Section 162 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 162 defines "associated enterprise" for the purposes of Chapter X. The transactions that Chapter X deals with are transactions between associated enterprises, so this definition is the starting point. The section lists twelve relationships, from shareholding of not less than 26% of voting power to a relationship of mutual interest as may be prescribed, and adds a wider group for specified domestic transactions. This article reads it as per the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026.
An enterprise is an associated enterprise of another if it meets any one of the tests in section 162(1)(a) to (l): common participation in management, control or capital; shares carrying not less than 26% of voting power; a loan of not less than 51% of the book value of total assets; a guarantee of not less than 10% of total borrowings; board appointments; dependence on know-how or on supply; control by the same individual or Hindu undivided family; or a not less than 10% interest in a firm. For a specified domestic transaction, the meaning widens under sub-section (2).
Scope and the amendment by the Finance Act, 2026
Section 162 is the first section of Chapter X after section 161. Its sub-section (2)(c) was substituted by section 50 of the Finance Act, 2026, with effect from 1 April 2026. The Act came into force on the 1st April, 2026 (section 1(3)), save as otherwise provided; later amendments, rules and notifications should be checked. The section applies "for the purposes of this Chapter", so it is a definition for Chapter X only.
Section 161 sets out the transfer pricing rule that this definition feeds; see our post on section 161 (transfer pricing). For the Chapter as a whole, read Chapter X of the Income-tax Act, 2025. If your group transacts across borders and you need the relationships mapped, our tax planning advisory team can help.
Section 162(1): the twelve tests
For the purposes of Chapter X, "associated enterprise", in relation to another enterprise, means an enterprise which meets any of the following.
| Clause | Test |
|---|---|
| (a)(i) | one or more persons who participate, directly or indirectly, or through one or more intermediaries, in management, control or capital of one enterprise also participate in the management, control or capital of the other |
| (a)(ii) | one enterprise holds, at any time during the tax year, directly or indirectly, shares carrying not less than 26% of the voting power in the other |
| (a)(iii) | any person or enterprise holds, at any time during the tax year, directly or indirectly, shares carrying not less than 26% of the voting power in each of the enterprises |
| (b) | has advanced a loan to the other enterprise and the loan constitutes not less than 51% of the book value of the total assets of the other |
| (c) | guarantees not less than 10% of the total borrowings of the other |
| (d) | more than half of its board of directors or governing board members, or one or more executive directors or executive members, are appointed by the other enterprise |
| (e) | more than half of its directors or governing board members, or one or more executive directors or members, are appointed by the same person or persons who have done so for the other enterprise |
| (f) | its manufacturing or processing of goods or articles, or business, is wholly dependent on the use of know-how, patents, copyrights, trademarks, licences, franchises or any other similar business or commercial rights, or any data, documentation, drawing or specification relating to a patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which it has exclusive rights |
| (g) | 90% or more of the raw materials and consumables for its manufacture or processing are supplied by the other enterprise, or persons specified by it, and the prices and other conditions of supply are influenced by the other enterprise |
| (h) | the goods or articles it manufactures or processes are sold to the other enterprise or to persons specified by it, and the prices and other conditions are influenced by the other enterprise |
| (i) | it is controlled by an individual, and the other enterprise is also controlled by that individual or his relative or jointly by that individual and his relative |
| (j) | it is controlled by a Hindu undivided family, and the other enterprise is controlled by a member of that family, by a relative of a member, or jointly by such member and his relative |
| (k) | it is a firm, association of persons or body of individuals, and the other enterprise holds not less than 10% interest in it |
| (l) | it has any relationship of mutual interest with the other enterprise, as may be prescribed |
Clause (a) opens by describing an enterprise "which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise in the following manner", and sub-clauses (i) to (iii) follow; only the sub-clauses give the test. The relationship of mutual interest in clause (l) is left to the Income-tax Rules, 2026; see our rule-wise guides.
Section 162(2): specified domestic transactions
In relation to a specified domestic transaction entered into by an assessee, "associated enterprise" also includes:
- (a) other units, undertakings or businesses of the assessee in respect of a transaction referred to in section 122 or 140(9);
- (b) any other person referred to in section 140(13) or 205(4) in respect of a transaction referred to there; and
- (c) other units, undertakings, enterprises or business of the assessee, or other person referred to in section 140(13), in respect of transactions referred to in Chapter VIII, to which the provisions of section 140(9) or (13) of this Act or section 80-IA(8) or (10) of the Income-tax Act, 1961 (43 of 1961) are applicable.
Clause (c) was substituted by the Finance Act, 2026, with effect from 1 April 2026. The reference to the 1961 Act in clause (c) is the Act's own and nothing is added to it here. A printing slip: the reference to "205(4)" in clause (b) carries a stray number "32" after it in the copy consulted; it is not part of the text.
Specified domestic transactions themselves are defined in section 164; see our article on sections 163 and 164.
How to apply the section
- Identify the pair. The tests are always "in relation to another enterprise". Take each pair of enterprises and test both directions where the clause is directional (for example, clauses (d), (g) and (h) refer to what the other enterprise does to this one).
- Check the timing words. Clauses (a)(ii) and (a)(iii) ask whether the shares are held "at any time during the tax year". A holding for part of the year is enough.
- Check the thresholds. Clauses (a)(ii) and (a)(iii) say "not less than 26%". Clause (b) says "not less than 51%" of the book value of total assets, clause (c) "not less than 10%" of total borrowings, clause (g) "90% or more", clause (k) "not less than 10%".
- Read the clause (a)(iii) test carefully. It is the common-holder test: one person or enterprise holds not less than 26% in each of the two enterprises.
- Check clause (i) and (j) control. Control by an individual, his relative, or a Hindu undivided family and its members links enterprises that have no shareholding between them.
A worked example
Names and amounts are invented; the thresholds are as printed.
Orchid Tools Limited holds shares carrying 30% of the voting power in Sapphire Packaging Limited throughout the tax year. Orchid has also lent Sapphire Rs. 5,00,000, while Sapphire's total assets have a book value of Rs. 20,00,000.
- Clause (a)(ii): 30% is not less than 26%, so Orchid and Sapphire are associated enterprises on that test alone.
- Clause (b): the loan is Rs. 5,00,000 / Rs. 20,00,000 = 25% of the book value of total assets, which is less than 51%, so clause (b) is not met. It does not matter, because clause (a)(ii) already is.
Now Vikram Das controls both Ganga Textiles and Narmada Dyes. Neither holds shares in the other. Under clause (i), Ganga is controlled by an individual and Narmada is also controlled by that individual, so they are associated enterprises.
Need help with transfer pricing groups?
Whether two enterprises are associated decides whether transfer pricing applies, and one test is enough. Our tax planning advisory service can map your holdings, loans, guarantees and control links against section 162 before the year closes.
Key takeaways
- Meeting any one test in section 162(1)(a) to (l) makes enterprises associated.
- The numerical tests are 26% of voting power, 51% of the book value of total assets, 10% of total borrowings, 90% of raw materials and 10% interest in a firm.
- Control by the same individual, relative or Hindu undivided family can link enterprises with no shareholding.
- For specified domestic transactions, section 162(2) adds other units, undertakings or businesses of the assessee and the persons in sections 140(13) and 205(4).
- Section 162(2)(c) was substituted by the Finance Act, 2026, with effect from 1 April 2026.
Read next
- Section 161: transfer pricing
- Sections 163 and 164: international transaction and specified domestic transaction
- Section 165: determination of arm's length price
- Chapter X of the Income-tax Act, 2025
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.