Intercompany Transactions: Handling Dual Exposure under TP and GST

If your business is part of a group, chances are you’re constantly dealing with intercompany transactions goods moving between units, support services supplied to a subsidiary, cross charges for IT, marketing, or management, and so on.

On paper, these may just look like internal entries. But for the Indian entity that’s operating in India, the same inter company transactions can trigger dual exposure:

• Under transfer pricing (TP) for income tax, and
• Under GST law for goods and services tax

In other words, the transfer price you set for related parties is not just about the Income Tax Act anymore. It also has implications for GST purposes including valuation, taxability, and input tax credit (ITC).

In this guide, we’ll break down how intercompany transactions are seen under both TP and GST, where the risks lie, and how to practically align your gst and tp positions so the tax authorities don’t see two different stories. If you find these dual requirements confusing, working with an experienced GST consultant in Gurgaon can help you navigate compliance and valuation effectively.

What Are Intercompany Transactions in the Indian Context?

In simple words, intercompany transactions (or inter company transactions) are transactions between related entities within the same group. These can be:

• Supply of goods from a parent to a subsidiary
• Supply of services like IT, HR, R&D, support, or management
• Cross-charges for shared costs and intra group allocations
• Use of brand, IP, or know how
• Cross-border transactions between an Indian entity and its foreign AE

Under Indian income tax, transfer pricing regulations apply when there are:

• International transactions between related parties, or
• Certain domestic transactions above thresholds

Under Indian GST, many transactions between related parties are treated as supply of goods or services even when there is inadequate or no consideration. This is where the dual exposure starts.

How Transfer Pricing Looks at Intercompany Transactions

From an income tax perspective, transfer pricing simply refers to the pricing of goods and services and finance between related entities. The core idea is:

Would this transfer price look acceptable if the same transaction happened between unrelated parties?

Key points under TP rules and Indian income tax:

• Transactions must be at arm’s length comparable to similar transactions between unrelated parties.
• You benchmark prices for goods or supply of services using methods like CUP, TNMM, etc.
• TP documentation is required to show:
• Nature of intercompany transactions
• Functions, assets, and risks
• How the transfer price or margin is justified
• If the Indian tax authorities disagree with your benchmark, they can propose TP adjustments, increasing your taxation in India.

So, for income tax, the focus is on: profit shifting, arm’s length, and correct reporting of income.

Must Read: Safe Harbor Rules for Transfer Pricing in India: A Complete Guide

How GST Law Treats Intercompany Transactions

Under GST act and CGST Act, the lens is different. The concern is taxability and value of the supply for goods or services.

Key ideas under Indian GST for transactions under GST:

• A supply made between related persons is taxable under GST, even if made without consideration, if it is in the course or furtherance of business.
• Schedule I of the GST (and Schedule I of the CGST) specifically covers transactions between related entities, including intra-company transactions between distinct registrations.
• For GST purposes, you must determine the value of supply of goods or services between related entities, often using:
• Open market value
• Value of similar goods or like kind and quality
• Cost-based rules, where needed

So, under gst law, even if you don’t charge anything on paper, many transactions between related entities can still be:

• Treated as supply
• Considered taxable
• And you may be liable to pay GST

At the same time, the recipient may claim input tax credit if eligible, so long as the transactions under GST and ITC conditions are satisfied.

Recommended: Transfer Pricing Study Report Applicability: A Complete Guide

Dual Exposure: Where GST and TP Overlap

Here’s where the real complexity starts: the same intercompany transaction is seen by two sets of tax authorities under two sets of tax laws:

• Income tax side → applying transfer pricing regulations and tp rules
• Goods and services tax side → applying Indian GST valuation rules as per the CGST Act

Example 1: Management Services from Parent to Indian Subsidiary

• Parent provides supply of services (management support, strategy, IT) to an Indian entity.
• For TP, you must show the transfer price is at arm’s length based on global transfer pricing policies.
• For GST, this is supply of services liable for tax under gst regime, and GST is applicable on the value of the supply.

If you underprice for TP, the income tax department may challenge it.
If you record zero or too low value for GST, the GST department may say the value of supply should be at open market value as per per the GST valuation rules.

Example 2: Cross-Charging Shared Costs

• HQ incurs global expenses (software, marketing, shared services) and cross charges them to the Indian entity.
• Under TP, your tp documentation must show the allocation keys are reasonable.
• Under GST, this supply of goods and services (or just services) to the Indian company may:
• Be treated as imported services
• Attract reverse charge liability
• Affect ITC availability

Now you’re dealing with:

• GST and TP regulations at the same time
• Dual checks during any audit both TP and GST teams ask similar but differently angled questions.

Valuation: Arm’s Length vs Open Market Value

A common question is:

If I’ve already determined an arm’s length transfer price, can I just use that as the value of goods and services for GST?

In many cases, it makes sense for both gst and tp to align but the rules are not identical.

• Transfer pricing focuses on ensuring margins and pricing between related parties are similar to unrelated parties.
• GST valuation cares about value of the supply for goods or services under gst law, especially supply made between related persons or without consideration.

