How to Set Up a Liaison Office in India – Complete Guide for Foreign Companies
A group company makes a part for Rs 100. It sells that part to a sister company in another country for Rs 110. A stranger would have happily paid Rs 150. Is that a problem? Ask a tax officer and the answer is probably yes.
We hear a version of this question from finance heads all the time. Who decides the price when both sides belong to the same group? That's the heart of transfer pricing. It's the price that related companies charge each other for goods, services, loans or the use of brands and technology.
When buyer and seller sit under one roof, nobody is bargaining hard. The price can land wherever the group likes. Tax authorities know this, so they ask a simple question: Would two strangers have agreed to this price?
At Vidhu Duggal & Company, we help businesses establish defensible transfer pricing policies, benchmark intercompany margins, prepare statutory Form 3CEB and Master File documentation, and defend their positions during tax assessments.
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Any company with a parent, a subsidiary or a sister concern across a border. That covers:
Foreign companies incorporating an Indian subsidiary or branch that transacts with overseas group entities.
Indian groups expanding abroad, setting up foreign subsidiaries in the US, Europe, or UAE & Dubai, and allocating management fees or royalties.
Fast-growing Global Capability Centers (GCCs) in India that serve an overseas parent company.
For these businesses, transfer pricing is not just an accounting exercise. It affects how profits are allocated, how much tax is payable and whether the company can defend its pricing decisions during an assessment.
Figure: Transfer Pricing Advisory — Benchmarking, Form 3CEB Documentation, and Arm's Length Principle.
One rule runs the whole subject. It's called the arm's length principle. Price every deal inside the group as if the two sides were unrelated and each was protecting its own interest.
The OECD built its guidelines around this idea. Most countries follow it, India and the US included.
Sales of goods, management fees, loans, royalties and services a GCC provides to its parent.
Study what each side really does, which assets it uses and which risks it carries. Tax people call this a functional analysis (FAR analysis).
Look for prices or margins in comparable deals between independent companies and pick a method to test your own price.
Write it all down in transfer pricing documentation, so you can defend the numbers when an officer comes asking.
This is where transfer pricing advisory services become useful. A company needs to understand its transactions, select an appropriate pricing method and maintain evidence that supports its decisions. A policy that looks reasonable on paper may not stand up to scrutiny if the underlying analysis and documentation are weak.
| If the Transfer Price is | Seller's Profit | Buyer's Profit | What a Tax Officer Sees |
|---|---|---|---|
| Equal to the arm's length price | Normal | Normal | Nothing to adjust |
| Below it | Too low | Too high | The seller's country loses tax |
| Above it | Too high | Too low | The buyer's country loses tax |
Both countries can't be happy at once, which is exactly why they watch each other.
Tax follows profit. Transfer pricing decides where the profit shows up. Move the price and you move the profit. Move the profit and the tax bill lands in a different country.
An Indian company makes a component at a cost of Rs 100. Independent customers pay Rs 150 for it. The company sells it to its group company in a low-tax country at Rs 110. That group company then resells it to outside customers at Rs 150.
India shows Rs 10 per unit. The low-tax country shows Rs 40. The group earned the same Rs 50 in total either way. But at a tax rate of about 25% in India, that Rs 40 gap means roughly Rs 10 less tax collected on every unit. The low-tax country collects very little on its extra profit.
This is what a transfer pricing officer in India spots. The officer will compare Rs 110 with what independent buyers pay, add Rs 40 back to the Indian company's income and raise a demand with interest.
The group may then face tax on the same Rs 40 in both countries until the two tax authorities sort it out through a mutual agreement procedure. That can take years.
It works in reverse too. Overstate the price and profit leaks out of the buyer's country instead. The wider the gap between two countries' tax rates, the stronger the pull to move profit—and the harder tax authorities look.
For businesses with cross-border transactions, a transfer pricing study helps establish whether the prices charged between related companies are consistent with the arm's length principle. The analysis typically involves reviewing the nature of transactions, identifying comparable companies or deals and documenting the basis for the pricing policy.
In the US, the rulebook is Section 482 of the Internal Revenue Code. It lets the IRS reallocate income and deductions between related companies when the prices don't reflect what independent parties would have agreed.
The test is the same arm's length standard we've been talking about. The IRS accepts several methods, including the comparable uncontrolled price, resale price, cost plus, comparable profits and profit split methods.
If the IRS adjusts your income, a 20% penalty on the extra tax can apply once the net adjustment crosses the lesser of $5 million or 10% of gross receipts. It becomes 40% above the lesser of $20 million or 20% of gross receipts. The best defence is documentation prepared at the time you filed, handed over within 30 days of the IRS asking for it.
