Transfer Pricing Made Simple: How US Software Companies Work with Indian Offshore Teams

By Rallapalli & Co | April 2025

Many US-based software companies work with offshore development centers (ODCs) in India. These centers handle things like coding, testing, and technical support. But when both the US and Indian teams belong to the same company, there’s a key question: how much should the US company pay the Indian team for their work?

This is where transfer pricing comes in.

What is Transfer Pricing?

Transfer pricing means deciding the right price for services, products, or IP (like software or code) that are shared between two parts of the same company, but in different countries.

Tax rules in both India and the US want to make sure that companies don’t move profits around just to save on taxes. That’s why they require companies to set prices that would be fair if two unrelated companies were working together. This is called the “arm’s length price.”

Example:

Let’s say a US software company hires its own Indian office to build an app. The Indian team spends 6 months on it. Now, the US office has to pay the Indian team a fair price—just like it would pay any outside contractor. That payment becomes the income for the Indian side, and an expense for the US side.

5 Simple Steps to Set Transfer Pricing Right

1. Understand Each Team’s Role
   List what the US and Indian teams do. Usually, the US team owns the product and takes the big risks, while the Indian team helps with development and support.
2. Pick a Pricing Method
   Most companies use the Cost Plus Method or TNMM (Transactional Net Margin Method).
   • Cost Plus: The Indian team’s costs + a small, fair profit margin (e.g. 12%).
   • TNMM: Compare the Indian team’s profit margin to similar companies in India.
3. Do a Benchmark Study
   Find Indian companies that offer similar software services. Compare their profit margins to what your Indian team is earning. This helps prove your pricing is fair.
4. Keep Records
   India and the US both need transfer pricing documentation. This means keeping details of:
   • What each team does
   • How you set the price
   • Who you compared it with
   • Why the pricing is fair
5. Review Regularly
   Each year, check if your pricing still makes sense. Costs, exchange rates, or tax laws might change, so you’ll need to update your methods too.

What Happens If You Don’t Follow the Rules?

• In India, the tax office might say your pricing is too low, increase your taxable income, and add interest or penalties.
• In the US, you might face extra reporting or audits from the IRS.

Bonus Tips

• You can apply for a Safe Harbour or an APA (Advance Pricing Agreement) in India to lock in a fair profit margin and avoid future tax issues.
• Use local experts who understand both US and Indian tax rules—this will save time and reduce mistakes.

Final Thoughts

Transfer pricing doesn’t have to be complicated. If you run a US software company with Indian operations, just follow a few clear steps:
Know your team’s roles, pick a fair method, compare with others, and keep your paperwork ready. That way, your business stays compliant and avoids surprises from tax authorities on either side.

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5 Smart Financial Moves to Make Before the Next Tax Season

By Rallapalli & Co | April 2025

As tax season fades into the rearview mirror, it’s the perfect time to reassess your financial strategy—not to wait until the last minute again next year. Whether you’re an individual taxpayer or a business owner, early planning can help you avoid surprises, reduce stress, and even save money.

Here are five proactive steps you can take now to make next tax season your smoothest yet:

1. Review This Year’s Return

Start by revisiting your most recent tax return. Did you owe more than expected? Was your refund smaller than you hoped? These clues can tell you whether your withholdings, deductions, or tax planning strategies need adjusting.

📌 Pro Tip: If you received a large refund, you may want to adjust your W-4 to have less tax withheld from each paycheck—and put that money to work for you now.

2. Maximize Retirement Contributions

Now is the time to consider contributing more to your retirement accounts. Contributions to traditional IRAs or 401(k)s can lower your taxable income, and the sooner you invest, the more time your money has to grow.

💡 Business Owners: Consider setting up a SEP IRA or Solo 401(k) if you’re self-employed.

3. Track Deductions in Real-Time

Don’t wait until January to start digging through old receipts. Use a mobile app or spreadsheet to track deductible expenses as they occur—whether it’s charitable donations, mileage, or business-related purchases.

📱 Apps like QuickBooks Self-Employed or Expensify can automate much of this process.

4. Consider Estimated Quarterly Payments

If you’re self-employed, a freelancer, or earn side income, you may need to make estimated tax payments throughout the year to avoid penalties. The IRS typically expects quarterly payments in April, June, September, and January.

🔎 Not sure how much to pay? Our team at Rallapalli & Co can help you calculate accurate estimates based on your income patterns.

5. Meet With a Tax Advisor Early

An annual meeting with a tax professional is one of the smartest financial habits you can adopt. We can help you understand tax law changes, evaluate your business structure, and spot opportunities to reduce your tax burden before it’s too late.

🤝 Book a mid-year tax planning session with us today to get ahead of the curve.

Final Thoughts

Great tax outcomes don’t happen by chance—they happen by planning. Whether you’re aiming to grow your business or build personal wealth, now is the best time to start making smarter financial decisions.

Need help putting these strategies into action?
Reach out to Rallapalli & Co—we’re ready to guide you every step of the way.