Your foreign parent charges a management fee. How do you prove you got anything for it?
Intra-group service charges are a frequent transfer pricing issue. The first question is often whether the service was rendered at all.
- Published
- Reading time
- 6 min
- Level
- Advanced
01 The question
An Indian subsidiary pays its parent 3% of turnover for “group support services”. What will a tax officer want to see?
02 Short answer
You need to show that services were actually rendered, that they provided an economic benefit to the Indian entity, that they were not duplicative or shareholder activities, and that the charge is at arm’s length. Contemporaneous evidence matters far more than an agreement alone.
03 The rule
Chapter X of the Income-tax Act (Sections 92 to 92F) requires international transactions between associated enterprises to be at arm’s length price. Rule 10D prescribes the documentation to be maintained, and Form 3CEB must be filed as an accountant’s report.
Authorities typically examine the “benefit test” — whether an independent enterprise would have paid for the service — alongside the method used to determine the price.
04 Simple example
Scenario
Brahmaputra Tech pays its Dutch parent a fixed 3% of revenue for HR, IT and strategy support. The agreement is in place, but there are few records of actual services.
An officer may question whether the services were rendered or whether they were shareholder activities (such as group-level reporting) that benefit the parent rather than the subsidiary.
Emails, deliverables, timesheets and cost allocation keys become essential evidence for supporting the charge.
05 Why it matters
Adjustments can result in additional tax, interest and penalties, and may create double taxation without relief.
Management fees often attract parallel scrutiny for withholding tax and GST on imported services.
06 Practical takeaway
- 01Maintain a contemporaneous evidence file for each category of service.
- 02Separate shareholder activities from genuine services in the cost pool.
- 03Revisit the allocation key annually as the business changes.
07 Source / reference
- Income-tax Act, 1961 — Sections 92 to 92F
- Income-tax Rules, 1962 — Rules 10B, 10D and 10E
- OECD Transfer Pricing Guidelines — Chapter VII — Intra-group services
References are to the provisions as generally understood at the time of writing. Provisions may since have been amended, renumbered (including under the Income-tax Act, 2025) or interpreted differently.
8. Educational disclaimer
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