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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