Related Parties & Controlled Transactions: Who and What Counts

Before any method, PLI or screen, a transfer pricing analysis must answer two threshold questions: are the parties related? and does this transaction fall inside the net? In India both answers come from section 92(2) of the Income-tax Act.

The Indian associated-enterprise test

Section 92(2) defines an associated enterprise in four limbs. Two entities are associated if:

1. Direct or indirect participation in management, control or capital. The operational working is the 20% threshold: one entity participates in the management, control or capital of the other to the extent of 20% or more — either directly or through one or more intermediaries. The classic pattern is a parent holding ≥20% (fully owned foreign subsidiaries are the easiest case).
2. Common control. Both entities are under the control of the same person or group — two sister subsidiaries of the same parent, even if neither owns the other.
3. Dominant influence. One entity exercises dominant influence over the other, or both are under the dominant influence of a third party. This catches influence without 20% — board dominance, financing dependence, commercial dependence (e.g., one party sourcing or selling ≥ a material share through the other).
4. Debt-dependence. Since the 2012 amendments, a relationship where one entity is debt-dependent on the other (the interest payable exceeds 50% of the interest the borrower pays to all lenders, and the borrower’s borrowings from the associated enterprise exceed 50% of its net worth) can also trigger association.

Practical reading. For a typical MNC structure — Indian subsidiary, overseas parent, overseas sister companies — limbs 1 and 2 do all the work. Limb 3 is where the TPO reaches in creative cases (agent arrangements, exclusive supply contracts). When in doubt, document why the relationship is (or is not) “dominant influence” contemporaneously.

What is an international transaction

The tests apply to “international transactions” — transactions between two associated enterprises where at least one is an Indian resident. The net catches:

• Sale or purchase of goods or property of any kind
• Provision of or use of services
• Use of or right to use any property, plant, machinery or equipment
• Use of or right to use any intellectual property (patents, trademarks, know-how, software)
• Lending or borrowing of money
• Provision or receipt of security for a loan

Two structural notes:

• The direction is irrelevant. Both inbound (overseas → India) and outbound (India → overseas) legs are captured; the TPO can adjust either side of the Indian entity’s position.
• Specified domestic transactions. s.92(2A) extends the net to certain domestic related-party transactions where the local entity’s turnover exceeds the s.92F threshold — so even a purely Indian group with large intra-group flows needs TP documentation.

OECD comparison

The OECD Model art. 25A uses a broader functional definition — “associated enterprises” are enterprises where one participates in the other’s management, control or capital, or the same person/group controls both, with a participation concept that is generally applied more expansively (many jurisdictions do not require a fixed 20% floor). The practical difference is small for MNC structures; it matters at the margins for minority investments and holding structures.

Test	India (s.92(2))	OECD art. 25A
Participation threshold	20% (direct/indirect)	No fixed % — “participation”
Common control	Yes	Yes
Dominant influence	Yes (explicit limb)	Implied via control/participation
Debt dependence	Yes (explicit limb)	Not a definition limb (covered via benefits analysis)

The transaction inventory exercise

The first working step of any TP file is the controlled-transaction inventory: every flow between the entity and each associate, with counterparty, nature, terms, and annual value. This list:

• Drives the documentation scope (Rule 10D item 4 requires it verbatim).
• Drives the Form 3CEB Annexure A schedule.
• Drives the benchmarking scope — you benchmark transactions, not the entity.
• Is the TPO’s first exhibit in a dispute. If your inventory missed a flow (a licence embedded in a services contract, a guarantee fee never charged), the adjustment starts from the missed item, not the benchmark.

Common edge cases

• Cost sharing with a parent that has no Indian operations. The cost pool and the buy-in both need an arm’s-length test; a blanket “50/50 split” without documentation is an invitation to challenge.
• Group guarantees with no fee. If the guarantee benefits the Indian borrower, an implicit fee may be imputed — and the safe-harbour 1% floor (Rule 10TD) gives you a documented way out if you elect it.
• Intra-group loans at below-market rates. Debt-dependence plus a below-market rate is the combination TPOs look for; the safe-harbour MCLR-plus-bps formula is the clean fix.
• Pure agent arrangements. If the Indian entity claims to be a pure agent, the “dominant influence” analysis and the functional analysis of what it actually does decide whether it is an associated enterprise earning a fee, or something else entirely.