Intercompany Billing in India: Related Party Transactions and Arm's Length

Intercompany billing in India: related party rules under GST and Income Tax, arm's length pricing, and transfer pricing documentation.

When Two Entities Are "Related"

Under Section 15 of the CGST Act, entities are related if one controls the other, both are controlled by a common parent, they share key management, or hold more than 25% in each other. Schedule I of the CGST Act treats supplies between related persons as taxable even if made without consideration. Examples include a parent company billing its Indian subsidiary for headquarters services, two sister concerns sharing a server, or a director using company resources. Intercompany transactions cannot be ignored or netted off — each leg requires a proper tax invoice.

Arm's Length Valuation

Rule 28 of the CGST Rules requires intercompany supplies to be valued at the open market value, or 90% of the price at which the recipient would sell to an unrelated party, or cost plus 10% as fallback. The same arm's length principle applies under Section 92 of the Income Tax Act for transfer pricing. Mispricing intercompany transactions can lead to GST demands, transfer pricing adjustments, and double taxation if the foreign jurisdiction also adjusts. Maintaining a documented pricing policy approved by management is the first line of defence.

Transfer Pricing Documentation

For cross-border intercompany transactions, Section 92D of the Income Tax Act requires maintenance of transfer pricing documentation including functional analysis, comparable benchmarking, and economic justification of the pricing method (CUP, TNMM, cost plus, or resale price). Form 3CEB must be filed annually by an independent chartered accountant certifying the arm's length nature. For domestic related-party transactions above specified thresholds, similar documentation is needed under Section 92BA. Skipping documentation invites scrutiny and 100-300% penalty on adjustments.

GST Practicalities

Each intercompany invoice must follow standard tax invoice rules with both supplier and recipient GSTINs, HSN/SAC, and tax breakup. Because the recipient is registered, they can claim ITC on the GST charged — making intercompany GST often cash-flow neutral at group level. However, branches in different states are treated as distinct persons under GST and must invoice each other for cross-state supplies, even though they're the same legal entity. This catches many businesses operating multi-state warehouses.

Documenting Related-Party Bills in BillBabu

BillBabu lets you flag a customer or supplier as "related party" and the system applies the right valuation logic, generates invoices that capture pricing-method notes for documentation, and produces a related-party transaction summary at year-end. For groups operating across multiple BillBabu accounts, intercompany reconciliation reports show matched and unmatched bills, dramatically reducing audit-prep time.

---

Built for Indian small businesses. BillBabu is GST-compliant billing software that helps you create invoices, manage estimates, track payments and stay audit-ready — from your phone. Learn more about BillBabu or download the app.