Because many GCCs in India serve US parents and the two tax authorities look at the same deal from opposite sides. The US wants the parent's payment to look reasonable. India wants the GCC's fee high enough. Here's how the two systems compare:
| Parameter | United States | India |
|---|---|---|
| Main Law | Section 482, Internal Revenue Code | Sections 92 to 92F, Income Tax Act, 1961 (carried into Sections 161 to 173 of the Income-tax Act, 2025) |
| Core Standard | Arm's length | Arm's length |
| Documentation | Contemporaneous records to avoid penalties | Full documentation once international transactions cross Rs 1 crore |
| Annual Report | Not a separate transfer pricing certificate | Form 3CEB for every international transaction, Form 48 from tax year 2026-27 |
| Typical Penalty | 20% or 40% of the underpaid tax | 2% of transaction value for missing documentation under the 1961 Act |
The good news is that both countries speak the same arm's length language. A well-built study usually serves both. An advance pricing agreement can also lock in your method with the tax authority for several years, which takes a lot of the guesswork out.
For businesses operating across India and the US, working with transfer pricing consultants who understand both jurisdictions can help identify differences in documentation requirements, pricing approaches and tax exposure before they become disputes.
Courtrooms teach more than textbooks. Three famous cases show how differently these fights can end:
The IRS said Amazon's Luxembourg subsidiary should have paid about $3.6 billion for intangibles transferred in 2005 and 2006. Amazon had recorded $255 million.
The Tax Court ruled for Amazon in 2017 and the Ninth Circuit upheld that in August 2019, with about $1.5 billion of tax at stake. What counts as an intangible asset can decide the whole case.
The Indian tax department argued that Vodafone India issued shares to its overseas parent at too low a price. It treated the gap as a loan to the parent and raised a demand of around Rs 3,200 crore.
In October 2014 the Bombay High Court ruled that share premium on an issue of shares is not income from an international transaction, so the transfer pricing rules didn't apply. The government chose not to appeal. Sometimes the first question is whether a transaction falls under transfer pricing at all.
Three cases, three outcomes, one common thread. Facts, definitions and paperwork decided each of them.
There are five core transfer pricing methods. India recognises a sixth catch-all "other method" too. There's no ranking in India. You choose the method that suits the deal best—and you explain why.
| Method | How it works | Where it fits |
|---|---|---|
| Comparable Uncontrolled Price (CUP) | Compares your price with a similar deal between strangers | Goods, loans and royalties that have clear market prices |
| Resale Price Method | Starts with the price the buyer resells at and removes a normal distributor margin | Distribution businesses |
| Cost Plus Method | Adds a normal markup to the supplier's cost | Contract manufacturers and service centres such as GCCs |
| Transactional Net Margin Method (TNMM) | Compares your net profit margin with similar independent companies | Most routine businesses. The US calls it the comparable profits method |
| Profit Split Method | Splits the combined profit based on what each side contributes | Deals where both sides own unique technology or brands |
TNMM is the one we see most often. Finding good comparables for CUP is hard in real life, so margins become the practical test. Cost plus is common for GCCs. If a GCC's costs are Rs 100 and the agreed markup is 15%, it bills its parent Rs 115. The only debate is whether 15% is a fair markup and the benchmarking study answers that.
A transfer pricing benchmarking study compares a company's pricing or profit margins with those of comparable independent businesses. The results help support the selected method and explain why the pricing policy is reasonable. But, the quality of the conclusion depends on the comparables selected, the functions performed by the businesses and the reliability of the available data.
Transfer pricing is necessary. It isn't painless.
A proper study needs data, benchmarking databases and someone who understands both the business and the law. For a small subsidiary the bill can feel out of proportion.
Two experts can pick different comparables and land on different margins. A tax officer can disagree with both.
Related-party deals are the first thing an officer checks. Miss the documentation and penalties follow, such as 2% of transaction value in India or 20% to 40% of the tax in the US.
If India adds Rs 40 to your income and the other country doesn't give a matching reduction, the same profit gets taxed twice. Relief exists but it can take years.
And it never stands still: A policy that worked three years ago may not fit today's business, so the exercise repeats every year. A stitch in time saves nine and documentation is no exception.
This is why companies often seek transfer pricing compliance services rather than treating documentation as a one-time task. Regular reviews help businesses identify changes in their related-party transactions, update their benchmarking analysis and maintain records that reflect how they actually operate.
Transfer pricing does a few jobs at once:
Not every business needs the same level of support. However, professional advice becomes particularly relevant when a company:
Enters into international transactions with its parent company, subsidiary or another related entity.
Establishes an Indian subsidiary or GCC that provides services to an overseas group company.
Needs to determine an appropriate arm's length price for goods, services, royalties or intercompany loans.
Requires a transfer pricing study, benchmarking analysis or supporting documentation.
