What is the meaning of the term Associated Enterprise (AE)?
The provisions of transfer pricing will apply only if the transactions happen to between the Associated Enterprises (AE). The term Associated Enterprises is specifically defined by the Income Tax act, 1961 in Section 92A. The definition explains various scenarios when an organization happens to be the Associated Enterprise, be it due to holding certain percentage of shares in the other entity or having control over it. Let us understand these various aspects in detail.
The section 92A of the Income Tax Act, 1961 defines the word ‘Associated Enterprises’ for the purpose of following:
- Section 92 – Computation of income from international transaction having regard to arm’s length price
- Section 92B – Meaning of international transaction
- Section 92C – Computation of arm’s length price
- Section 92D – Effect to advance pricing agreement
- Section 92E – Secondary adjustment in certain cases
- Section 92F – Definitions of certain terms relevant to computation of arm’s length price, etc
The conditions are:
|an enterprise||which participates, directly or indirectly, or through one or more intermediaries, in:
of the other enterprise.
If A controls the management directly in B and B controls the management of C. This means that A has a direct control on B and an Indirect control on C. and hence B & C both are the AEs of A.
|Two enterprises are AEs||if:
By the same persons who participate, directly or indirectly, or through one or more intermediaries in the said enterprises.
|Ms. M control the management of C Pvt. Ltd. And V Pvt. Ltd. and hence C Pvt. Ltd. And V Ltd. Are AEs.
Apart from the above criteria, there are other parameters on which two enterprises are deemed to be the AEs. These are as follows:
|Ownership||not less than 26% of the voting power in the other enterprise, directly or indirectly|
|Substantial voting power by common person in 2 different entities||not less than 26% of the voting power in each of such enterprises, directly or indirectly|
|Advancing a substantial loan amount||not less than 51% of the book value of the total assets of the other enterprise|
|Guaranteeing the borrowings||not less than 10% of the total borrowings of the other enterprise|
|Appointment of more than half of the Board of Directors||If any enterprise has appointed more than half of the Board of Directors of any other enterprise, the both the enterprises are deemed AEs|
|Appointment of more than half of the Board of Directors by same person||If more than half of the Board of Directors of 2 enterprises are appointed by the same person, those 2 enterprises are deemed AEs|
|Dependence in terms of know-how, patents, and other intangibles||Where the business of one enterprise is wholly dependent on the use of know-how, patents, technical know-how, etc. of which the other enterprise is the owner or has exclusive rights, the 2 enterprises are deemed AEs|
|Supply of 90% or more of the raw materials||2 enterprises are deemed AEs, if 90% or more of the raw material and consumables as required by the one enterprise for manufacturing or processing of the goods or articles, is supplied by the other|
|Dependence on Sale||the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise|
|Control by an individual and/or his relative||2 enterprises are deemed to be AEs where they are controlled severally or jointly by the individual or/ and his relative|
|Control by HUF and its members||where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative|
|Interest in Firm, AOP or BOI||Where one enterprise is a Firm, AOP or BOI and the other enterprise holds not less than 10% interest in such Firm, AOP or BOI.|
|Mutual Interest relationship||There exists between the two enterprises, any relationship of mutual interest, as may be prescribed|
Disclaimer: The above-mentioned cases are illustrative and not exhaustive. This article is only for discussing general issues and hereby we do not express any opinion or give any consultation in whatsoever manner understood. The cases may differ from assessee to assessee. We recommend you to take expert advice depending upon your particular case.