Every captive runs on the same engine: the Indian subsidiary does the work, adds up its costs, applies a markup, and invoices the parent. Simple in concept – but the cost base, the markup, the invoice discipline and the GST/FEMA plumbing each hide decisions that determine whether the model sails through scrutiny or generates a decade of adjustments. This is the practical build guide for the cost-plus model.
The engine in five parts
| Part | The decision |
|---|---|
| 1. The agreement | An intercompany master services agreement signed before operations begin: scope, cost pool definition, markup, billing currency and frequency, credit period, true-up mechanism. This document is exhibit one in every future audit |
| 2. The cost base | All operating costs – salaries, rent, depreciation, allocated overheads. The fights live in the edges (below) |
| 3. The markup | Benchmarked under TNMM – or fixed at 15.5% by the safe harbour election for eligible IT/ITeS captives |
| 4. The invoice cycle | Monthly or quarterly, in USD/EUR; consistent methodology; true-up at year-end inside the same fiscal year where possible |
| 5. The collection discipline | FEMA realisation (9 months now; 15 under the new export regime) AND the GST export condition both require the money to actually arrive |
The cost-base fights – and the safe answers
| Item | The dispute | Practical position |
|---|---|---|
| Pass-through / reimbursements | Taxpayers exclude pure pass-throughs from the markup base; TPOs often mark up total cost | Exclude only genuine no-value-add conduit costs, document why, and expect the argument; where amounts are small, marking up avoids the fight |
| Parent-stock ESOP/RSU recharges | Inclusion in the cost base – and its GST treatment – are live disputes | Safest: include in the cost base and mark up; align the safe-harbour operating-expense definition if electing |
| Idle capacity / startup costs | Whose cost is the empty bench? | Contract for it – capacity commitments belong in the MSA, not in assessment arguments |
| Depreciation on parent-funded assets | In or out of the base | In – the captive owns and depreciates them; keep the fixed-asset register clean (our FAR tool helps) |
The GST layer – zero-rated, refund-driven
- The subsidiary and its foreign parent are separate persons – CBIC Circular 161/17/2021 settles that subsidiary-to-parent services qualify as export of services (a branch billing its head office does not);
- File the LUT every year and invoice without IGST; claim refund of unutilised ITC on the cost base (2-year window per period);
- The export conditions include receipt in convertible forex – a collection failure can retroactively poison the zero-rating;
- Reverse charge runs the other way: services imported from the parent (management fees, software) attract 18% IGST self-invoiced by the subsidiary.
The FEMA layer – the money must move
- Invoices are export receivables: realisation within 9 months (15 months from 1 October 2026), tracked in EDPMS via the SoftEx/EDF cycle;
- Receivables outstanding beyond the agreed credit period are the classic TP trap – recharacterised as interest-free loans to the parent with notional interest added. Set a realistic credit period in the MSA and enforce it on the parent’s treasury;
- Currency: bill in the parent’s currency, absorb forex in the cost-plus true-up – and keep the EEFC option in mind for natural hedging of forex outflows.
Worked example (the shape, not the advice)
| Line | ₹ |
|---|---|
| Operating costs of the year (salaries, rent, depreciation, overheads) | 10,00,00,000 |
| Markup at 15.5% (safe-harbour election) | 1,55,00,000 |
| Invoiced to parent (zero-rated export) | 11,55,00,000 |
| Corporate tax ~25.17% on the 1.55 crore margin | ~39,01,000 |
| GST ITC refunded on the cost base | cash-flow return, not P&L |
Setting up or cleaning up a captive’s invoicing?
We draft the MSA, define the cost pool, benchmark or elect safe harbour, and wire the GST/FEMA cycle so the engine runs itself.
Talk to My Cloud AccountantFrequently asked questions
What markup should an Indian captive charge its parent?
Whatever benchmarking supports – typically low-to-mid teens for IT services under TNMM – or the flat 15.5% safe-harbour margin for eligible captives, which trades a possibly higher rate for zero benchmarking risk over five years.
Is GST charged on invoices to the foreign parent?
No – subsidiary-to-parent services are export of services (separate legal persons per CBIC Circular 161/17/2021), zero-rated under a LUT, with refund of input tax credit. The consideration must arrive in convertible foreign exchange.
Are reimbursements marked up?
Contested territory – genuine no-value-add pass-throughs are commonly excluded from the markup base, but TPOs frequently demand markup on total cost. Document the conduit nature, or mark up small amounts and avoid the dispute.
What happens if the parent pays invoices late?
Three problems: transfer pricing treats overdue receivables as loans with notional interest, the GST export status leans on forex receipt, and FEMA EDPMS entries age toward realisation limits. Enforce the credit period contractually and operationally.
Based on the Indian TP provisions, CBIC Circular 161/17/2021-GST, the IGST Act export-of-services conditions and FEMA export realisation rules. Last reviewed: July 2026.