Wants to review its existing pricing policy before a tax assessment or audit.
Needs help understanding its transfer pricing obligations in India and another country.
The right approach depends on the nature of the transactions, the applicable tax rules and the company's existing documentation. A review at the right time can help identify gaps before they turn into costly disputes.
Transfer pricing sounds technical but the idea is plain. Related companies should deal with each other the way strangers would. When they do, tax lands where profit is earned. When they don't, officers step in and the bill can run into billions, as Coca-Cola found out.
Three things are worth carrying away: Price every group transaction at arm's length. Pick a method you can explain in one sentence. Keep your documents ready before anyone asks for them.
At Vidhu Duggal & Company, we assist businesses with transfer pricing services in India, including transfer pricing studies, benchmarking and documentation. Our work covers foreign companies setting up in India, Indian groups expanding abroad and GCCs that need a clear and defensible pricing policy.
We also support businesses with international taxation, business valuation and due diligence. This broader understanding helps us consider how transfer pricing decisions fit into the company's wider tax and business requirements.
If your company has cross-border transactions, is setting up an Indian subsidiary or needs to review its existing transfer pricing policy, our team can help you understand the applicable requirements and identify the next steps.
Operating across borders? Explore our integrated international corporate practices:
End-to-end setup, cost-plus markup structuring, STPI/SEZ registrations, and cross-border billing for shared services hubs.
Advisory on Indian subsidiary incorporation, branch office licenses, FDI compliance, and FEMA filings.
Withholding tax under Section 195, Permanent Establishment (PE) mitigation, and treaty relief across 85+ partner countries.
Registered Valuer DCF valuations under FEMA, Rule 11UA tax valuations, and financial due diligence for investors.
Visit Vidhu Duggal & Company or email us at vidhu@vidhuduggalandco.com to discuss your requirements.
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Our experts are here to guide you every step of the way.
There are five core methods. They are the Comparable Uncontrolled Price method, the Resale Price method, the Cost Plus method, the Transactional Net Margin method and the Profit Split method. India also allows a sixth "other method" when none of the five fits.
Done properly, it brings tax certainty and lowers the risk of penalties and double taxation. It supports fair profit allocation among group companies and helps management judge each unit's performance. It also gives the group a documented answer when a tax officer asks why a price was set.
It's the set of rules that makes related-party transactions follow the arm's length principle for tax purposes. In India these rules sit in Chapter X of the Income Tax Act, 1961, covering Sections 92 to 92F. From tax year 2026-27 they are carried into Sections 161 to 173 of the Income-tax Act, 2025. They cover documentation, the annual accountant's report and penalties.
Some groups misuse it by pricing deals to push profit into low-tax countries, for example by underpricing goods sold to a group company there. The arm's length principle, documentation rules and penalties exist to catch exactly that. Following the rules is legal tax planning. Mispricing to hide profit is not.
The arm's length principle. A deal between related companies must be priced as if it were between two independent parties.
Transfer pricing consultants help businesses review related-party transactions, analyse comparable prices or profit margins, select an appropriate transfer pricing method and prepare supporting documentation. Depending on the engagement, they may also assist with compliance requirements, benchmarking and tax authority queries.
A company may need transfer pricing documentation when it enters into transactions with associated enterprises that fall within the applicable transfer pricing rules. The specific requirements depend on the jurisdiction, transaction type and relevant thresholds. Businesses should review their obligations under the applicable Indian tax provisions and maintain the required records.
A benchmarking study compares the pricing or profit margins of related-party transactions with comparable transactions or businesses operating independently. It helps a company assess whether its pricing is consistent with the arm's length principle and provides supporting evidence for its transfer pricing policy.
Transfer Pricing refers to the pricing of transactions between associated enterprises across different tax jurisdictions. It is essential to ensure fair pricing and compliance with tax regulations to prevent profit shifting and tax avoidance.
Transactions such as the sale of goods, provision of services, licensing of intellectual property, loans, and cost-sharing arrangements between related entities fall under Transfer Pricing regulations.
Non-compliance with Transfer Pricing documentation requirements can result in heavy penalties, including adjustments to taxable income and interest on unpaid taxes.
An APA provides certainty on transfer pricing methods for future transactions, reducing litigation risks and ensuring smooth tax compliance.
CbCR is part of the BEPS Action Plan and requires large multinational enterprises to disclose detailed financial and tax information, ensuring transparency and preventing tax base erosion.
Ensure full compliance with Indian Income Tax rules, OECD guidelines, and IRS Section 482.
Vidhu Duggal and Company (‘VDC’) is a Delhi-based Chartered Accountancy firm with a strong staff of competent and proficient Chartered Accountants that are capable of handling all aspects of the financial services industry.
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