Under GST act and valuation rules:

• You may need to consider open market value or the value charged to unrelated parties for similar goods or similar transactions.
• If that’s not available, you may use cost based methods.

In practice, many multinational groups aim to:

• Ensure that the transfer price under TP is also a defendable value of goods or services under GST.
• Document why the pricing of goods and services supplied between related parties is reasonable from both angles.

If you treat these separately one value for TP and a very different one for GST you may invite questions during audit from both sides.

Special Focus: Transactions Without Consideration

Under TP, if there’s no charge, there may still be an issue (like free services or guarantee benefits).

Under GST, the issue is sharper:

• Certain transactions between related parties, even if made without consideration, are treated as supply as per Schedule I of the CGST.
• For example:
• Goods sent from head office to branch in another state
• Services between distinct registrations
• Intercompany transactions that support business

In such cases, for GST purposes:

• You still need to determine a value of supply
• The transaction may be taxable under GST
• The recipient unit/entity may claim input tax credit if conditions are met

From a planning perspective, intercompany transactions must be reviewed to see whether they:

• Are taxable as per transactions under GST
• Are simply book entries, or real supply of goods or services
• Need an invoice and proper GST treatment

Cross-Border Transactions: TP, GST, and Reverse Charge

For cross-border transactions and international transactions, the interaction between TP and GST becomes even more important.

For example:

• Services supplied outside India may be treated as export of services under GST, if conditions are met (place of supply, receipt in foreign exchange, etc.).
• If an Indian entity receives imported services from a foreign related party, reverse charge may apply, and the Indian company is liable to pay GST on the value of goods and services (services, in this case).
• From the transfer pricing side, the same cross border charges may be examined as international transactions under TP, to ensure arm’s length pricing.

In short:

• TP rules care about whether the transfer price is fair.
• GST regulations care about whether the supply of goods or services is taxed correctly in India.

A mismatch such as undercharging for TP and not paying GST under reverse charge can lead to issues under both tax regulations.

Key Risk Areas in Intercompany Transactions Under TP and GST

Some common risk zones where dual exposure often arises:

• Low or Nil-Valued Services
• HQ or parent provides lots of support but charges very little or nothing.
• Under TP, this may be seen as profit shifting.
• Under GST, transactions under GST could still be taxable as supply made between related persons, even if made without consideration.
• Stock Transfers and Intra Company Transactions
• Movement of goods between branches or group units.
• GST is applicable on such supply of goods in many cases, with value of goods based on valuation rules.
• Centralised Costs and Cross charges
• Global software, licences, or services are paid centrally and cross charged.
• Need alignment of value of the supply for GST and transfer price for TP.
• Incorrect or No Documentation
• Missing or vague agreements, no clear invoice trail, or weak tp documentation.
• Both TP and GST teams may question the taxability, valuation, and ITC.

Practical Steps to Align TP and GST on Intercompany Transactions

Here’s a simple, practical framework to manage gst and tp on intercompany dealings:

Step 1: Map All Intercompany Transactions

List all intercompany transactions domestic and cross-border where there is:

• Supply of goods and services
• Shared costs, allocations, and reimbursements
• IP, royalty, or finance arrangements

Identify which ones:

• Fall under transfer pricing regulations (under Indian income tax)
• May be taxable under GST as per cgst act and gst act

Step 2: Determine Taxability Under GST

For each transaction, ask:

• Does it qualify as supply of goods or services in the course or furtherance of business?
• Is it between a related person or distinct persons where schedule I of the GST applies?
• Is it taxable or exempt per the GST?
• Who is liable to pay GST supplier, or recipient under reverse charge?

Step 3: Align Valuation and Transfer Price

Ensure that:

• Your transfer price policy and value of supply for GST are not contradictory.
• The value of goods and services charged to the Indian entity is:
• Defensible as arm’s length under TP, and
• Acceptable as open market value or permitted methods under GST.

Step 4: Strengthen Documentation

• Put clear inter company agreements in place.
• Maintain tp documentation with FAR analysis and benchmarking.
• Keep a proper invoice trail and workpapers for GST valuation.
• Ensure appropriate ITC treatment no double claims, no missing credits.

Step 5: Review Regularly and Prepare for Audit

• Conduct periodic internal reviews of intercompany transactions.
• Reconcile TP and GST treatment, especially for high value related party transactions.
• Be prepared to explain your logic and working during audit both from TP and GST officers.

Conclusion: One Story for Both TP and GST

Intercompany transactions sit right at the intersection of transfer pricing and Indian GST. For an Indian entity:

• The same supply of goods or services can be examined under the Income Tax Act and the CGST Act.
• Both gst and tp have their own rules, but the facts and pricing cannot be two different stories.

If you:

• Map all transactions between related parties
• Understand how each one is seen under gst law and transfer pricing regulations
• Align the value of supply and transfer price
• Keep strong documentation for both tax regimes

…you can manage the complexities of transfer pricing and GST far more smoothly, and stay ahead of both Indian tax authorities.

At DSRV India, we help groups design and document their intercompany pricing so it stands up under both TP and GST review from policy design and benchmarking to GST valuation and compliance.