
A three-page contract and four quarterly debit notes show agreed terms and invoicing, but do not by themselves establish actual delivery. Reconstruct what can be verified from correspondence, access logs, working papers or interviews supported by records. An adverse adjustment is possible; the missing evidence does not itself produce a mandatory 100% adjustment.
4. Recruitment and 120 hours of safety training
An ₹80 lakh charge covers recruiting four technical directors and running training. A recruitment quote of 25% on combined annual pay of ₹4.80 crore implies ₹1.20 crore for recruitment alone. The apparent difference is ₹40 lakh; compare equivalent scopes and separate training. Keep interview files and attendance records. A reported 40% decline in lost-time injuries may support the business case but does not prove the training caused the decline.
5. Integrated automotive tooling support
Raw materials of ₹50 crore, royalty of ₹5 crore and services of ₹8 crore total ₹63 crore. The reported TNMM margin is 14.50%; no comparables are supplied to establish whether it falls within the applicable range. The 35th to 65th percentile range applies only where the relevant rule’s conditions are met. Document why robotic calibration and the other transactions are closely linked, and retain job records and segmented data. A 50% reduction of the ₹8 crore charge would be ₹4 crore, but the percentage is illustrative and does not follow from missing timesheets.
6. Bilateral advance pricing agreement (APA)
A ₹40 crore annual fee over five years is ₹200 crore in fees. A claimed ₹70 crore tax demand cannot be calculated without the applicable rates, interest and case facts. If a negotiated 3.50% markup applies and ₹40 crore is the charge inclusive of markup, the implied cost is about ₹38.65 crore. Under section 92CC, an APA can cover up to five prospective years, with up to four preceding rollback years where the conditions apply. It binds only the covered transactions and periods on its terms, subject to critical assumptions and compliance; it does not automatically reverse five historical years or every disputed demand.
Practical control steps
- Approve scope and budget, identify owners for evidence and align contracts to actual conduct.
- Archive work products and reconcile beneficiary allocations to source ledgers, invoices and financial accounts.
- Document the method, exclusions, allocation calculations and any applicable certification.
- Report covered transactions in the applicable accountant’s report: Form 3CEB under the 1961 Act framework or Form 48 under the 2026 Rules. Reconcile to the local file and consider APA or treaty relief where appropriate.
Frequently asked questions
1. Can declining profit make the fee’s arm’s-length price nil?
Not on that basis alone. Examine actual services, pricing evidence and the prescribed method.
2. Does withholding under section 195 establish the price?
No. Determine withholding under the applicable Act and treaty separately from transfer pricing.
3. Can an expatriate director provide chargeable services?
Yes in principle. Establish who provides and receives distinct operational services, separate governance or employment duties and verify the pricing and tax treatment.
4. Direct or indirect charge?
Directly charge traceable services to their beneficiary; allocate genuinely shared costs using documented drivers.
5. Can the entity-level TNMM be used?
Only if the facts and applicable method support the aggregation and reliable comparison.
6. What if cost data is confidential?
Arrange controlled disclosure or an accountant’s review where possible. Comparable third-party quotes may help substantiate pricing, but they do not establish actual delivery or replace a required safe harbour certification.
Sources
- Delhi High Court: Cushman and Wakefield (India), including discussion of EKL Appliances
- OECD Transfer Pricing Guidelines, Chapter VII
- Income Tax Department: transfer pricing under the 1961 Act
- Income-tax Rules, 2026: prescribed methods, reporting and safe harbour
- Finance Act, 2026: AY 2026–27 rates
- Income Tax Department: domestic company tax and surcharge
- CBDT Notification 23/2015: APA rollback