Why it matters
Most foreign-owned Indian entities transact with their group: a captive centre provides services to the parent, a distributor buys from a group manufacturer, a subsidiary pays royalties. These transactions fall under the transfer-pricing rules, and an accountant’s report on them is required. For service centres, the main choices are whether to use the safe harbour or seek an advance pricing agreement (APA).
The IT-services safe harbour
Budget 2026-27 introduced a single safe harbour for IT services, now in the Income-tax Rules 2026.
| Feature | Position |
|---|---|
| Services covered | Software development, IT-enabled services, knowledge process outsourcing and contract R&D |
| Margin | 15.5% operating margin on cost |
| Eligibility | Taxpayers within the ₹2,000 crore threshold, raised from ₹300 crore |
| Approval | Automated |
| Duration | The option can run for five years once chosen |
Note: The 15.5% safe harbour suits routine cost-plus centres. Higher-value R&D or AI work may attract a claim for a higher margin. Such centres should benchmark annually or seek an APA.
Advance pricing agreements
- Fast track for IT services: unilateral APAs for IT services are to be fast-tracked, with the aim of concluding them within two years, extendable by six months.
- Modified returns: associated enterprises may file modified returns after an APA is concluded, so that the agreed pricing flows through to both sides.
Data-centre services
Budget 2026-27 announced a 15% cost-plus safe harbour for related-party data-centre services. Confirm that it has been notified before relying on it. Separately, a notified foreign cloud company’s income from data-centre services procured in India is exempt to the tax year ending 31 March 2047, subject to conditions (see corporate tax).
The accountant’s report (s.172)
A transfer-pricing accountant’s report is still required under s.172 of the Income-tax Act 2025. The Finance Act 2026 replaced the penalty for not furnishing it with a fee (s.428).
Permanent establishment risk
Transfer pricing and PE risk are linked: income of a foreign company attributable to a PE in India is taxed at the foreign company rate of 35% plus surcharge and cess.
Hyatt (Supreme Court, July 2025)
The Supreme Court held that control over the operations of Indian hotels, exercised under a strategic oversight agreement, created a fixed-place PE under Article 5(1) of the India-UAE treaty.
For captive centres and service entities, the practical response is to keep decision rights and the roles of seconded staff documented, so that it is clear which decisions are made in India and by whom.
Significant economic presence
Payments from India above ₹2 crore a year, or interaction with 300,000 or more users in India, can create a taxable presence for a foreign company even without staff or premises in India.
What to check next
- Test whether each Indian service entity is within the ₹2,000 crore threshold and whether its work is routine enough for the 15.5% safe harbour.
- For R&D, AI or other higher-value work, compare an APA with annual benchmarking.
- Review inter-company agreements, secondment letters and governance documents for evidence of where decisions are taken.
- Confirm that the 15% data-centre safe harbour has been notified before pricing on it.
- Diary the s.172 accountant’s report; the fee replaced the penalty, but the filing obligation remains.