Related Party: Definition and Ownership Tests (India and OECD)
A related party defined: the associated-enterprise tests — ownership, voting power, participation in management, and the other listed connections — that put a counterparty in transfer pricing scope.
Definition
A related party (in Indian law, an associated enterprise) is a person that bears to another person one of the relationships that the law treats as bringing their transactions into transfer pricing scope. In India the test sits in section 92(2) of the Income-tax Act; in the OECD framework it is the “associated enterprises” test of Model Convention Article 9.
The Indian test, in substance — a person is associated with another where:
- Participation in management, control or capital — one person participates, directly or indirectly, in the management or control or capital of the other (the ownership and voting connections, at the levels the section and the rules prescribe — the 20%/26% thresholds that operate in the practice).
- Common control — both persons are under the control of the same third person.
- The listed family and fiduciary connections — the other relationships the section enumerates (the family relationships of the controlling persons, the fiduciary and nominee positions, and the residual “similar” catch the drafting provides for).
The OECD’s test is functionally the same question — control or significant participation, direct or indirect — which is why the Indian and the OECD analyses usually reach the same answer, and the file documents the specific connection that exists, not the general label.
Why the definition is a scoping act
Identifying the related parties is the first step of the whole exercise: it decides which counterparties’ transactions are in scope for the arm’s length standard, the documentation and the Form 3CEB schedule. A counterparty that is a related party makes every transaction with it a controlled transaction that must be shown arm’s length; a counterparty that is not, is outside the regime entirely. Missed related parties are missed scope — the examination finds them from the share registers and the beneficial-ownership trails the taxpayer did not file.
Example
An Indian company in which a non-resident parent holds 60% of the equity, and a second non-resident entity in which the same parent holds 100%, are associated enterprises with each other through the parent (common control) as well as the Indian company being associated with the parent directly (participation in capital). Transactions among all three are in scope; the file documents each connection with the specific section-92(2) ground.
See also
FAQ
At what ownership level does a party become “related”? The section and the rules operate at the prescribed thresholds (the 20%/26% levels in the practice); below them, the other limbs of the test (management or control participation, common control, the listed connections) are what bring a counterparty in scope. The analysis is the specific connection, not a single percentage.
Does the OECD test and the Indian test always agree? They are convergent by design — both ask about control or significant participation, direct or indirect. The edge cases (indirect chains, the listed family/fiduciary connections in the Indian drafting) are where the file documents the specific ground, because that is what the examination will test.
Run the screens as a study, not a spreadsheet
Quartyl applies the method, PLI and screening steps above as a pipeline — and keeps a documented reason for every exclusion.
Related docs
Controlled Transaction: Definition, Thresholds and Coverage
A controlled transaction defined: a transaction between related parties on terms differing from independent dealings — the unit to which transfer pricing law applies.
Read docThe Arm's Length Principle Explained (OECD and India)
The arm's length principle in full: the OECD Article 9 standard, India's section 92, how a price gets tested against independent evidence, and how the principle shows up in an audit.
Read doc