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| Redrawing the AE Line: Simplification That Complicates |
The proposed changes to the definition of Associated Enterprises (AEs) under the new Income Tax Bill, 2025, carry significant implications. Before delving into the impact, it is important to revisit the current legal framework under Section 92A(1) and 92A(2) of the Income-tax Act, 1961.
| Section 92A(1) defines AEs where:
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- One enterprise directly or indirectly participates in the management, control, or capital of another enterprise; or
- The same persons (directly or indirectly) participate in the management, control, or capital of both enterprises.
Section 92A(2) sets out 13 deeming scenarios for determining AE status under sub-section (1), including significant shareholding (≥26%), financial arrangements (such as substantial loans or guarantees), common directors or key decision-makers, and economic dependency on aspects like intellectual property, raw materials, or sales.
The tax authorities had previously interpreted these sub-sections as independent, asserting that fulfilling the conditions under either sub-section could trigger an AE relationship. This interpretation led to significant litigation, eventually reaching the Income Tax Appellate Tribunal (ITAT), High Courts, and finally the Supreme Court.
The High Court held that both sub-sections (1) and (2) of Section 92A must be read together to determine if two entities are AEs. The courts rejected the argument that sub-sections (1) and (2) operate independently, stating that such an interpretation would render one of the provisions redundant, which is contrary to established principles of statutory construction. The Supreme Court upheld this view by dismissing the Revenue's Special Leave Petition, confirming that the two sub-sections are interlinked and must be applied conjunctively.
| Despite this judicial clarity, the new Income Tax Bill, 2025 had proposed to revise Section 92A(2), changing the phrase:
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"For the purposes of sub-section (1)"
to
"Without affecting the generality of the provisions of sub-section (1)".
This change effectively reverses the judicial precedent by implying that sub-sections (1) and (2) may now operate independently, thereby making prior court rulings redundant.
A 31-member Select Committee, constituted by the Lok Sabha Speaker to examine the Bill introduced on 13 February 2025, reviewed this provision under Clause 162 of the draft Bill. The Committee submitted a report containing 285 recommendations, which was tabled in the Parliament on 21 July 2025.
Within the 4000-page report, the Committee specifically examined Clause 162 corresponding to the current Section 92A and took note of the change in phraseology. While the Ministry argued that this revision would clarify ambiguities and reduce litigation, the Committee expressed concerns that it could have the opposite effect, creating confusion and potentially leading to independent application of the two sub-sections.
To address this concern, the Committee recommended reinstating the original language from the 1961 Act. As stated on page 1353, paragraph 162.6:
"Thus, the Committee, recommend the Ministry to reinstate the position of the proposed Clause 162 in consonance with the Section 92A of the IT Act, 1961 vis-à-vis the reinstatement of the earlier phrase "for the purposes of sub-section (1)" in the opening line of sub-clause (2) of the proposed Clause 162 of the Bill in the place of proposed phrase "Without affecting the generality of the provisions of sub-section (1)"."
This recommendation was reiterated again on page 3679. However, the version of Clause 162 on page 4154 of the report appears to adopt a different formulation, as excerpted below:
| "162. (1) In this Chapter, "associated enterprise", in relation to another enterprise, means an enterprise—
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- 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,—
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the persons who participate, directly or indirectly, or through one or more intermediaries, in management or control or capital of one enterprise, also participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
- an enterprise holds, directly or indirectly, shares carrying not less than 26% of the voting power in the other enterprise; or
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which holds, directly or indirectly, shares carrying not less than 26% of the voting power in each of such enterprises; or
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which has advanced a loan to the other enterprise and such loan constitutes not less than 51% of the book value of the total assets of the other enterprise; or... "
This draft of Clause 162 essentially merges the provisions of both sub-sections (1) and (2), substantially broadening the AE definition, even in the absence of tangible shareholding or management control.
As a result, many transactions that were previously outside the scope of transfer pricing regulations could now fall within it, expanding the compliance obligations for related party arrangements. This could significantly burden taxpayers, who would now face challenges in objectively identifying AE relationships.
For instance, earlier, participation in management or capital could be evidenced through shareholding or board representation. Now, without any definitive indicators in 162(1)(i), demonstrating the existence or absence of an AE relationship becomes subjective. This ambiguity is likely to increase the risk of disputes and increase compliance complexities.
Moreover, the amendment raises concerns about overlap with other regulatory frameworks. With increasing scrutiny from SEBI and under the Companies Act on related party transactions, the interplay of these rules with the broadened AE definition remains uncertain.
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Our Comments
While the amendment may have been aimed at simplification, it appears to have complicated the AE determination process, increasing both uncertainty and the potential for litigation.
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Page Industries Ltd [TS-19-HC-2021(KAR)-TP]
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