Section 162 is the substantive equivalent of 1961 s. 92 A -- the gateway definition for the TP regime. The definition has TWO LIMBS: (1) a direct / indirect-management-participation test (sub- s. 1 ); (2) a 13-clause DEEMING TRIGGER list…
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ITA 2025 · Section 162
Section 162 — - MEANING OF ASSOCIATED ENTERPRISE
Section 162 is the substantive equivalent of 1961 s. 92A -- the gateway definition for the TP regime. The definition has TWO LIMBS: (1) a direct / indirect-management-participation test (sub-s. 1); (2) a 13-clause DEEMING TRIGGER list (sub-s. 2) bringing-in further enterprises into AE-status even where direct participation is absent. The 26% equity-holding threshold (sub-s. 2(a)/(b)) is the most-litigated trigger -- Indian subsidiaries with 26%+ Indian-shareholding are AE; mutual 26% holdings; loans >= 51% of book value; >90% raw-material dependence; appointment-of-directors authority; technology-transfer dependence; etc. The breadth ensures most cross-border group transactions fall within TP net.
STATUTORY ARCHITECTURE
TWO-LIMB DEFINITION: (I) Sub-s. (1) -- general test: enterprise PARTICIPATES (directly / indirectly / through intermediaries) in management / control / capital of another enterprise; OR same persons participate in both. (II) Sub-s. (2) -- 13 DEEMING TRIGGERS (each independently sufficient to make two enterprises AE): (a) Enterprise holds 26%+ EQUITY of another (direct / indirect); (b) Both have common 26%+ shareholder; (c) LOANS -- one to another >= 51% of book value of total assets; (d) GUARANTEES -- one for another >= 10% of book value of total borrowings; (e) APPOINTMENT-OF-DIRECTORS authority -- one appoints >50% directors of another; (f) APPOINTMENT-OF-EXECUTIVES authority -- one appoints/controls executives; (g) >90% RAW-MATERIAL / CONSUMABLES dependence -- one supplies, with influenced terms; (h) MANUFACTURE WHOLLY DEPENDENT -- on technology / patent / copyright / trade-mark / similar property of other; (i) SALE-OF-OUTPUT >= 50% of total sales of one to other / influence on price; (j) MUTUAL-INTEREST as may be prescribed; (k) HUF / FAMILY relationship between enterprises (closely-held); (l) FIRM-PARTNER / TRUSTEE-BENEFICIARY ties; (m) other CG-prescribed cases. Each trigger is independent; one trigger creates AE-status for both enterprises bilaterally. Practitioner: AE-determination is BINARY but FAR-CONTROL test (FAR analysis -- functions / assets / risks) drives subsequent ALP determination. Key thresholds: 26% equity, 51% loans, 10% guarantees, 90% raw-material, 50% sales -- audit checklist for every group entity.
CASE LAW
(i) Diageo India v. CIT (Bom HC) -- 26% equity threshold; intermediary holdings count. (ii) Maruti Suzuki v. CIT (Del HC) -- AE-status / FAR analysis intersection. (iii) Page Industries v. CIT -- raw-material dependence trigger application. (iv) Bharti Airtel v. ACIT -- guarantee / loan AE-trigger interaction. (v) Recent ITAT decisions: (i) interpretation of 'influence' in clauses (g)/(i).
PLANNING NOTES
(i) AE-MAPPING -- annual exercise mapping all group entities against 13 triggers; document negative-clearance for entities clearly outside. (ii) THRESHOLDS MONITORING -- equity holdings drift over time; 26% threshold can be triggered by share-buybacks / new issues. (iii) DEPENDENCE TESTS (clauses g, h, i) -- review supply / sales contracts; if percentages near thresholds, consider portfolio diversification. (iv) COMMON CONTROL -- broad reading of 'participation'; same individual / family / trust as common controller catches widely.
CROSS-REFERENCES