Section 162: meaning of "associated enterprise"

Introduction

Section 162 defines when enterprises are associated for transfer-pricing purposes through control, management, capital and listed relationship tests. A domestic transaction can also bring in units or persons specified by subsection (2).

Key takeaways

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.

Step-by-step flow for applying Section 162

1. 1

   Check participation in management, control or capital

   Direct, indirect or through intermediaries, including common participants (clause (a)(i)), 26% or more voting power held by one in the other (a)(ii), or by a common holder in each (a)(iii).

2. 2

   Check financial dependence

   Loan of 51% or more of the book value of the other's total assets (b); guarantee of 10% or more of its total borrowings (c).

3. 3

   Check board and operational dependence

   Board appointments (d), (e); wholly dependent on the other's intangibles (f); 90% or more of raw materials supplied with influenced prices (g); sales to the other with influenced prices (h).

4. 4

   Check family and entity control

   Common control by an individual and relatives (i), by an HUF and its members or relatives (j), 10% or more interest in a firm, AOP or BOI (k), or a prescribed relationship of mutual interest (l).

5. 5

   Any one test met?

   • Yes: The enterprises are associated enterprises for this Chapter.
   • No: Not associated under Section 162(1); for specified domestic transactions also check Section 162(2).

Practical checklist

Glossary

Associated enterprise

An enterprise related to another through the specified management, control, capital or deemed relationship tests.

Specified domestic transaction

A qualifying transaction within Section 164 that can invoke additional association tests.

Frequently asked questions