Transfer pricing disputes rarely begin with pricing. They begin with a far more fundamental question: are the parties even “associated enterprises” in the first place? In India, that question has historically turned on the interpretation of the Income-tax Act, 1961—specifically Section 92A. Over the years, litigation on this definition has been intense, technical, and commercially significant.

With the enactment of the Income Tax Act, 2025, Parliament has revised this definition under Section 162. At first glance, the thresholds appear familiar—26 per cent voting power, 51 per cent loan dependency, and so on. However, structurally and interpretively, the change is more consequential than it initially appears.

This article examines how the concept of “Associated Enterprise” (AE) has evolved, why the earlier framework led to persistent litigation, how courts interpreted Section 92A, and how Section 162 attempts to remove ambiguity. More importantly, it explains what this means for multinational groups, domestic businesses engaged in specified domestic transactions (SDT), and tax risk management going forward.

Why the Definition of “Associated Enterprise” Matters

Transfer pricing provisions apply only when transactions occur between associated enterprises. If two parties are not AEs, the arm’s length principle does not apply. The entire compliance burden—documentation under Section 92D, accountant’s report under Section 92E, benchmarking under Section 92C—depends on crossing this definitional threshold.

In practice, disputes over AE status can determine whether:

• A routine commercial loan becomes a transfer pricing controversy

• A minority investment triggers annual documentation obligations

• A supply dependency arrangement invites scrutiny

Given the compliance costs and potential tax adjustments involved, the definition of AE 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, adopted a layered structure.

Sub-section (1) laid down a broad principle: two enterprises would be associated if one participated, directly or indirectly, in the management, control, or capital of the other, or if the same persons participated in both.

Sub-section (2) then lists thirteen specific situations in which enterprises “shall be deemed” to be associated. These included:

• Shareholding of at least 26 per cent of voting power

• Common shareholding of 26 per cent in both enterprises

• Loan dependency where a loan constituted 51 per cent or more of total assets

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

On paper, this structure appeared logical: a general rule supplemented by illustrative deeming provisions.

In practice, it created interpretative tension.

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

Taxpayers began arguing that the broad language of sub-section (1) could not operate independently. According to this view, even if there was some form of “participation in management or control,” unless the relationship also satisfied one of the specific conditions in sub-section (2), AE status would not arise.

The Revenue, in several cases, took the opposite position: sub-section (1) was the primary test, and sub-section (2) merely expanded the scope.

This divergence led to conflicting tribunal decisions.

The controversy was squarely addressed in the Asst. CIT v. Veer Gems (Ahmedabad Tribunal), later affirmed by the Gujarat High Court in CIT v. Veer Gems and ultimately upheld by the Supreme Court in CIT v. Veer Gems.

The courts held that sub-sections (1) and (2) must be read cumulatively. Sub-section (1) laid down the broad framework, but sub-section (2) governed and defined the contours of participation. If a relationship did not fall within the specific circumstances enumerated in sub-section (2), AE status could not be established merely by invoking general participation language.

The Karnataka High Court reiterated this interpretation in Page Industries Ltd. v. PCIT.

However, earlier, the Mumbai Tribunal in Kaybee (P.) Ltd. v. ITO had taken a broader view, treating sub-section (2) as an expansion rather than a restriction.

Although the Supreme Court’s position brought doctrinal clarity, the legislative drafting remained structurally complex.

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

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

Instead of maintaining a two-tier system, it integrates the general principle and the specific conditions into a single, consolidated provision. The language explicitly ties participation in management, control, or capital to enumerated conditions within the same sub-section.

In effect:

• The interpretative debate between cumulative versus disjunctive reading is legislatively resolved.

• The earlier structural distinction between “principle” and “deeming fiction” is removed.

• The thresholds (26 per cent voting power, 51 per cent loan dependency, etc.) are retained but embedded within a unified definitional clause.

From a statutory construction perspective, this reduces the possibility of arguing that one part governs independently of the other.

Practical Implications for Multinational Groups

Minority Investments and Private Equity Structures

Consider a foreign investor holding 28 per cent voting power in an Indian company. Under both the old and new regimes, the 26 per cent threshold is crossed. The entity qualifies as an AE.

The practical issue arises where shareholding hovers around 25 per cent with strong shareholder rights—board nomination rights, affirmative voting rights, veto powers over strategic decisions.

Under Section 92A, taxpayers sometimes argued that, absent satisfaction of sub-section (2) thresholds, enhanced governance rights alone did not create AE status. Courts largely accepted that position.

