Before Your Indian Subsidiary Pays the Foreign Parent, Check These 5 things first

This is a situation we regularly see with foreign-owned companies operating in India.

The foreign parent provides management support, IT services, technical assistance or some other group service to its Indian subsidiary.

An invoice is raised.

The Indian company records the expense.

And someone asks:

“Can we simply pay this invoice to the parent company?”

Usually, that is where the real discussion starts.

Because one intercompany transaction can potentially involve:

Accounting → Income Tax → TDS → GST → Transfer Pricing → FEMA → Banking Documentation

The transaction may also eventually appear in the company’s statutory audit, tax filings and transfer-pricing reporting.

That is why an intercompany transaction should never be looked at only as an invoice between two companies belonging to the same group.

For a foreign-owned company in India, the better question is:

What is the real nature of the transaction, and how should it be treated across all the applicable Indian regulations?

Let’s understand this practically.

What Is an Intercompany Transaction?

An intercompany transaction is a transaction between companies belonging to the same corporate group.

For example:

Foreign Parent Company
↓
owns
↓
Indian Subsidiary

Once the Indian subsidiary starts operating, money can move between the two entities for several reasons.

Common examples include:

• Management fees
• IT support
• Technical services
• Shared service costs
• Software charges
• Royalty or licence fees
• Purchase or sale of goods
• Employee-related costs
• Travel expenses
• Expense reimbursements
• Intercompany loans
• Interest
• Cost allocations
• Marketing support
• Research and development support

Although the companies are related, they remain separate legal entities.

Therefore, the fact that “both companies belong to the same group” does not by itself determine the tax or regulatory treatment.

The 5 Questions We Ask Before Processing an Intercompany Transaction

Before discussing tax rates or filing requirements, I would first understand five things:

1: What is the transaction actually for?

• Is it a service?
• A reimbursement?
• A loan?
• Royalty?
• Purchase of goods?
• Cost allocation?
• Capital contribution?

2: Is there an agreement?

The agreement should support the commercial relationship between the foreign parent and Indian subsidiary.

3: Is there evidence that the service or benefit was actually received?

This becomes particularly relevant for management fees, technical services and shared group costs.

4: How has the price been determined?

Because the parties are related, transfer pricing may become relevant.

5: How will the money move between India and the foreign country?

That brings FEMA, banking documentation and withholding-tax compliance into the picture.

Only after understanding these points should the company decide how to account for and remit the amount.

One Transaction, Multiple Regulations

Consider a simple example.

A US parent company provides management and IT support to its wholly owned Indian subsidiary and raises an annual invoice of ₹25 lakh.

At first glance:

Parent raised invoice → Indian company pays ₹25 lakh.

But the Indian finance team may need to examine:

That is why these transactions should ideally be reviewed before payment, rather than several months later during the audit.

1: Accounting Treatment Comes First

Every intercompany transaction should first be recorded according to its true nature.

For example:

Management support should not automatically be recorded as “reimbursement.”

A loan should not be recorded as an ordinary payable.

Software licence fees should not automatically be classified as general professional charges.

Share capital received from the parent is fundamentally different from money received as an intercompany loan.

The accounting description should agree with the commercial documentation.

Ideally:

Agreement → Invoice → Accounting Entry → Tax Treatment → Remittance

should all tell the same story.

This becomes particularly important at year-end when auditors reconcile the Indian company’s records with confirmations received from the foreign parent.

2: Is TDS Applicable When the Indian Subsidiary Pays the Foreign Parent?

This is one of the most important questions.

Under section 195 of the Income-tax Act, 1961, withholding applies when a person makes specified payments to a non-resident or foreign company and the amount is chargeable to tax in India. The provision generally looks to the earlier of credit or payment for the withholding trigger.

But this does not mean that every foreign-parent invoice should mechanically suffer TDS at one standard rate.

The company first needs to determine the nature of the payment.

For example:

• Royalty
• Fees for technical services
• Interest
• Business income
• Reimbursement
• Other taxable income

Then examine:

Indian domestic tax law + Applicable DTAA

The applicable Double Taxation Avoidance Agreement can be important because treaty treatment may differ from the domestic-law position, subject to satisfaction of the relevant conditions and documentation.

Example: Management Fee Paid to Foreign Parent

Suppose a UK parent company provides strategic and management support to its Indian subsidiary.

Before remitting the fee, the Indian company should not simply ask:

“What TDS percentage should we deduct?”

Instead, it should ask:

• What exactly are the services?
• Where and how are they performed?
• How are they characterised under Indian tax law?
• What does the India-UK DTAA provide?
• Does the foreign parent have any relevant presence in India?
• What supporting tax-residency/treaty documents are available?

Only after this analysis should the withholding position be determined.

The Income Tax Department’s current guidance confirms that section 195 covers taxable payments to non-residents including interest, royalty, fees for technical services and other taxable payments.

Don’t Forget Form 15CA / 15CB and Remittance Documentation

When money is remitted outside India, withholding tax is not the only consideration.

Depending on the nature, amount and taxability of the remittance, Form 15CA and/or Form 15CB requirements may need to be examined.

