Section 162: meaning of "associated enterprise"

The general participation test

An enterprise is an "associated enterprise" of another if it participates, directly or indirectly, or through one or more intermediaries, in the management, control or capital of the other enterprise - including where:

• The same person(s) participate, directly or indirectly, in the management, control or capital of both enterprises.
• One enterprise holds, at any time during the tax year, directly or indirectly, shares carrying not less than 26% of the voting power in the other.
• Any person or enterprise holds, at any time during the tax year, directly or indirectly, shares carrying not less than 26% of the voting power in each of the two enterprises.

Financial and dependency tests

Two enterprises are also "associated" where:

• One has advanced a loan to the other that constitutes not less than 51% of the book value of the other's total assets.
• One guarantees not less than 10% of the total borrowings of the other.
• More than half of the board of directors/governing board (or one or more executive directors/members) of one enterprise are appointed by the other.
• More than half of the directors/governing board members (or one or more executive directors/members) of both enterprises are appointed by the same person(s).
• The manufacturing, processing or business of one enterprise is wholly dependent on know-how, patents, copyrights, trademarks, licences, franchises or similar business/commercial rights (or related data, drawings, specifications) owned by, or under exclusive rights of, the other enterprise.
• 90% or more of the raw materials/consumables used by one enterprise for manufacturing or processing are supplied by the other (or by persons it specifies), with the price and other supply conditions influenced by that other enterprise.
• The goods or articles manufactured or processed by one enterprise are sold to the other (or to persons it specifies), with the price and other conditions influenced by that other enterprise.

Family, HUF and firm control tests

• One enterprise is controlled by an individual, and the other is also controlled by that individual, by their relative, or jointly by the individual and their relative.
• One enterprise is controlled by a Hindu undivided family, and the other is controlled by a member of that HUF, by a relative of a member, or jointly by such member and relative.
• One enterprise is a firm, association of persons or body of individuals, and the other holds not less than 10% interest in it.
• The two enterprises have any relationship of mutual interest with each other, as may be prescribed.

Associated enterprise for specified domestic transactions

For a specified domestic transaction entered into by an assessee, "associated enterprise" also includes: other units, undertakings or businesses of the same assessee in respect of transactions covered by section 122 or section 140(9); and any other person referred to in section 140(13) or section 205(4) in respect of transactions referred to there - as well as other units, undertakings, enterprises or businesses of the assessee, or the person referred to in section 140(13), in respect of transactions under Chapter VIII to which section 140(9) or 140(13) of this Act (or the corresponding section 80-IA(8) or (10) of the Income-tax Act, 1961) applies.

Frequently asked questions