Under Section 162, the drafting ties participation directly to defined circumstances, reinforcing the threshold-driven approach. Governance rights without crossing prescribed benchmarks may still not trigger AE status unless they fit within specified conditions.

For private equity funds and venture capital investors, this means threshold management remains critical. A 25 per cent stake with strong protective rights may not automatically create AE status—but crossing 26 per cent almost certainly will.

Intra-Group Financing Structures

The 51 per cent loan-to-total-assets test continues. If one enterprise advances a loan constituting at least 51 per cent of the borrower’s book value of total assets, AE status is triggered.

In practice, treasury structures in multinational groups must monitor this ratio annually. A routine shareholder loan, combined with declining asset values, can unintentionally cross the 51 per cent mark.

Under Section 162, because the condition is integrated into the main definition, the scope for interpretative manoeuvring is narrower. Quantitative thresholds will likely dominate litigation over qualitative control arguments.

Associated Enterprise in the Context of Specified Domestic Transactions

A notable development in the 2025 Act is the express extension of the AE definition to specified domestic transactions (SDT).

Under the 1961 framework, there was no independent definition of AE specifically for SDT. The omission did not cause significant disruption because SDT applicability was transaction-driven—covering transactions under sections such as 80-IA(8), 115BAB(6), and related provisions.

However, from a drafting perspective, the absence of a definitional anchor created theoretical room for dispute.

Section 162 now clarifies that for SDT purposes, AE includes:

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

• Persons specified under designated anti-avoidance provisions

• Enterprises involved in transactions covered under the enumerated domestic anti-abuse sections

For groups operating multiple tax-incentivised units—say, an infrastructure undertaking claiming deductions and a related trading arm—this clarification strengthens the transfer pricing compliance perimeter.

Alignment with OECD Principles

The OECD Transfer Pricing Guidelines emphasise “associated enterprises” based on participation in management, control, or capital, broadly similar to India’s statutory language.

However, OECD guidance does not prescribe rigid percentage thresholds such as 26 per cent or 51 per cent. India’s approach remains more formula-driven.

Section 162 preserves this rule-based structure while eliminating drafting ambiguity. For multinational enterprises accustomed to OECD-style qualitative control tests, India’s statutory thresholds continue to demand separate, jurisdiction-specific analysis.

Litigation Outlook: What Changes, What Doesn’t

The consolidation under Section 162 reduces structural ambiguity, but disputes are unlikely to disappear. Litigation may now shift focus to:

• Indirect participation through layered entities

• Interpretation of “book value of total assets” in volatile financial years

• Guarantee structures and implicit support arrangements

• Supply dependency clauses

What is less likely is renewed litigation over whether sub-sections must be read cumulatively. That debate appears legislatively settled.

Compliance Strategy for Corporations

Businesses should approach the revised framework methodically.

First, re-map shareholding patterns, including indirect holdings through intermediaries. The statute explicitly includes indirect participation.

Second, monitor loan ratios quarterly, not just annually. Asset revaluations or impairments can distort the 51 per cent test.

Third, reassess domestic inter-unit transactions where tax incentives apply. The expanded AE definition in SDT contexts widens documentation exposure.

Finally, ensure that transfer pricing documentation reflects a clear analysis of AE status. Many audits begin with a definitional challenge.

Broader Policy Signal

The redrafting of AE provisions under Section 162 signals a legislative preference for clarity over interpretative elasticity. Rather than expanding the scope of transfer pricing, the 2025 Act rationalises and consolidates it.

In doing so, it reduces room for technical arguments but increases emphasis on quantitative compliance. The thresholds remain unchanged; the architecture is simplified.

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

Closing Perspective

The definition of “Associated Enterprise” is the gateway to India’s transfer pricing regime. Under Section 92A of the Income-tax Act, 1961, structural drafting led to years of interpretative litigation, culminating in judicial clarity through cases such as CIT v. Veer Gems.

Section 162 of the Income-tax Act, 2025, does not alter the economic thresholds but fundamentally reorganises the statutory language to remove ambiguity. By integrating principle and condition into a single cohesive provision and extending clarity to specified domestic transactions, it strengthens administrative certainty.

For businesses, the message is straightforward: transfer pricing risk begins with relationship mapping. In a regime increasingly driven by data analytics and structured audits, definitional precision is not merely a legal issue—it is a strategic one.

The evolution from Section 92A to Section 162 reflects India’s broader tax reform trajectory: simplify the law’s architecture while preserving its enforcement strength. Those who treat AE determination as a threshold compliance exercise, rather than a core structural analysis, do so at their own risk.