Is Group per Hour Billing allowed as per Income tax India ?

Hi Experts,

We are a Engineering consultancy company having a Foreign Branch and a Subsidiary (Domestic Company) in India,

Our employees are registered under Domestic Company ,

We have Projects under Foreign Branch

So our employees who are registered under Domestic company is working for Foreign company and monthly invoice is raised to the Foreign company based on the hours spend by the employees

So we find Cost Per hour of each employee and add a margin to actual cost , later we group these employees into 7 categories and each group is assigned with a standard Cost per Hour

Those employees who are coming under each group will be having same Cost Per hour

Then total Hours of each Group is calculated and multiplied with standard Cost Per Hour assigned for each group

Then invoice is Raised to Foreign Branch

Is this kind of invoicing allowed under IT India

I heard PWC is having similar kind of invoicing

Thank you!

Hi Arif,

Your question is about whether group per hour billing, where employees are categorized into groups with a standard hourly rate per group, is allowed for invoicing between your domestic company and foreign branch under Indian Income Tax laws.

Here’s an analysis:

1. Nature of Transaction & Transfer Pricing

Since your domestic company is billing the foreign branch (a related entity), this is a related-party transaction.
Under Indian Transfer Pricing (TP) regulations, such transactions must be at arm’s length price — meaning the price charged must be similar to what unrelated parties would have charged in comparable circumstances.
Grouping employees into categories and billing at a standard cost per hour is acceptable provided that the overall pricing methodology reflects the arm’s length principle.
The method you are using seems like a form of cost-plus method (cost + margin), which is one of the prescribed TP methods under the Income Tax Act.

2. Is Grouping Allowed?

Grouping employees with similar skills/roles and assigning a standard hourly cost to each group is common practice in service industries.
The key is justification and documentation:
- You should have a clear policy or cost allocation methodology that defines how the group costs and margins are determined.
- It should be consistent and based on actual cost structures (salary, benefits, overheads) and an appropriate margin.
The TP documentation must explain this grouping and demonstrate how it approximates arm’s length pricing.

3. Compliance with Income Tax

There is no specific prohibition in the Income Tax Act against using grouped hourly rates.
What matters is that the price charged to the foreign branch must be justifiable and documented as per TP guidelines.
The TP study should show that such billing is comparable to market rates.

4. Practical Considerations

Make sure the domestic company maintains robust TP documentation with:
- Details of employee categories.
- Cost components included in the hourly rate.
- Margin calculations.
- Benchmarking study supporting the arm’s length price.
Since PwC and other professional firms use similar approaches, it is a widely accepted practice.

Summary

Aspect	Comment
Group per hour billing	Allowed, if documented and justified
Transfer Pricing compliance	Must satisfy arm’s length principle
Documentation required	Detailed TP report and cost breakup
Income tax implication	No direct disallowance if TP compliant