Transfer pricing and intra-group services in India: Aligning operational efficiency with risk mitigation

Importance of intra-group services

IGS are essential for multinational enterprises (MNEs), enhancing cost efficiency, resource optimisation and operational consistency. Bhutani notes that 35% of intercompany transactions are service-based, with India’s service sector contributing nearly 50% of the country’s GDP. The rapid expansion of Global Capability Centres (GCCs) in India further underscores the country’s growing role in centralised services.

Chargeability and OECD guidelines

A core issue in transfer pricing is distinguishing chargeable from non-chargeable IGS. Chargeable services – such as IT support, human resources, and R&D – must provide tangible economic or commercial benefits to the recipient entity.

“The key feature to decide whether a service is chargeable is that it must satisfy a benefit test.”

Non-chargeable services include shareholder activities and duplicated functions. OECD guidelines suggest applying both the benefit test and the independent enterprise test to determine legitimacy.

Litigation and regulatory challenges

IGS transactions face intense scrutiny in India. Bhutani identifies common disputes, including inadequate documentation, unclear cost allocation and benefit-test failures.

“Demonstrating economic and commercial benefits has been a never-ending struggle.”

Tax authorities often challenge the necessity of services, the adequacy of documentation and potential duplication of costs. These issues contribute to litigation, with tax officers sometimes defaulting to a nil benchmarking approach, questioning the legitimacy of service-related expenses.

International comparisons, dispute avoidance and the role of technology

Comparing India’s transfer pricing framework with other economies, Bhutani notes that Advance Pricing Agreements (APAs) and Mutual Agreement Procedures (MAPs) are gaining traction. Statistics indicate that 64% of unilateral APAs and 50% of bilateral APAs signed in FY 2023–24 involved intra-group service arrangements, demonstrating an increased preference for tax certainty among MNEs. She also contrasted India’s safe harbour rules with those in the US and USA, highlighting differences in scope, mark-up thresholds and compliance requirements.

The pandemic has accelerated the shift toward centralised service models and hybrid work. India now hosts over 1,600 GCCs, with projections indicating 1,900 by 2025. Shared services now encompass high-value functions like digital transformation and data analytics. Bhutani also stressed that technology will play a critical role in IGS governance through automation, AI-driven compliance tracking and operational transfer pricing (OTP) tools.

Key takeaways

Five vital best practices for managing IGS are set out in the interview.

• Comprehensive planning: Clear policies and robust documentation ensure compliance.
• Internal controls: Strong governance frameworks and fair cost allocation.
• Continuous monitoring: Real-time tracking and regular benchmarking.
• Dispute avoidance mechanisms: APAs, MAPs, and safe harbours to minimise litigation risks.
• Proactive compliance: Leveraging technology to stay ahead of regulatory changes.

Bhutani concludes that as businesses expand globally, effective IGS management is more crucial than ever. Digital transformation, regulatory changes, and proactive compliance will shape the future of transfer pricing in India.

This article first appeared in the Chambers and Partners on 17 March 2025.