Fintech groups often establish captive service arrangements, where an Indian subsidiary provides services to the overseas parent or group companies. These arrangements are subject to transfer pricing rules under the Direct Tax Code (DTC) 2025. This guide analyses the transfer pricing implications for fintech captive service arrangements and provides practical compliance strategies.
The Transfer Pricing Framework
Section 161 — The Arm's Length Principle
Section 161(1) requires that "Any income arising from an international transaction or a specified domestic transaction shall be determined having regard to the arm's length price". For fintech captive service arrangements, this means the fees charged for services must be at arm's length.
Section 161(2) extends this to "Any allowance for any expense or interest".
Section 162 — Associated Enterprise
The overseas parent or group company becomes an associated enterprise (AE) of the captive centre under Section 162 when:
- The parent company holds, directly or indirectly, shares carrying not less than 26% of the voting power
- The parent company participates in the management or control or capital
Section 163 — International Transaction
The provision of services by the captive centre to its overseas parent or group companies constitutes an international transaction.
Common Fintech Captive Services
1. Software Development
- Application development
- Platform development
- Mobile app development
- Web development
2. IT Services
- IT support and maintenance
- Infrastructure management
- Network operations
- Cloud services
3. Business Process Services
- Back office operations
- Data processing
- Customer support
- Transaction processing
4. Financial Technology Services
- Payment processing
- Fraud detection
- Risk management
- Compliance services
5. Research and Development
- Technology research
- Innovation and development
- Product development
Determination of Arm's Length Price
Applicable Methods
Section 165(1) prescribes six methods. For fintech captive services, the most appropriate method is typically the Transactional Net Margin Method (TNMM).
TNMM Application
Under TNMM:
- The net profit margin realised by the captive centre is compared with that of comparable independent enterprises
- The net profit margin should be calculated in relation to costs incurred
Functional Analysis
- Functions: Software development, IT support, transaction processing, research
- Assets: Intellectual property, proprietary systems, brand, physical assets
- Risks: Market risk, operational risk, key person risk
Comparable Selection
- Identify comparable independent enterprises
- Consider factors such as size, location, industry, and functions
- Make adjustments for differences
Documentation Requirements
Section 171 — Information and Documents
Rule 84(1) prescribes the documentation requirements:
- Description of the ownership structure
- Profile of the multinational group
- Description of the business and industry
- Nature and terms of the international transaction
- Functional analysis
- Method selection and application
Rule 84(2) — Threshold
If the aggregate value of international transactions does not exceed ₹1 crore, the documentation requirements shall not apply.
Section 172 — Report from an Accountant
Every person who has entered into an international transaction shall obtain a report from an accountant and furnish it on or before the specified date.
Safe Harbour Options
IT Services Safe Harbour
Fintech captive service arrangements involving software development or IT services may be eligible for the safe harbour under Rules 86–93.
Safe Harbour Margin
Rule 89(2) provides a safe harbour margin of 15.5% for IT services where aggregate operating revenue does not exceed ₹2,000 crore.
Conditions for Safe Harbour
- The captive centre must be providing IT services with insignificant risk
- The foreign principal must perform most of the economically significant functions
- The capital and funds must be provided by the foreign principal
- The captive centre must work under the direct supervision of the foreign principal
Practical Compliance Strategies
1. Assess Applicability
- Determine whether the captive centre is engaged in international transactions
- Identify all related-party transactions
- Determine the value of these transactions
2. Conduct Transfer Pricing Study
- Conduct a functional analysis
- Identify comparables
- Determine the arm's length price
- Document the analysis
3. Consider Safe Harbour
- If the captive centre is engaged in IT services, consider the safe harbour rules
- Assess whether the safe harbour margin can be met
4. Maintain Documentation
- Maintain contemporaneous documentation
- Ensure documentation is complete and accurate
- Retain documentation for nine years
5. File Report
- Obtain a report from an accountant
- File the report on or before the specified date
Penalties for Non-Compliance
Section 442 — Penalty
Section 442 provides for a penalty of 2% of the value of each international transaction for:
- Failure to keep and maintain information and document
- Failure to report such transaction
- Maintaining or furnishing incorrect information or document
Section 457 — Penalty
Section 457 provides for a penalty of 2% of the value of the transaction for failure to furnish any information or document as required under Section 171(2).
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on transfer pricing for fintech captive service arrangements. Our direct tax experts help fintech groups understand their obligations, prepare documentation, and navigate the regulatory framework. We assist in TP study preparation, safe harbour assessment, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on transfer pricing or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex transfer pricing framework for fintech captive service arrangements requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- TP Assessment: Evaluation of transfer pricing obligations
- Documentation: Assistance with TP study and documentation
- Safe Harbour: Guidance on safe harbour eligibility
- Representation: Representation before Transfer Pricing Officers
Contact us for expert legal guidance on your transfer pricing matters.