The Income Tax Department maintains Form 15CB as the accountant’s certificate used in the non-resident remittance framework.

The bank may also ask for documents supporting the remittance.

These can vary depending on the transaction and bank requirements, but may include items such as:

• Invoice
• Agreement
• Tax analysis
• Form 15CA/15CB, where applicable
• Tax Residency Certificate, where relevant
• Transfer-pricing/supporting documentation
• Purpose code
• Other declarations requested by the authorised dealer

This is another reason to prepare the transaction properly before initiating the foreign remittance.

3: GST on Services Received From the Foreign Parent

Income tax is only one side.

GST must be analysed separately.

Where an Indian company receives services from its foreign parent, the transaction may constitute an import of services under GST.

For example:

Foreign Parent
provides
↓
IT / Management / Technical Support
to
↓
Indian Subsidiary

The Indian company may need to evaluate GST under the Reverse Charge Mechanism (RCM) based on the nature of the transaction and applicable provisions.

An especially important point for related companies is that GST law can treat certain imports of services from a related person or an overseas establishment in the course or furtherance of business as a supply even without consideration. CBIC’s guidance expressly highlights this principle under Schedule I.

That can become relevant where the foreign parent provides support but does not raise a conventional invoice.

Example: Parent Provides Free IT Support

Suppose the foreign parent provides centralised IT support to its Indian subsidiary but doesn’t charge anything separately.

The Indian company may think:

“There is no invoice and no payment, so there cannot be GST.”

That conclusion should not be made automatically.

Because the parties are related, the company should examine whether the transaction falls within the GST rules dealing with supplies between related persons/import of services.

This is an excellent example of why intercompany transactions need to be reviewed from multiple regulatory perspectives.

4: Transfer Pricing: Is the Intercompany Price at Arm’s Length?

Now we reach another major area for foreign-owned companies.

Transactions between an Indian subsidiary and its foreign associated enterprise can fall within India’s transfer-pricing framework.

The broad principle is straightforward:

Related companies should transact on an arm’s-length basis.

In other words, the pricing should be supportable as commercially reasonable having regard to the applicable transfer-pricing framework.

Examples can include:

• Management fees
• Technical service charges
• IT support
• Purchase of goods
• Sale of goods
• Royalty
• Interest
• Loans
• Cost allocations
• Shared services
• Certain reimbursements

The Income Tax Department currently identifies Form 3CEB as the accountant’s report under section 92E relating to international transactions and specified domestic transactions.

Transfer Pricing Is Not Just a Year-End Form

This is a common misconception.

Businesses sometimes think:

“We will give all the intercompany transactions to the transfer-pricing consultant at year-end.”

But transfer pricing should ideally begin when the transaction is designed, not when Form 3CEB is due.

For example, before the foreign parent charges ₹50 lakh as management fees, ask:

• What services are being provided?
• How was ₹50 lakh calculated?
• Is it based on actual cost?
• Is there a markup?
• What allocation key was used?
• Did the Indian subsidiary receive a benefit?
• Is there an intercompany agreement?
• Can the pricing be supported?

The Income Tax Department also notes that international transactions require arm’s-length pricing, and its APA framework exists specifically to provide advance certainty for eligible international transactions.

5: FEMA: Can the Indian Company Remit the Money Overseas?

After accounting, tax, GST and transfer pricing comes another question:

Can the money legally be remitted from India to the foreign parent, and under what framework?

FEMA distinguishes broadly between current-account transactions and capital-account transactions.

RBI explains that ordinary payments connected with foreign trade, business and services are examples of current-account transactions.

Current-account foreign exchange transactions operate within FEMA and the Foreign Exchange Management (Current Account Transactions) Rules, 2000, including restrictions or approval requirements applicable to specified categories.

Therefore, a genuine service payment to the foreign parent is fundamentally different from:

• Equity contribution
• Intercompany borrowing
• Repayment of certain loans
• Capital restructuring

Those transactions may fall under different FEMA frameworks.

Don’t Treat Every Movement of Money as a Service Payment

This distinction is extremely important.

Suppose the foreign parent transfers USD 500,000 to its Indian subsidiary.

Before accounting for the receipt, determine:

• Is it equity?
• Is it a permitted foreign borrowing?
• Is it an advance for services?
• Is it payment for goods?
• Is it reimbursement?

The answer determines the accounting, tax and FEMA consequences.

Similarly, when the Indian subsidiary sends money back to the parent, the commercial nature of the payment should be established before remittance.

Decide the nature of the money before moving the money.

This principle applies equally to funding and intercompany transactions.

6: Management Fees: One of the Most Common Intercompany Transactions

Management fees deserve special attention because they are common among multinational groups.

A foreign parent may provide:

• Finance support
• HR support
• Legal support
• Strategy
• IT infrastructure
• Procurement assistance
• Marketing
• Group management
• Senior leadership support

The parent may then allocate part of the group cost to its Indian subsidiary.

That does not automatically make the charge wrong.

But the Indian company should be able to explain:

What services were provided?

Avoid vague descriptions such as:

“Management Services – Annual Fee.”

