Associate Enterprise Under Transfer Pricing

Section 92A(1) defines the associated enterprises generally. Section 92A(2) provides 13 relationships between the enterprises which constitute deemed associated enterprises. 

Associated Enterprises [Section 92A(1)]

1.An enterprise which participates, directly or indirectly, or through one or more intermediaries, in:

• management of the other enterprise, or

• control of another enterprise, or

• capital of other enterprise
  

Example -  A Ltd. directly participates in the management of B Ltd. and B Ltd. participates in the management of C Ltd. In such case, A Ltd. has direct participation in the management of B Ltd. but has an indirect participation in the management of C Ltd. In such a scenario, both B Ltd. and C Ltd. would be associated enterprises of A Ltd.

2. If one or more persons participate, directly or indirectly, or through one or more intermediaries in the management/control/capital of the two different enterprises, then those two enterprises are AEs.

Example- Mr A directly has control in A Ltd. and B Ltd. In such a scenario, both A Ltd. & B Ltd. are associated enterprises since there is a common person i.e., Mr A, who controls both entities A Ltd. & B Ltd.

Test Cases of Associated Enterprises [Section 92A(2)]

Two enterprises are deemed to be associated enterprises if they fall under any one or more of the situations mentioned in section 92A(2). However, it is very important to note that two enterprises will not be deemed to be Associate Enterprise u/s 92A(2) unless they satisfy the test control and management as mentioned in 92(A)(1)

Section 92(A)(2) specifies 13 such situations during which an associated enterprise relationship is deemed to be established. Two enterprises are deemed to be AE if:

• Voting Power in Another Enterprise: One enterprise holds directly or indirectly 26% or more of the voting power, in the other enterprise.

Example: A Ltd. holds 33% of Voting Power in B Ltd. and B Ltd. holds 80% of Voting Power in C Ltd. In the above example, A Ltd. holds 26% or more voting power in B Ltd., directly and in C Ltd. indirectly. Therefore, both B Ltd. & C Ltd. are deemed associated enterprises of A Ltd.

• Voting Power in Multiple Enterprises: Any person or enterprise holds directly or indirectly, 26% or more of the voting power, in each of two different enterprises.

Example: Mr. A holds 40% of voting power in both X Ltd. and Y Ltd. where neither X Ltd. has any holding in Y Ltd. nor Y Ltd. has any holding in X Ltd since Mr. A directly holds 40% of voting power in both X Ltd. and Y Ltd., X Ltd. & Y Ltd. will be deemed associated enterprises.

• Advancing of Loan: One enterprise advances loan to the other enterprise atleast 51% of the book value of the total assets of other enterprise.

Example: Book Value of total assets of Y Ltd. is ₹100 crores. X Ltd. advances loan of ₹60 crores to Y Ltd. X Ltd. advances loan of ₹60 crores to Y Ltd, which is 60% of the book value of total assets of Y Ltd. Hence, X Ltd. & Y Ltd. are deemed associated enterprises.

• Guaranteeing Borrowings: One enterprise guarantees at least 10% of the total borrowings of the other enterprise.

Example: P Inc. has total loan of 1 million dollars from XYZ Bank of America. Out of that, A Ltd., an Indian company, guarantees 20% of total borrowings in case of any default made by P Inc. since A Ltd. guarantees 20% of total borrowings of P Inc., P Inc. and A Ltd. are deemed associated enterprises.

• Appointment of directors by enterprise: One enterprise appoints more than 50% of the Board of Directors or members of the Governing Board, or one or more Executive Directors or Members of the Governing Board of other enterprise 

Example: X Ltd. has 15 directors on its Board. Out of that, Y Ltd. has appointed 8 directors. In such case, X Ltd. and Y Ltd. are deemed associated enterprises.

• Appointment of directors in two different enterprises by same person: more than 50% of the Board of Directors or members of the Governing Board, or one or more Executive Directors or Members of the Governing Board of each of the two enterprises are appointed by the same person.

Example: Mr. A appointed 9 directors out of 15 directors of X Ltd. and appointed 2 executive directors on the board of Y Ltd.  In such case, since a common person i.e. Mr. A appointed more than half of the directors in X Ltd. and appointed 2 executive directors in Y Ltd., both X Ltd. and Y Ltd. are deemed associated enterprises.

• Dependence on intangibles: Manufacturing or processing of goods or articles of an enterprise is wholly dependent on the use of certain intangible assets of which the other entity is the owner or in respect of which the other enterprise has exclusive rights. 

• Dependence on raw material: atleast 90% of raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise are supplied by the other enterprise and the prices and other vital terms are fixed by the other enterprise.

• Dependence on sales: Goods or articles manufactured or processed by an enterprise are sold to other enterprise, and the prices and other vital terms are fixed by the other enterprise.

• Control by common individual: two such enterprises are controlled by the same individual or by his/her relatives.

Example: Mr. A and Mr. B are relatives. Mr. A has control over X Ltd. and Mr. B has control over Y Ltd. Therefore,both X Ltd. and Y Ltd. will be deemed associated enterprises.

• Control by HUF: an enterprise is controlled by a Hindu Undivided Family (HUF) and the other enterprise is controlled by a member of such HUF or their relatives, those enterprises would be associated enterprises .

Example: A Ltd. Control by HUF and B Ltd. Control by the member of such HUF. Therefore, both A Ltd. and B Ltd. will be deemed associated enterprises.

• Interest in a Firm, AOPs or BOIs: one enterprise holds at least 10% or more in   Firm/AOPs/BOIs.

• Mutual interest relationship: relationship of mutual interest, relationship as may be prescribed between the two enterprises.

Case Law : Orchid Pharma Limited vs. DCIT (ITAT Chennai)

Transfer Pricing - Meaning of “Associated Enterprises”: The fact that an enterprise can “influence prices and other conditions relating to sale” does not make it an “associated enterprise” of the assessee if it does not participate in the (a) capital, (b) management, or (c) control of the assessee and thus does not fulfil the basic rule u/s 92A(1). S. 92A(2)(i) has to be read with s. 92(A)(1). Even if the conditions of s. 92A(2)(i) are fulfilled, this enterprise cannot be treated as  ‘associated enterprise’ if the requirements of s. 92A(1) are not fulfilled

92(A) (1) and 92(A)(2) has to be read together and only if 92(A)(1) is satisfied than an enterprise will be called AE if it falls under any one criteris of 91(A)(2).