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Section 162 Income Tax Act 2025: What Is an Associated Enterprise?

Section 162 explains when two enterprises are treated as associated enterprises (AEs) for Indian transfer pricing. The relationship may arise through shareholding, common management, financing, guarantees, commercial dependence or specified domestic transactions.

Current law: The Income-tax Act, 2025 applies from 1 April 2026. Section 162 corresponds broadly to section 92A of the Income-tax Act, 1961. Read the provision with the amendments made by the Finance Act, 2026 and the relevant rules.

What is an associated enterprise under section 162?

An associated enterprise is an enterprise connected with another enterprise through the participation, ownership, control or other relationships specified in section 162. The law examines direct and indirect relationships, including relationships through intermediaries and common persons. The statutory tests must be applied to the actual facts of each case.

When are two enterprises associated under section 162(1)?

Participation in management, control or capital - clause (a)(i). Common participation, directly or indirectly or through intermediaries, in the management, control or capital of both enterprises is covered by the statutory language.

26% voting power - clauses (a)(ii) and (iii). One enterprise holds, directly or indirectly, at least 26% voting power in another at any time during the tax year; or a person or enterprise holds at least 26% voting power in each of two enterprises.

Loan financing - clause (b). A loan advanced by one enterprise to the other constitutes at least 51% of the book value of the borrowing enterprise's total assets.

Guarantees - clause (c). One enterprise guarantees at least 10% of the other enterprise's total borrowings.

Board appointment - clauses (d) and (e). The requisite majority of directors or governing-board members, or one or more executive directors or executive members, are appointed by the other enterprise or by the same person or persons who make such appointments in both enterprises.

Intellectual-property dependence - clause (f). Manufacturing, processing or business activities are wholly dependent on specified know-how, intellectual property, commercial rights or technical information owned or exclusively controlled by the other enterprise.

Raw-material dependence - clause (g). At least 90% of required raw materials and consumables are supplied by the other enterprise or persons specified by it, and the prices and other supply conditions are influenced by that enterprise.

Sales dependence - clause (h). Goods or articles are sold to the other enterprise or persons specified by it, and that enterprise influences the prices and other conditions. The statutory clause does not state a fixed percentage-of-sales threshold.

Individual or family control - clauses (i) and (j). The law covers specified common control by an individual and relatives, and specified control involving a Hindu undivided family, its members and their relatives.

Interest in firm, AOP or BOI - clause (k). An enterprise holds at least a 10% interest in the other enterprise where the latter is a firm, association of persons or body of individuals.

Prescribed mutual interest - clause (l). Any further relationship of mutual interest prescribed under the applicable rules may also be covered.

Important: The percentages above apply to their respective statutory tests. A commercial relationship alone does not automatically satisfy every test; assess the specific clause, supporting facts and applicable rules.

Associated enterprises in specified domestic transactions: section 162(2)

For a specified domestic transaction, the definition is extended to particular units, undertakings, businesses and persons identified by the Act. This includes the categories referenced in sections 122, 140(9), 140(13) and 205(4), and relevant transactions under Chapter VIII, subject to the exact amended wording of section 162(2).

The Finance Act, 2026 amended section 162(2)(c), including removal of the reference to section 144. For a particular tax year, verify the applicable amended text rather than relying on an earlier Bill or draft.

Related statutory definitions

Enterprise: Section 173 broadly covers a person, including a permanent establishment, engaged or proposed to be engaged in specified business, intellectual-property, service, investment, financing or securities activities.

Arm's length price: Under section 173, this is a price applied or proposed in a transaction between persons other than associated enterprises under uncontrolled conditions.

International transaction: Section 163 sets out the statutory meaning and circumstances in which a transaction qualifies.

Specified domestic transaction: Section 164 identifies the domestic transactions brought within the transfer-pricing framework.

Practical illustrations

Example 1: Shareholding

Company A directly holds 30% of the voting power in Company B during the tax year. The 26% voting-power test in section 162(1)(a)(ii) is met.

Example 2: Common investor

A shareholder holds 27% voting power in each of Companies X and Y. The common-holding test in section 162(1)(a)(iii) may apply.

Example 3: Loan funding

Company P has advanced a loan of Rs. 60 lakh to Company Q, whose total assets have a book value of Rs. 1 crore. The loan represents 60% of the assets and meets the numerical threshold under clause (b).

Example 4: Borrowing guarantee

Company M guarantees Rs. 15 lakh of Company N's total borrowings of Rs. 1 crore. The 15% guarantee exceeds the threshold in clause (c).

Why does associated-enterprise status matter?

Identifying associated enterprises is a foundational step in transfer-pricing analysis. Where a transaction also qualifies as an international transaction or specified domestic transaction, the arm's length rules and related obligations may apply. Section 161 deals with arm's length computation, section 165 with determination methods, section 171 with records, and section 172 with the accountant's report.

Businesses should review shareholding registers, financing agreements, guarantees, board appointment rights, intellectual-property licences, purchasing and sales arrangements, and domestic-unit relationships. AE status by itself does not establish that every transaction is reportable: the relevant transaction definition and statutory conditions must also be checked.

Frequently asked questions

Is 26% ownership enough to create an associated-enterprise relationship?

Yes, where the ownership carries at least 26% voting power and meets the direct or indirect holding test in section 162(1)(a). Other tests can apply even without that level of shareholding.

Can a guarantee create an associated-enterprise relationship?

Yes. A guarantee covering at least 10% of the other enterprise's total borrowings is a specified test.

Is a 51% loan test based on turnover?

No. The statute compares the loan advanced with the book value of the borrowing enterprise's total assets.

Does section 162 itself determine the arm's length price?

No. Section 162 defines the associated-enterprise relationship; section 165 addresses methods for determining arm's length price.

Which provision of the 1961 Act corresponds to section 162?

Section 92A of the Income-tax Act, 1961. The applicable law depends on the tax year and statutory transition provisions.

Official statutory sources

Income Tax Department: Section 162 Income-tax Act 2025, as amended Official section correspondence

Updated: 10 November 2026. This article is general legal information; verify the statutory text and rules applicable to the relevant tax year.