Section 92A vs Section 162: Redefining Associated Enterprise

Transfer pricing disputes rarely begin with pricing. They begin with a more basic question: are the parties “associated enterprises” at all? In India, that question has long turned on how Section 92A of the Income-tax Act, 1961 is read. Litigation on this definition has been heavy, technical and costly.

The Income-tax Act, 2025 rewrites this definition in Section 162. At first glance the thresholds look much the same: 26 per cent voting power, 51 per cent loan dependency and so on. In form and in effect, though, the change runs deeper than it first appears.

This article traces how the idea of the “Associated Enterprise” (AE) has changed, why the old test drew years of dispute, how courts read Section 92A, and how Section 162 tries to settle the point. It then sets out what this means for multinational groups, for domestic firms with specified domestic transactions (SDT), and for how tax risk is managed.

Why the Definition of “Associated Enterprise” Matters

Transfer pricing rules apply only to dealings between associated enterprises. If two parties are not AEs, the arm’s-length test does not apply. The whole filing load — the records under Section 92D, the accountant’s report under Section 92E, the benchmarking under Section 92C — turns on this one test.

In practice, a dispute over AE status can decide whether:

• A routine commercial loan becomes a transfer pricing controversy

• A minority investment triggers annual documentation duties

• A supply dependency arrangement invites scrutiny

Given the cost of filing and the tax at stake, the AE test is not academic. It is strategic.

The Two-Tier Structure Under Section 92A of the Income-tax Act, 1961

Section 92A of the Income-tax Act, 1961 used a layered scheme.

Sub-section (1) set out a broad test. Two enterprises were associated if one took part, directly or indirectly, in the management, control or capital of the other. They were also associated if the same persons took part in both.

Sub-section (2) then listed thirteen cases in which enterprises “shall be deemed” to be associated. They included:

• A stake of at least 26 per cent of voting power

• A common stake of 26 per cent in both enterprises

• A loan of 51 per cent or more of total assets

• Guarantees, supply dependencies, appointment of directors and other functional links

On paper the design looked logical: a broad rule, plus listed deeming cases.

In practice, it bred disputes.

The Core Controversy: Must Both Sub-sections Be Satisfied?

Taxpayers argued that the broad words of sub-section (1) could not work on their own. On this view, some “participation in management or control” was not enough. The tie also had to meet one of the listed cases in sub-section (2). Without that, there was no AE status.

The Revenue took the other side in several cases. For it, sub-section (1) was the main test, and sub-section (2) only widened the reach.

The split led to conflicting tribunal rulings.

The point was finally tested in Asst. CIT v. Veer Gems (Ahmedabad Tribunal). The Gujarat High Court affirmed that ruling in CIT v. Veer Gems, and the Supreme Court upheld it.

The courts held that sub-sections (1) and (2) must be read together. Sub-section (1) gave the broad frame, but sub-section (2) set the limits of participation. If a tie did not fall within the listed cases in sub-section (2), general words about participation could not create AE status.

The Karnataka High Court took the same view in Page Industries Ltd. v. PCIT.

An earlier Mumbai Tribunal ruling in Kaybee (P.) Ltd. v. ITO had read sub-section (2) more widely, as an expansion and not a limit.

The Supreme Court settled the doctrine. The drafting, though, stayed complex.

Section 162 of the Income-tax Act, 2025: Structural Consolidation

Section 162 of the Income-tax Act, 2025 addresses this doubt directly.

It drops the two-tier design. The broad rule and the listed cases now sit in one provision. The words tie participation in management, control or capital to listed cases in the same sub-section.

In effect:

• The debate over reading the two parts together or apart is now settled by the statute.

• The old split between a “principle” and a “deeming fiction” is gone.

• The thresholds (26 per cent voting power, 51 per cent loan dependency and so on) stay, but now sit inside one definition clause.

In reading terms, this makes it harder to argue that one part of the clause stands alone.

Practical Implications for Multinational Groups

Minority Investments and Private Equity Structures

Take a foreign investor with 28 per cent voting power in an Indian company. Under the old law and the new one, the 26 per cent mark is crossed. The company is an AE.

