A centre serving only your own group has no Indian customers, so almost nothing written about India market entry applies to it. What decides whether it runs smoothly is the markup you charge the parent, whether your Indian accounts convert cleanly into the group's, and how you move people between countries without creating a tax liability you had not priced.
A captive bears little risk and owns no intangibles, so it is remunerated on a cost-plus basis. The markup is benchmarked against comparable Indian service providers and documented before the year end, not argued afterwards.
Electing safe harbour means accepting a prescribed minimum margin in exchange for the pricing not being challenged. An advance pricing agreement is the route where the amounts justify negotiating certainty instead.
A company below the net worth threshold reports under Indian accounting standards rather than Ind AS, so the numbers have to be converted for an IFRS or US GAAP parent. Doing that monthly is far cheaper than doing it at the year end.
Where the parent seconds employees and recharges the cost, that arrangement has been held capable of being a taxable supply of manpower services rather than a simple reimbursement. It is a large exposure and it is usually discovered late.
Provident fund, insurance, professional tax and salary withholding for local staff, and the international worker rules plus any social security agreement for people posted in.
Building a first captive rather than a thousand-seat centre.
Serving only the parent, with no Indian revenue.
Where a vendor runs it first and the group takes it over.
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💬 Get my quote →On a cost-plus basis, in almost every case. A captive serves only the group, takes little commercial risk and owns no intangibles, so the arm's-length answer is that it recovers its operating costs plus a markup for the service it provides. The markup is the whole ball game: it is benchmarked against what independent Indian service providers earn for comparable work, and it has to be documented contemporaneously. Setting it at a round number because it looked reasonable is the most commonly challenged item in a foreign-owned Indian company.
It is a bargain offered by the tax authorities: declare a margin at or above a prescribed minimum for your category of service, and your transfer pricing will not be challenged for that year. For an IT, ITeS, knowledge-process or contract research captive it removes a recurring argument, which for a smaller centre is worth more than the extra margin costs. The catch is that the prescribed margin is usually above what a benchmarking study would support, so you pay more Indian tax for the certainty. Both the eligibility thresholds and the margins have been revised more than once recently, so confirm the current figures for the year you are electing for rather than relying on an article.
Only where the numbers justify it. An APA is negotiated with the tax authorities and fixes the pricing methodology for a period, with rollback to earlier years available — which is genuine certainty rather than a defence prepared after the fact. It takes time and professional cost to obtain, so it suits a large centre with a long horizon. A forty-person captive is usually better served by good documentation, or by safe harbour.
Usually not, and that is the source of most group reporting pain. Ind AS applies to listed companies and to unlisted companies above a net worth threshold; below it a company reports under the Indian accounting standards. So a captive typically prepares statutory accounts on a basis that is neither IFRS nor US GAAP, and the figures have to be converted for the parent. The practical answer is to run the conversion as part of the monthly close with a documented bridge, rather than reconciling twelve months of differences in the week the group audit starts.
It can be, and this is the exposure most groups have not priced. Where a foreign parent seconds employees to its Indian company and recharges the cost, the arrangement has been held capable of amounting to a supply of manpower services by the parent to the Indian company rather than a simple reimbursement of salary — which brings indirect tax on the recharged amount, payable by the Indian company under reverse charge, often for past years. Whether it applies turns on the specific facts of the contracts and who the real employer is. If you have secondees and recharges in place, this is worth reviewing before it is raised with you rather than after.
That you will have two transitions to get right rather than one. While a vendor operates the centre you are buying a service, with withholding and indirect tax on those payments. On transfer you are acquiring a business or a company, which raises valuation, the price paid for the workforce and any intangibles, stamp duty, and the FEMA reporting on acquiring shares from a resident with its pricing ceiling. Employees moving across need continuity of service for gratuity and a provident fund transfer rather than a restart. The commercial case is usually sound; the cost is usually underestimated on the transfer leg.
No. Talent availability, attrition, office cost and infrastructure decide that, and they are questions for a location adviser and a recruiter, not for a tax and compliance firm. We will tell you what differs between states on the compliance side — professional tax, shops and establishments registration, and the state incentives that exist where you are considering — and we will work with whoever you appoint on the rest. We would rather be narrow and right.
The ordinary set for an Indian company plus the transfer pricing layer. Statutory audit regardless of size, an income tax return, quarterly withholding returns, GST returns and refund claims where it exports services, ROC filings after the annual general meeting, and DIR-3 KYC for each director. On top: transfer pricing documentation and the accountant's report on international transactions, due ahead of the return. And because it is foreign owned, the annual FLA return to the Reserve Bank by 15 July.
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