The India Markup Premium
A Comparable Pool Problem Hiding in Plain Sight
Software companies with India-based service entities apply intercompany markups that consistently run 1.5x to 2.5x higher than their non-India equivalents. The premium itself is defensible. The way most companies document it is not.
If your company has an R&D or IT services entity in India, there is a number in your transfer pricing documentation that probably does not look like anything else in your intercompany structure. The markup on that entity, almost certainly somewhere between 12% and 18%, is likely running at double the rate you apply to functionally identical entities in the US, UK, or Europe.
This is not a mistake. It is a structural feature of how transfer pricing benchmarking works in India. And while the markup itself is defensible, the way most software companies handle it leaves gaps that are getting harder to ignore.
The Pattern
A consistent pattern characterizes software-vertical transfer pricing: companies with India-based service entities apply markups significantly higher than what they apply to equivalent entities elsewhere. The premium runs roughly 1.5x to 2.5x the non-India rate, and it shows up across every observable case in the software-vertical compliance landscape. Not most. All of them.
The entities in question report to the same parent, operate under the same intercompany framework, and often deliver the same categories of work: development services, technical support, shared operations. The only meaningful difference is location.
What makes this worth attention is not the premium itself. Experienced TP professionals have seen it in their own files. It is the consistency across companies, and the set of downstream risks that consistency creates, that most teams have not fully addressed.
Why India Benchmarks Produce Higher Ranges
When a transfer pricing analyst benchmarks an Indian service entity, the comparable set is drawn from privately and publicly listed Indian technology firms. That pool is dominated by companies like Wipro, Persistent Systems, Infosys, Tata Elxsi, and L&T Technology, all operating at structurally higher margins than their Western counterparts.
The economics are straightforward. Indian IT services firms sell at or near global rates while operating with Indian cost structures. That labor cost advantage, combined with public market expectations for operating margins in the 15 to 20 percent range, produces a benchmarking universe where the floor of the arm’s-length range starts around 12 percent.
A US or European benchmark for the same type of work draws on a comparable pool with higher cost bases and margin expectations in the 5 to 10 percent range. The floor in these markets starts around 4 to 5 percent.
Same work. Different comparables. Different range. Different markup.
Where This Creates Risk
The India premium is well within arm’s-length standards. That is the point. The markups are defensible because they reflect the local comparable pool. There is no immediate compliance problem with the rate itself.
The risk shows up in three less obvious places.
Uniform pricing collisions. Many software companies apply one intercompany markup across all their service entities as a matter of simplicity. That works until India is in the picture. A rate that fits comfortably within the arm’s-length range in the US, UK, and Australia will land below the floor in India. The same policy that passes in five markets fails in the sixth, not because the pricing changed, but because the benchmark did. Companies that have not carved out their India markup are carrying a compliance gap they may not have identified.
Undocumented rationale. When the India markup is differentiated, and it should be, the transfer pricing documentation needs to explain why functionally identical entities earn materially different returns. “The comparable pool is different” is the right answer. In industry practice, however, most companies apply the correct rate without documenting the reason for the divergence. That gap becomes a problem when an examiner, in the home jurisdiction, asks why the numbers do not match.
Stale benchmarks. The Indian IT services comparable pool evolves faster than most markets. Mid-cap firms like Coforge, KPIT Technologies, and Birlasoft have shifted their margin profiles meaningfully in the last three years. A comparable set built two or three years ago may produce a materially different arm’s-length range than one constructed today. For India entities specifically, the refresh cycle needs to be shorter than whatever the company’s global default is.
The Bigger Picture
The India premium is the clearest example of a broader dynamic in transfer pricing: comparable pool composition drives markup outcomes as much as, or more than, the functional analysis does. Two entities performing the same work, documented the same way, governed by the same agreement, will land in different arm’s-length ranges if their benchmarks are drawn from different markets.
This matters beyond India. Any jurisdiction with a structurally distinct comparable pool, whether a small market with limited comparables, an emerging economy, or a sector with few public peers, will produce ranges that diverge from the home-market benchmark. India is simply the most pronounced case because the pool is deep, well-established, and consistently elevated.
What To Check
For TP teams at software companies with India operations, three questions are worth verifying.
Is the India markup differentiated? If the India entity carries the same rate as non-India entities, one jurisdiction is almost certainly outside the arm’s-length range. The markup either needs to reflect the India comparable pool, or the documentation needs to make an affirmative case for why a global rate is appropriate.
Is the rationale written down? Applying the right rate is necessary but not sufficient. The local file should document why the India markup diverges from other entities, grounded in the comparable set composition. Without that, the company is relying on an examiner accepting an unexplained discrepancy.
When was the India comparable set last refreshed? If the answer is more than two years ago, the range may have moved. The Indian IT market shifts faster than most, and a benchmark that was current in 2023 may not hold up to scrutiny in 2026.
The premium is not the problem. It is a feature of how arm’s-length pricing works in India. The problem is treating it as an anomaly instead of a structural reality that needs its own documentation, its own refresh cycle, and its own line of defense.
ABOUT EXACTERA
Exactera is a tech-enabled services partner for international tax. Our team combines AI-powered technology with deep international, incentives, and indirect tax expertise to deliver customized, defensible solutions across the full compliance lifecycle, from data collection to strategy. The pattern recognition behind this analysis reflects sustained observation of our international practice across the software vertical, paired with proprietary methodology that brings cross-engagement perspective to questions a single-engagement view cannot answer.
