Associated Enterprise under Indian Transfer Pricing Regulations - Section 92A(1)/(2) of the Income-Tax Act 1961

Section 92A(1): Associated enterprise

An enterprise which participates directly or indirectly or through one or more intermediaries in:

• Management of the other enterprise, or
• Control of the other enterprise; or
• Capital of the other enterprise.

An enterprise in respect of which one or more persons participates directly or indirectly, or through one or more intermediaries, in management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. 

Section 92A(2): Deemed Associated Enterprise Relationship

Two enterprises shall be deemed to be associated enterprises if, at any time during the previous year;

a) Enterprise Ownership: One enterprise holds, directly or indirectly, shares carrying not less than 26% of the voting power in the other enterprise; or

b) Mutual Holdings: Any person holds directly or indirectly, shares carrying not less than 26% of the voting power of each of such enterprise; or

c) Substantial Lender: A loan advanced by one enterprise to the other enterprise constitutes not less than 51% of the books value of the total assets of the other enterprise; or

d) Guarantor for Borrowings: One enterprise guarantees not less than 10% of the total borrowings of the other enterprise; or

e) Appointment of Board: More than half 1/2 the board of directors or member of the governing board or 1 or more of the executive directors or executive members of the governing board, one enterprise are appointed by other enterprise; or

f) Appointment of Board in two or more entities: More than half of the directors or members of the governing board, or one or more of the executive directors or executive members of the governing board, of each of the two enterprise are appointed by the same person or persons; or

g) Dependency on Tangibles: The business of one enterprise is wholly dependent on the use of know-how, patent, technical know-how, etc. of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights.

h) Supply Dependency: 90% or more of the raw materials and consumable required for the manufacture or processing of the goods or articles carried out by one enterprise, are supplied by the other enterprise, or

i) Sale Dependency: The goods or articles manufactured or processed by one enterprise, are sold to the other enterprise and the prices and other conditions relating thereto are influenced by such other enterprise; or

j) Individual Control: Where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and his relative; or

k) HUF- Member/relative controlled entities: Where one enterprise is controlled by an Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family, or relative of a such member or jointly by such member and his relative; or

l) Minority holding in a Firm, AOP or BOI: Where one enterprise is a firm, association of persons or body of individuals, and the other enterprise holds not less than 10% interest in such firm, Association of persons or body of individuals.

CBDT Circular Further Explaining AE"S under Transfer Pricing Regulations

The substituted new section 92A and 92B provide meanings of the expressions “associated enterprise” and “International Transaction” with reference to which the income is to be computed under the new section 92. While sub section (1) of section 92A gives a general definition of AE, based on the concept of participation in management, control or capital, sub section (2) specifies the circumstances under which the two enterprises shall be deemed to be associated.

The term “enterprise” is defined very widely and covers almost every type of business activity that an entity would normally engage in. Broadly, it includes business activities involving tangible assets, intangible assets, services, investments, loans, and shares/securities. Further, an undertaking is considered to fall within the definition of an enterprise if it is or has been engaged, or is proposed to engage, in specified activities or business, whether such specified category of activity was carried on directly or through a subsidiary.1The term “enterprise” can apply to all categories of person; therefore, any enterprise that is a person as defined in Sec. 2(31) of the ITA would be an enterprise if it were engaged in specified categories of activity/business, whether directly or through a subsidiary.