Section 162 of the Income-tax Act, 2025 — Meaning of Associated Enterprise (Transfer Pricing)

In plain language

What Section 162 actually says

Section 162 of the Income-tax Act, 2025 defines the term "associated enterprise" (AE) for the purposes of India's transfer pricing regime. It is the direct successor to Section 92A of the old Income-tax Act, 1961, and it largely carries forward the same tests and numeric thresholds, restructured into cleaner, plainer language. In simple words, two businesses are "associated enterprises" when they are not truly independent of each other — one controls the other, or the same people/entity control both — so their dealings can be priced to shift profits rather than at true market rates.

The two-part test

• General limb (participation test): An enterprise is an AE of another if it participates, directly or indirectly, or through one or more intermediaries, in the management, control or capital of the other; or if the same person(s) participate in the management, control or capital of both enterprises.
• Deeming limb (specific tests): Even without obvious participation, the law deems two enterprises to be associated if any one of the listed conditions is met during the tax year. Meeting even a single condition is enough.

The deeming conditions (any one triggers AE status)

• Equity: One enterprise holds, at any time in the year, directly or indirectly, shares carrying 26% or more of the voting power in the other; or the same person holds 26%+ in both.
• Loans: A loan advanced by one enterprise is at least 51% of the book value of the total assets of the other.
• Guarantees: One enterprise guarantees 10% or more of the total borrowings of the other.
• Board control: More than half the board of directors or one or more executive directors of one enterprise are appointed by the other (or by the same person for both).
• Intangibles: The manufacture or business of one enterprise is wholly dependent on patents, copyrights, trademarks, licences, franchises or know-how owned by the other.
• Raw materials: 90% or more of the raw materials/consumables are supplied by the other enterprise (or persons it specifies) and prices/conditions are influenced by it.
• Sales dependence: Goods manufactured by one are sold to the other (or persons it specifies) at prices/conditions influenced by that other.
• Individual / family control: Both enterprises are controlled by the same individual or a relative of that individual, or by a member of a Hindu Undivided Family (HUF) or a relative of such member.
• Firm/AOP interest: One enterprise holds a 10% or more interest in a firm, association of persons or body of individuals.
• Mutual interest / prescribed relationship: A catch-all covering other prescribed relationships of mutual interest.

Who this applies to

• Multinational groups with Indian entities transacting with foreign parents, subsidiaries or sister concerns (international transactions under Section 164).
• Domestic group companies entering into Specified Domestic Transactions (SDTs) above the prescribed threshold — Section 162 expressly extends the AE concept to SDTs, including different units/undertakings of the same assessee for provisions like profit-linked deductions and Section 122 (transactions between own units).
• Family-run businesses and closely-held groups where control runs through individuals, relatives or an HUF rather than through shareholding.

How it interacts with other sections

• Section 162 only defines the relationship. Once two parties are AEs, the pricing must be at arm's length (Section 165), computed using prescribed methods, supported by documentation (Section 171) and an accountant's report (Section 172), with penalties for non-compliance.
• It works together with the definition of international transaction and specified domestic transaction to decide whether transfer pricing applies at all.

Practical implications

• Because any single condition creates an AE, companies with no common shareholding can still fall inside transfer pricing — e.g. a supplier providing 90%+ of your inputs, or a lender whose loan exceeds half your assets.
• Businesses should map all counterparties against these tests before the year-end, because the 26%, 51%, 10% and 90% tests are checked "at any time during the tax year", not just on the balance-sheet date.
• Family and HUF-controlled groups must watch the "relative" test closely, as it can pull ordinary intra-family arrangements into the regime.