Taxation of a GCC or captive unit in India

Short answer: a captive has one customer, and that customer owns it. There is no market price to point at and no negotiated return, so five separate tax questions all trace back to the same structural fact — transfer pricing, the parent's permanent establishment exposure, GST, secondment of expatriates, and ESOP recharge.

Why this entity is different

An ordinary company sells to strangers. Its prices are evidence of what its services are worth, and the tax system can largely take them as given.

A Global Capability Centre does not. It typically:

• earns all or nearly all of its revenue from its parent or affiliates;
• is remunerated on cost plus a markup fixed by agreement;
• takes no market risk and holds no customer relationships of its own; and
• is staffed partly by people the parent sent.

Every one of those is a fact pattern the department examines closely, and none of them is an accusation. They are simply what a captive is. The work is demonstrating that the arrangement is what it says it is, and that it has been priced and documented consistently.

The five questions

Question 2 is the one that should worry a group most, because it is the only one where the exposure sits with the parent and is measured on profits attributable to India rather than on an adjustment to a markup.

1. Transfer pricing, and the 2026 reset

Arm's length pricing sits at s.161 of the Income-tax Act, 2025 (the old s.92), with reference to the Transfer Pricing Officer at s.166 (the old s.92CA).

For a cost-plus captive the live questions are the markup percentage, what sits inside the cost base it is applied to, and the comparables used to support it.

What changed on 1 April 2026 is the alternative to all of that. The safe harbour regime was substantially rebuilt: IT and ITeS merged into one category at a unified 15.5% margin, with the eligibility threshold raised from ₹300 crore to ₹2,000 crore, and a five-year block in which the revenue threshold is tested only in the first year.

That is a different proposition from the old regime, and a GCC that ruled safe harbour out years ago — on the old margins, or because it was above the old threshold — is very likely working from a conclusion that no longer holds. See the new safe harbour rules.

2. The parent's permanent establishment

The captive pays its own tax on its own markup. A permanent establishment finding does something different: it makes the parent taxable in India on the profits attributable to that establishment.

The exposure is a function of how the relationship actually operates, not of what the intercompany agreement recites — premises at the parent's disposal, personnel rendering services in India, and authority to conclude contracts are all tested against conduct. See permanent establishment risk for the foreign parent.

3. GST — and the condition that catches captives

The service to the parent looks like a textbook export: overseas recipient, foreign exchange, work done in India. Whether it is one turns on a condition that has nothing to do with any of that.

Export treatment is denied where supplier and recipient are merely two establishments of the same person. So:

• an Indian subsidiary supplying its foreign parent is two persons and can export;
• an Indian branch or project office supplying its own head office is one person and cannot.

For a captive, this single point often decides the entire GST position — and it was settled years earlier, when someone chose the entity form for reasons that had nothing to do with tax. See the five conditions.

4. Seconded expatriates

Where the parent sends people to work in India and recovers their cost, the question is whether that recovery is a supply of manpower taxable in the Indian entity's hands under reverse charge.

The Supreme Court held that it was on the facts before it in Northern Operating Systems — but framed the decision on those facts, and CBIC has since instructed that it must not be applied mechanically to every secondment. Later High Court decisions have gone the other way where the facts differed.

The answer turns on who actually employs and controls the individual, how the cost is recovered, and whether anything beyond salary is being recharged. See secondment and the expat GST question.

5. ESOP recharge

Where employees of the Indian entity hold options over the parent's stock and the parent recharges the cost, three questions arrive together:

• Deductibility in the captive's computation;
• Transfer pricing, because the recharge is an international transaction in its own right; and
• Withholding on the payment out.

They are usually examined separately and are better looked at together — a recharge that fails one tends to fail the others for the same underlying reason. See ESOP recharge from a foreign parent.

What holds it all together

One observation is worth more than the five sections above: these questions are decided by the same set of facts.

Who controls the expatriates bears on both the secondment analysis and the PE analysis. Whether the entity is a subsidiary or a branch decides the GST answer and shapes the PE one. What sits in the cost base drives the markup and the ESOP recharge. The intercompany agreement is read in all five.

That is why answering them one at a time, by different advisers, in different years is how groups end up with positions that contradict each other — and a contradiction between two of your own filings is the most expensive thing in this area, because it does the department's work for it.

The pricing question has an annual filing calendar attached to it, and both the chapter and its forms have been renumbered — Form 3CEB is now Form 48. See what a captive actually files.

An adjustment to the price is not the end of it. If the money stays with the parent, it becomes a deemed loan carrying interest — see secondary adjustment under Section 92CE, now Section 170.

This is a working reference, not the statute. For anything you are relying on, confirm the section and rule text directly.