Intercompany Loans & Transfer Pricing in India

Your US parent is short on cash, so you wire ₹5 crore from the Indian company to tide it over, interest-free, because it is all one group anyway. Two years later a transfer pricing notice arrives asking why you never charged interest.

This is Ankit’s classic mistake number three, and it is the one founders find hardest to believe. For intercompany loan transfer pricing, a loan to or from a foreign associated enterprise is a full international transaction, and it must carry an arm’s length interest rate. Charge zero, and the department can invent the interest for you and tax it. This guide covers when a loan is caught, how the rate is benchmarked, why guarantees need a fee too, and how an unpaid notional interest snowballs into a secondary adjustment.

1 Why an intercompany loan is a transfer pricing transaction at all

Founders think of transfer pricing as being about the service fee their captive dev-centre charges the parent. It is broader than that. Section 163 (old 92B) defines an international transaction to expressly include the lending or borrowing of money and the provision of a guarantee between associated enterprises.

So the moment money moves as a loan between your Indian company and a foreign parent, subsidiary or fellow group entity, you have a financing transaction that has to be priced at arm’s length, just like any sale of goods or services would be. The same applies to a receivable you let sit uncollected for months: an unusually long credit period can itself be re-characterised as an interest-bearing loan.

2 The interest-free loan mistake

Here is the trap in one line: an interest-free or below-market loan to a foreign AE does not save the group tax, it just moves the taxable interest income out of India, and the department will move it back.

When you lend at zero, a transfer pricing officer computes what interest an independent lender would have charged, calls it the arm’s length price, and adds that deemed interest to your taxable income. You end up paying Indian tax on interest you never actually received.

3 How the arm’s length interest rate is benchmarked

The single most important principle, and the one most home-grown “we used the SBI rate” attempts get wrong, is this: price the loan in the currency it is denominated in, not in Indian rupees.

Indian tribunals have repeatedly held that a foreign-currency loan carries foreign-currency risk, so it must be benchmarked against the market rate for that currency, not against a rupee lending rate. The rate is built up in two parts.

Add the two and you have an arm’s length rate: for example, a USD reference rate of around 4.5% plus a credit spread of about 1.5% gives roughly 6% for a mid-risk unsecured USD loan. The exact figure depends on the facts and should be supported in your benchmarking study.

4 Corporate and bank guarantees need a fee too

Guarantees are the quieter half of financial transactions and the one founders forget entirely. If your Indian company gives a corporate guarantee, or arranges a bank guarantee, so that a foreign subsidiary can borrow, you have provided a benefit that an independent party would have charged for. That is an international transaction, and it needs an arm’s length guarantee fee.

Guarantee fees are typically benchmarked as a percentage of the guaranteed amount, often in a range of roughly 0.5% to 1% a year, and sometimes higher depending on the subsidiary’s standalone credit and the size of the benefit passed on. Charge nothing, and, exactly as with an interest-free loan, the officer can impute a notional fee and tax it.

5 Getting it right: the sequence

If you are about to lend to, borrow from, or guarantee a foreign AE, run these steps before the money moves, not after the notice arrives.

6 The secondary adjustment: how one loan keeps costing you

This is the part that turns a one-time adjustment into a recurring one. When notional interest is added to your income to bring the loan to arm’s length, that extra income represents money that should have flowed to India but stayed with the foreign AE. The secondary adjustment rule (Section 92CE concept) says that excess must be repatriated to India within the prescribed time.

If you do not bring it back in time, the excess is treated as a deemed advance to the AE, and further notional interest is charged on it, year after year, until it is repatriated. So an interest-free loan can cost you twice: once as deemed interest on the loan, and again as interest on the un-repatriated primary adjustment.

7 Your intercompany financing checklist

1. Treat every loan, long-outstanding receivable and guarantee with a foreign AE as an international transaction.
2. Put a written intercompany agreement in place before the money moves, stating currency, tenor, rate and security.
3. Benchmark the interest rate in the loan’s own currency: a market reference rate (SOFR for USD, not LIBOR) plus a credit spread.
4. Never lend or borrow interest-free with a foreign AE; a 0% rate invites a deemed-interest adjustment.
5. Charge an arm’s length guarantee fee (roughly 0.5% to 1%+) on any guarantee you give for an AE.
6. Actually invoice and collect the interest and fees; do not just book them.
7. Report every financing transaction in Form 3CEB by 31 October.
8. If a primary adjustment arises, repatriate the excess in time to avoid a secondary adjustment and its recurring interest.

8 FAQs

Disclaimer: This article is general information as of August 2026 and is not legal or tax advice. Transfer pricing outcomes turn on the specific facts, the currency and terms of the transaction, and evolving case law. Confirm your position with a qualified transfer pricing professional before acting.