Why did the Indian company need them?

There should be a commercial rationale.

How was the charge calculated?

For example:

Actual cost + appropriate markup

or another supportable allocation mechanism, depending on the arrangement.

What evidence exists?

Potential supporting evidence can include:

• Agreement
• Invoice
• Email correspondence
• Reports
• Meeting records
• Work performed
• Cost-allocation workings
• Timesheets, where relevant
• Group policies

Has withholding tax been examined?

Yes—separately.

Has GST been examined?

Yes—separately.

Has transfer pricing been examined?

Again—separately.

One invoice can therefore have several different compliance consequences.

7: Are Expense Reimbursements Really Tax-Free?

Another common transaction is reimbursement.

Example:

The foreign parent pays ₹8 lakh of travel, software and professional expenses on behalf of the Indian subsidiary.

Later it asks the Indian company to reimburse ₹8 lakh.

The instinct may be:

“It’s only reimbursement, so there is no tax.”

That conclusion can be risky without examining the underlying facts.

Ask:

• Who originally incurred the expense?
• Who received the service?
• Was the parent acting merely as a paying agent?
• Is any markup included?
• What is the underlying expense?
• Are invoices/supporting documents available?
• What does the intercompany agreement say?
• What are the GST, withholding-tax and transfer-pricing consequences?

The label “reimbursement” does not by itself determine the tax treatment.

This deserves careful transaction-specific analysis.

8: Intercompany Loans Are Different From Service Transactions

Suppose the foreign parent wants to financially support its Indian subsidiary.

It may be tempting to simply transfer money and record:

Loan from Parent Company

But foreign borrowing by an Indian company can fall within India’s external commercial borrowing and FEMA framework.

Therefore:

An intercompany loan should not be treated like an ordinary domestic unsecured loan merely because the lender is the parent company.

Before receiving the funds, the company should examine the applicable FEMA/ECB framework, including eligibility, permitted structure, pricing, maturity, reporting and other conditions applicable to the proposed borrowing.

This is also why funding should be planned before remittance.

9: Purchase and Sale of Goods Between Group Companies

Not all intercompany transactions are services.

An Indian subsidiary may:

• Import products from its foreign parent
• Export products to the parent
• Purchase components
• Sell finished goods
• Act as distributor
• Provide contract manufacturing
• Purchase machinery

These transactions can involve a different mix of considerations:

Customs + GST + Transfer Pricing + Income Tax + FEMA + Accounting

Transfer pricing and customs valuation may both become relevant, although they approach valuation for different regulatory purposes.

Therefore, pricing and documentation should be planned consistently.

Why Monthly Review Is Better Than Year-End Cleanup

Imagine discovering during the statutory audit that:

• TDS should have been evaluated months earlier
• RCM was not considered
• Parent-company balances don’t reconcile
• Management-fee workings aren’t available
• Transfer-pricing support hasn’t been prepared
• The agreement doesn’t match the invoices

Now the finance team has to reconstruct the entire year.

A much better process is:

Monthly Accounting
↓
Identify Intercompany Transactions
↓
Tax & GST Review
↓
Transfer-Pricing Mapping
↓
FEMA / Remittance Documentation
↓
Parent-Subsidiary Reconciliation

By year-end, the audit and compliance process becomes significantly easier.

How Manish Anil Gupta & Co. Supports Foreign-Owned Companies

Foreign-owned companies often have separate people handling:

Accounting

• GST
• TDS
• International Tax
• Transfer Pricing
• FEMA
• Audit

The difficulty is not always whether each professional understands their own subject.

The challenge is making sure one transaction is treated consistently across all of them.

At Manish Anil Gupta & Co., our approach is to look at foreign-parent transactions as part of the complete India finance and compliance function—from accounting and GST/TDS to transfer pricing, FEMA, audit and ongoing compliance.

This helps foreign management get a more coordinated view of its Indian subsidiary.

Final Thoughts

Intercompany transactions are a normal part of operating a multinational group.

They should not automatically be considered complicated.

But they do need to be structured, documented and reviewed correctly.

Before the Indian subsidiary pays or receives a material amount involving its foreign parent, ask:

What exactly is this transaction?

Then examine it through the relevant lenses:

• Accounting
• Income Tax
• TDS / DTAA
• GST
• Transfer Pricing
• FEMA

The biggest mistake is often not choosing the wrong tax rate.

It is moving the money first and asking the compliance questions later.

For a foreign-owned company in India, a well-managed intercompany process can mean cleaner books, smoother remittances, stronger documentation and fewer surprises at year-end.

Have regular transactions between your foreign parent and Indian subsidiary?

Manish Anil Gupta & Co. helps foreign-owned companies coordinate their accounting, taxation, GST, transfer pricing, FEMA and annual compliance requirements in India.

Disclaimer

This article is for general educational purposes and does not constitute tax, legal, GST, transfer-pricing or FEMA advice. The treatment of an intercompany transaction depends on its facts, contractual terms, countries involved, applicable tax treaty and regulations in force at the relevant time. Obtain transaction-specific professional advice before making or receiving cross-border payments.