Control in substance is not enough. s.92A(1) describes participation in the management, control or capital of another enterprise, directly or indirectly or through intermediaries, but s.92A(2) then lists the specific relationships that count, and the Tribunal and the Gujarat High Court have read the two together: unless one of the clauses of sub-section (2) is actually satisfied, de facto or even de jure participation does not make two enterprises associated. If they are not associated enterprises there is no international transaction, no arm's length exercise and no Form 3CEB.
s.92A(1) defines an associated enterprise, in relation to another enterprise, as an enterprise '(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise'; or '(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise'. Clause (a) is the vertical case — parent and subsidiary, however many layers deep. Clause (b) is the horizontal case — two entities under a common participant, which is how sister companies are caught.
s.92A(2) then opens with the words 'For the purposes of sub-section (1)' and deems two enterprises to be associated if, at any time during the previous year, any of thirteen relationships exists. The ones actually met in practice are these. Under clause (a), 'one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise'; clause (b) is the same test applied to a common holder in both enterprises. Under clause (c), 'a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise'. Under clause (d), 'one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise'. Under clause (e), 'more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise' — note that the second half of that clause needs only one executive director, not half the board; clause (f) applies the same to appointments by a common person. Under clause (g), the manufacture or processing of goods or the business carried on by one enterprise is 'wholly dependent on the use of know-how, patents, copyrights, trade-marks, licences, franchises or any other business or commercial rights of similar nature' of which the other is the owner or in respect of which it has exclusive rights. Under clause (h), 'ninety per cent or more of the 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, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise'. Clause (i) is the mirror image on the sales side. Clauses (j) and (k) deal with control by an individual and his relatives, and by a Hindu undivided family and its members. Clause (l) catches a firm, association of persons or body of individuals in which the other enterprise holds not less than 10% interest. Clause (m) is a residual power to prescribe further relationships of mutual interest.
The relationship between the two sub-sections is the whole battleground, and it is settled against the department. As enacted in 2001, s.92A(2) began 'Two enterprises shall be deemed to be associated enterprises'; the Finance Act 2002 substituted the opening words with 'For the purposes of sub-section (1), two enterprises shall be deemed to be associated enterprises', and the Memorandum to the Finance Bill 2002 explained that the mere fact of participation by one enterprise in the management or control or capital of the other shall not make them associated enterprises unless the criteria specified in sub-section (2) are fulfilled. On that footing the Ahmedabad Tribunal in ACIT v. Veer Gems, order of 3 January 2017, held that sub-section (2) is exhaustive and not simply illustrative, and that a form of participation which it does not recognise does not produce an associated enterprise however real it is. The Gujarat High Court dismissed the revenue's appeal on 20 June 2017 in PCIT v. Veer Gems, holding that as long as no clause of s.92A(2) is satisfied, de facto participation in the capital, management or control of the other enterprise is not enough. The Bangalore Tribunal in Page Industries Ltd v. DCIT [2016] 159 ITD 680 (Bangalore) and the Chennai Tribunal in Orchid Pharma Ltd v. DCIT [2016] 162 ITD 303 (Chennai) reached the same conclusion, Page Industries on the pointed facts that clause (g) was satisfied but sub-section (1) was not.
There was one decision the other way and it is gone. Diageo India Pvt Ltd v. ACIT, decided by the Mumbai Tribunal on 21 September 2011 and reported at 47 SOT 252, treated s.92A(1)(a) and (b) as a basic rule unaffected by the specific instances in sub-section (2), and found associated-enterprise status from de facto control over a contract bottling unit dependent on the assessee's trademarks. In Kaybee Pvt Ltd v. ITO, order of 28 February 2020, the Mumbai Tribunal itself held that Diageo is no longer good law, relying on the Finance Act 2002 amendment, on a CBDT circular which the digest records as Circular 8/2008 and which the Tribunal read as saying that enterprises are associated only where one of the criteria in sub-section (2) is fulfilled, and on the Veer Gems line. So the practitioner's first question to the officer is not 'why do you say I control them' but 'which clause of sub-section (2), and on what figures'.
Once two enterprises are associated, s.92B decides what is caught. An international transaction is a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, provision of services, lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and it includes a mutual agreement for the allocation or apportionment of, or contribution to, any cost or expense.
s.92B(2) is the trap. A transaction entered into by an enterprise with a person who is not an associated enterprise is deemed to be a transaction between two associated enterprises if there exists a prior agreement in relation to the relevant transaction between that other person and the associated enterprise, or if the terms of the relevant transaction are determined in substance between that other person and the associated enterprise. The Finance Act 2014 added words making clear that it applies whether or not that other person is a non-resident, which closed the argument that a purely domestic contract could never be a deemed international transaction. The practical exposure is a supply or distribution contract with an independent Indian party whose price and terms were in fact fixed by a global agreement with the foreign parent — the Indian contract is then benchmarked as though it were with the parent.
