Use of know-how can lead to associated enterprise status

When transactions are entered into between independent enterprises, the price is understood to be determined by market forces. However, when associated enterprises deal with each other, the commercial and financial aspects of the transactions may also be influenced by internal factors. To prevent any misconduct in intra-group transactions, India introduced transfer pricing regulations through sections 92 to 92F of the Income Tax Act, 1961.

Section 92A defines “associated enterprise” (AE) as an enterprise which participates directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise. Similarly, an enterprise in respect of which one or more persons who participate in its management or control or capital, directly or indirectly, or through one or more intermediaries, are the same persons who participate in a similar manner in the management or control or capital of the other enterprise is regarded as an AE.

Deemed AEs

Another class of AEs are entities which are deemed to be AEs under the act, whereby two enterprises fulfilling any of the conditions listed under the specified clauses become AEs under Indian transfer pricing regulations. The deeming provisions describe situations that could influence the commercial and financial aspects of the enterprises’ transactions.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Ajit Tolani is a partner at the firm and Abhay Pitale is a senior associate.