A US-based IT company approached us with a strategic plan:
They wanted to shift their entire backend operations to India.
The plan:
• Hire Indian employees
• Set up a legal structure in India
• Fund Indian operations from the US
• Operate exclusively for the US parent
• No third-party Indian clients
Sounds simple?
It wasn’t.
The Real Concerns
The US management had serious questions:
• Should they open a Branch Office, Project Office or Subsidiary?
• Will RBI approval be required?
• How will funds be remitted under FEMA?
• Will this create a Permanent Establishment (PE) in India?
• What are the Transfer Pricing implications?
One wrong structure could lead to:
❌ PE exposure in India
❌ Corporate tax liability on US profits
❌ Transfer Pricing litigation
❌ FEMA non-compliance penalties
Our Strategic Approach
1️⃣ Choosing the Right Structure
We advised incorporation of an Indian Private Limited Subsidiary under Companies Act, 2013.
Why not Branch or Liaison Office?
• Restricted activities
• Heavy RBI oversight
• Limited operational flexibility
Under FEMA (Automatic Route), 100% FDI is permitted in IT/ITES — no prior RBI approval required.
2️⃣ Managing Permanent Establishment (PE) Risk
The key was to ensure the US parent does NOT create PE in India.
We structured operations such that:
✔ Indian entity operates as an independent legal entity
✔ No authority to conclude contracts for US parent
✔ Strategic control remains outside India
✔ Clear inter-company agreements
This significantly mitigated PE exposure.
3️⃣ Transfer Pricing Strategy
Since both entities are Associated Enterprises, Transfer Pricing regulations applied.
We implemented:
✔ TNMM (Transactional Net Margin Method)
✔ Cost-plus compensation model
✔ Benchmarking study for markup analysis
✔ Arm’s Length Pricing (ALP) documentation
Typical IT/ITES captive margins range between 8%–20% depending on FAR analysis.
A detailed TP Study was prepared.
Form 3CEB compliance ensured.
4️⃣ FEMA & RBI Compliance
✔ FDI under Automatic Route
✔ FC-GPR filing for capital infusion
✔ Annual FLA return filing
✔ Proper capital structuring
Full regulatory alignment achieved.
Final Outcome
✅ Compliant Indian subsidiary structure
✅ PE exposure mitigated
✅ Transfer Pricing documentation secured
✅ FEMA & RBI compliance aligned
✅ Smooth capital infusion from US
The company successfully transitioned operations to India with zero litigation risk.
Key Insight
Outsourcing to India is not just operational planning.
It is:
• Structural planning
• Tax planning
• FEMA compliance
• Transfer Pricing strategy
• PE risk mitigation
Cross-border expansion must be engineered — not improvised.
Vidhu Duggal
Founder – Vidhu Duggal & Company (VDC)
International Tax & Cross-Border Advisory
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