Form 3CEB has no monetary threshold, and that is the single most common compliance failure. The department's section page for s.92E is a 2009 snapshot, and the words it serves — 'Every person who has entered into an international transaction during a previous year' shall obtain a report from an accountant and furnish it on or before the specified date in the prescribed form — should be used only as evidence that the obligation exists, not as a statement of its present scope. The department's own Form 3CEB page states the obligation as it now stands: the report is to be filed 'by every person who has entered into an international transaction or specified domestic transaction during the relevant previous year'. What matters here is what neither version contains, and that is a monetary threshold. The form is Form 3CEB under rule 10E, it is filed electronically, and the specified date is 31 October of the assessment year, one month before the extended return due date for a transfer pricing assessee. One transaction of any size with an associated enterprise triggers it. Failure to obtain and furnish it carries a penalty of Rs 1,00,000 under s.271BA.
The documentation obligation, by contrast, does have a threshold. s.92D requires the prescribed information and documents to be kept and maintained, and rule 10D(1) lists them; rule 10D(2) provides that 'Nothing contained in sub-rule (1), in so far as it relates to an international transaction, shall apply in a case where the aggregate value, as recorded in the books of account, of international transactions entered into by the assessee does not exceed one crore rupees' — though the assessee must still be able to substantiate, on the material available, that the income has been computed in accordance with s.92. Rule 10D(5) requires the information and documents to be kept for eight years from the end of the relevant assessment year. Above the second tier, rule 10DA requires a master file: Part A of Form 3CEAA is filed by every constituent entity of an international group with no threshold, and Part B where both the group's consolidated revenue exceeds Rs 500 crore and the Indian entity's aggregate international transactions exceed Rs 50 crore, or Rs 10 crore where they relate to intangible property. Country-by-country reporting under s.286 is triggered where the group's consolidated revenue in the preceding accounting year exceeds Rs 6,400 crore.
The penalty that rides on all of this is s.271AA, and it is dealt with fully on its own page in this library — two per cent of the value of each international or specified domestic transaction for failing to keep the s.92D documents, for failing to report the transaction, or for maintaining or furnishing incorrect information, plus a flat Rs 5,00,000 under s.271AA(2) for the master file. What belongs here rather than there is the order of the argument: if the associated-enterprise question is answered in your favour, s.271AA never arises, because there is no international transaction to document. Take the s.92A point first.
Under the Income-tax Act 2025 the definition moves to s.162, and it is not drafted the way s.92A is — which matters, because the whole Veer Gems argument depends on the drafting. On the only text of s.162 that could be opened, the section has two sub-sections and not the s.92A(1)/(2) pair. Sub-section (1) opens 'For the purposes of this Chapter, the expression "associated enterprise", in relation to another enterprise, means an enterprise—' and then runs a single flat list of clauses (a) to (l) carrying the familiar 26 per cent, 51 per cent, 10 per cent and 90 per cent tests, together with the individual, Hindu undivided family and firm limbs and a residual prescribing power. Sub-section (2) opens 'In relation to a specified domestic transaction entered into by an assessee, associated enterprise shall also include—'. There is no separate participation limb for a deeming provision to operate 'for the purposes of', and there is no sub-section (3). If that rendering is accurate, the structural foundation of Veer Gems — sub-section (2) controlling sub-section (1) — has not been carried forward, and the clauses would stand on their own. That text was reachable on one host only and could not be corroborated on a second, so do not carry the Veer Gems argument into a tax year under the new Act without reading s.162 in the bare Act first. The documentation obligation becomes s.171.
The associated-enterprise question decides whether the transfer pricing chapter applies at all, and it is the only question in that chapter that can be answered without an economic analysis. Officers routinely describe a relationship in commercial terms — the same family behind both, a supplier who cannot survive without you, a distributor you dictate terms to — and treat that as participation in management or control. Veer Gems says that is not the test. On the other side, s.92B(2) and the no-threshold Form 3CEB obligation catch groups that never thought of themselves as having international transactions at all, and the penalty for missing the form is fixed rather than proportionate.
The TPO says my advertising and marketing spend built my foreign parent's brand and has added a mark-up. There is no agreement with the parent about it. Can he do that?
I lent dollars to my overseas subsidiary — must the arm's length interest be benchmarked against Indian lending rates because I am the Indian lender?
The Assessing Officer referred my case to the TPO in a one-paragraph letter without dealing with my objection that there was no international transaction at all. Can I attack the reference itself?
The TPO says I control the foreign party in substance, so we are associated enterprises. Is de facto control enough under s.92A?
The TPO says we issued shares to our parent too cheaply. Can he tax the shortfall?
The TPO says my advertising spend is higher than comparables and has added the excess as brand building for my foreign parent. Can he do that?
The TPO has adjusted a domestic transaction that the Assessing Officer never referred to him and that I never reported in Form 3CEB. Did he have jurisdiction?
We issued shares to our foreign parent at a premium the Transfer Pricing Officer says is too low. Can he tax the shortfall as income under the transfer pricing provisions?
Every page in this library links to what it was written from, so you can check it rather than take our word for it.