Section 92A of Income Tax Act: Associated Enterprises & Transfer Pricing Rules

Globalization has opened doors for Indian businesses to expand internationally. Along with opportunities, it has also brought challenges in taxation. Companies often transact with related parties in other countries, raising concerns about fair pricing and tax revenue. To address this, the Indian Income Tax Act introduced transfer pricing regulations, and Section 92A of the Income Tax Act is at the heart of it.

This section defines associated enterprises and ensures that profits are not shifted to low-tax jurisdictions. In simple terms, it tells us when Company A & Company B would be considered associated enterprises, and how their international dealings should be taxed.

Meaning of Associated Enterprise

The meaning of associated enterprise is crucial to understanding transfer pricing. Under Section 92A, an “associated enterprise” is defined as an enterprise that directly or indirectly participates in the management, control, or capital of another enterprise.

This means that if one company has substantial influence over another—through shareholding, board composition, or decision-making powers—they are considered associated enterprises. In other words, the law ensures that related entities do not manipulate transactions to shift profits.

When Two Enterprises are Deemed to be Associated Enterprises

Section 92A lists several situations where two enterprises are deemed to be associated enterprises:

1. If one enterprise holds 26% or more of the voting power in another.
2. If both enterprises have the same person holding 26% or more of voting rights.
3. If one enterprise advances substantial loans to another.
4. If one enterprise guarantees substantial borrowings of another.
5. If over 10% of raw materials or goods are sourced from one enterprise.
6. If both enterprises share common management, directors, or decision-makers.

Thus, Company A & Company B would be considered associated enterprises when such financial or managerial control exists."

Why Section 92A Matters

The main objective of Section 92A is to prevent profit shifting through artificial pricing of goods, services, or intellectual property. It ensures:

• Fair computation of income from international transactions.
• Avoidance of double taxation.
• Transparency in cross-border business dealings.
• Protection of India’s tax base against manipulative practices.

Without Section 92A, multinational companies could easily shift profits to tax havens & reduce their liability in India.

Also Read: Guide for Taxpayers Engaged in International Transactions

Link Between Section 92A and Transfer Pricing

Section 92A is directly linked to transfer pricing regulations. Transfer pricing refers to the pricing of goods, services, or intangibles between associated enterprises. If not monitored, companies could overprice or underprice such transactions to move profits out of India.

By defining associated enterprises, Section 92A sets the foundation for transfer pricing rules. It clearly identifies when enterprises fall under scrutiny, ensuring that computation of income from international transactions is done at an arm’s length price.

Example: Company A and Company B

Let’s say Company A & Company B would be considered associated enterprises because Company A holds 30% of Company B’s voting rights. If Company A sells raw materials to Company B at artificially low prices, Company B (in a low-tax country) earns more profit while Company A (in India) reports lower profit.

Section 92A ensures such transactions are adjusted so that the right amount of tax is paid in India.

Conditions for Deemed Associated Enterprises

To summarize, two enterprises are deemed to be associated enterprises if there is:

• Capital control (ownership/voting power).
• Management control (common directors, policies, or influence).
• Financial dependence (loans, guarantees, or supply chain dependence).

These conditions are broad, ensuring that even indirect relationships are captured under Section 92A."

Section 92A and International Tax Compliance

Section 92A is not just about defining relationships. It is also the starting point for computation of income from international transactions. Once enterprises are identified as associated, they must comply with:

• Section 92C (arm’s length pricing methods).
• Section 92D (maintenance of documentation).
• Section 92E (filing of transfer pricing report by an accountant).

Thus, Section 92A lays the foundation for international tax compliance in India.

Also Read: Documentation for International and Domestic Transactions

Practical Implications for Companies

For multinational corporations & Indian companies with overseas subsidiaries, Section 92A has direct consequences:

• Documentation Burden: Enterprises must maintain proof of transactions and pricing policies.
• Tax Adjustments: If tax authorities believe profits were shifted, they can re-compute income.
• Litigation Risks: Many transfer pricing disputes arise from the interpretation of associated enterprises.

So, businesses must carefully evaluate if they fall under Section 92A & ensure compliance.

Landmark Judicial Interpretations

Over the years, courts have clarified Section 92A. Some rulings emphasized that both control and participation are necessary to classify enterprises as associated. Others stressed that even indirect influence—such as funding dependence—can bring companies under its scope.

These judgments highlight the evolving nature of transfer pricing laws and the importance of keeping records transparent.

Role in Preventing Tax Evasion

By defining associated enterprises, Section 92A prevents companies from entering into sham contracts with related parties. It ensures that computation of income from international transactions is realistic, discouraging tax avoidance.

In fact, India has aligned Section 92A with global standards under OECD transfer pricing guidelines, strengthening its fight against base erosion & profit shifting (BEPS).

Key Challenges for Businesses

1. Complexity – Determining whether enterprises are associated can be confusing.
2. Compliance Costs – Maintaining documentation & reports can be expensive.
3. Frequent Disputes – Many cases end up in litigation due to differing interpretations.
4. Dynamic Nature – Laws evolve with international agreements, requiring constant updates.

Also Read: The Core of International Taxation and Transfer Pricing

Conclusion

Section 92A of Income Tax Act is the cornerstone of India’s transfer pricing regulations. It defines associated enterprises, explains the meaning of associated enterprise, and ensures that two enterprises are deemed to be associated enterprises when one influences the management, control, or capital of another.

By doing so, it makes sure that the computation of income from international transactions is fair & prevents tax evasion. For multinational companies, this section is not just legal text but a guiding principle for compliance.

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