The live question is a holding near 25 per cent that carries strong rights: board nomination, affirmative votes, and vetoes over strategic decisions.

Under Section 92A, taxpayers argued that strong governance rights alone did not create AE status if no sub-section (2) threshold was met. Courts largely agreed.

Section 162 ties participation to listed cases, so the thresholds still lead. Strong rights that cross no listed mark may still leave AE status unmet.

For private equity and venture capital funds, the stake still decides. A 25 per cent holding with strong protective rights may not create AE status on its own. Crossing 26 per cent almost certainly will.

Intra-Group Financing Structures

The 51 per cent loan-to-assets test stays. If one enterprise lends at least 51 per cent of the borrower’s book value of total assets, AE status follows.

Group treasury teams must watch this ratio each year. A routine shareholder loan, plus falling asset values, can pass the 51 per cent mark by accident.

Under Section 162 the condition sits inside the main definition, so there is less room to argue. Arguments over numbers will likely crowd out arguments over control.

Associated Enterprise in Specified Domestic Transactions

One clear change in the 2025 Act is that the AE test now reaches specified domestic transactions (SDT).

The 1961 Act had no separate AE test for SDT. That caused little trouble, because SDT turned on the deal itself, under sections such as 80-IA(8) and 115BAB(6).

In draft terms, though, a missing definition left room to argue.

Section 162 now says that for SDT, an AE includes:

• Other units or undertakings of the same assessee in certain intra-unit transactions

• Persons named under designated anti-avoidance rules

• Enterprises in transactions covered by the listed domestic anti-abuse sections

For a group with several tax-incentivised units — an infrastructure arm claiming deductions, say, and a related trading arm — this widens the reach of transfer pricing compliance.

Alignment with OECD Principles

The OECD Transfer Pricing Guidelines define “associated enterprises” by participation in management, control or capital. That is close to India’s statutory words.

The OECD sets no fixed percentages such as 26 or 51 per cent. India’s test is more of a formula.

Section 162 keeps the rule-led design and removes the drafting doubt. Groups used to OECD-style tests of control must still run a separate India analysis on the statutory marks.

Litigation Outlook: What Changes, What Doesn’t

Consolidation cuts the doubt in the drafting, but disputes will not vanish. The argument may shift to:

• Indirect participation through layered entities

• How “book value of total assets” is read in a volatile year

• Guarantees and implicit support

• Supply dependency clauses

Less likely is a fresh round on whether the two sub-sections must be read together. The statute has settled it.

Compliance Strategy for Corporations

Businesses should work through the new test in order.

First, map the shareholding again, including indirect stakes held through other entities. The statute expressly covers indirect participation.

Second, watch loan ratios each quarter, not once a year. A revaluation or an impairment can skew the 51 per cent test.

Third, review domestic deals between units that claim tax incentives. The wider AE test for SDT adds to the records you must keep.

Last, make sure the transfer pricing file shows a clear AE analysis. Many audits open with a challenge on this point.

Broader Policy Signal

The rewrite of the AE rules in Section 162 shows a preference for clear text over loose reading. The 2025 Act does not widen transfer pricing. It tidies and merges it.

That leaves less space for technical argument and more weight on the numbers. The thresholds do not move. The design is simpler.

For taxpayers, this is not a relaxation. It is a recalibration.

Closing Perspective

The AE test is the gateway to India’s transfer pricing regime. The drafting of Section 92A of the Income-tax Act, 1961 fed years of disputes, until the courts settled the reading in cases such as CIT v. Veer Gems.

Section 162 of the Income-tax Act, 2025 keeps the thresholds but reorders the words to remove doubt. It puts rule and condition in one place, brings SDT into the frame, and so makes the outcome easier to call.

For businesses the point is simple: transfer pricing risk starts with mapping the ties. In a regime that leans more and more on data analytics and structured audits, getting the definition right is not just a legal point. It is a strategic one.

The move from Section 92A to Section 162 fits India’s wider tax reform path: make the law simpler, keep its force. Those who treat AE determination as a compliance step, rather than a core reading of the structure, do so at their own risk.