Direct Tax Laws & International Taxation · Transfer Pricing

Associated Enterprises and Specified Domestic Transactions

Updated 5 October 2026 · Fact-checked

Associated enterprises are enterprises linked by participation in management, control or capital, or by deeming tests such as 26% voting power, a loan of 51% of assets or a 10% guarantee. Specified domestic transactions are certain resident-to-resident deals, such as payments to specified persons, above ₹20 crore. Test the link, identify the parties, check the threshold, then apply arm's length price.

Understand Associated Enterprises and Specified Domestic Transactions

Transfer pricing stops related parties from shifting profit by fixing prices that differ from what independent parties would agree. The law needs two things before it applies: a relationship between the parties and a qualifying transaction. This topic covers both.

The relationship is called an associated enterprise (AE). The basic test is that one enterprise takes part, directly, indirectly or through intermediaries, in the management, control or capital of the other. Or the same persons take part in both. The law then lists deeming situations where two enterprises are treated as AEs. These are mostly numeric tests: voting power, loans, guarantees, board appointments, supply dependence and control by an individual or relatives.

An international transaction is a transaction between two or more AEs, at least one of whom is a non-resident, in the nature of purchase, sale, lease, services, lending, borrowing and similar items. Here the AE link is essential. If the other party is not an AE, transfer pricing does not apply, except in the deeming cases for third-party deals made under a prior agreement with an AE.

A specified domestic transaction (SDT) is different. Both parties are residents, and the AE test is not the gate. The gate is the type of transaction. Under the current section 92BA, the categories that remain are mainly expenditure payments made to persons specified under section 40A(2)(b), and any other transaction that may be prescribed. The older clauses on inter-unit transfers by profit-linked deduction units, close-connection arrangements and section 80-IA transactions have been omitted, so do not apply them. An SDT is covered only if the aggregate of such transactions in the year exceeds ₹20 crore.

The purpose of the SDT rule is to stop excess payments to related persons from reducing taxable profit. Once a transaction is an international transaction or an SDT, income is computed at arm's length price. Check the current Act text and Rules for the exact wording of the SDT clauses.

Key rules to remember

General AE test: AE = participation in management, control or capital, directly, indirectly or through intermediaries; The same person(s) participating in both enterprises also makes them AEs.
Voting power (deemed AE): One enterprise holds ≥ 26% voting power in the other, OR any person holds ≥ 26% in each of the two; Holding can be direct or indirect. Exactly 26% qualifies. 25.9% does not.
Loan test: Loan advanced by one enterprise to the other ≥ 51% of the book value of the borrower's total assets; Use book value of the borrower's total assets, not the lender's.
Guarantee test: Guarantee by one enterprise ≥ 10% of the total borrowings of the other; The base is total borrowings of the guaranteed enterprise.
Board control: One enterprise appoints more than half the directors, or one or more executive directors, of the other; or the same person(s) do so for both; Executive directors: even one appointment is enough.
Raw material dependence: > 90% of one enterprise's raw materials or consumables supplied by the other (or persons it specifies), at prices and conditions influenced by that other; Both the 90% and the influence on price and conditions must be present.
Sales dependence: Goods made or processed by one enterprise are sold to the other (or persons it specifies), with prices and conditions influenced by that other; No percentage is given. Influence on price and conditions is the key.
Control by individual, HUF or entitlement to firm income: Common control by an individual or his relative, or by an HUF or its member or relative; or one enterprise is entitled to not less than 10% of the income of the firm, AOP or BOI; The firm, AOP or BOI test is an income entitlement, not just a holding. Also a prescribed relationship of mutual interest.
SDT scope: Expenditure payment to a person specified under section 40A(2)(b), or another prescribed transaction; Both parties are resident. The AE test is not the gate. Inter-unit transfers and section 80-IA transactions are no longer SDTs.
SDT threshold: Aggregate of specified domestic transactions in the year > ₹20 crore; Greater than, not equal. Aggregate all SDTs together.

How to solve Associated Enterprises and Specified Domestic Transactions questions

Use the same sequence for every question on AEs, international transactions and SDTs.

1Identify the parties and mark each as resident or non-resident. Note whether they are enterprises.
2Check the general test: does either party participate in the management, control or capital of the other, directly, indirectly or through a common person?
3Go through the deeming tests one by one: voting power, loan, guarantee, board appointments, raw material or sales dependence, individual or HUF control, entitlement to not less than 10% of the income of a firm, AOP or BOI. Compare the actual figure with the exact threshold.
4Decide the nature of the transaction. If at least one party is non-resident and they are AEs, it is an international transaction.
5If both parties are resident, check whether the deal is a current SDT type, such as an expenditure payment to a person specified under section 40A(2)(b), or another prescribed transaction.
6For SDTs, add up all such transactions in the year and compare the total with ₹20 crore.
7Conclude clearly: AE or not, international transaction or SDT or neither, and whether arm's length price rules apply.
8State the consequence: income to be computed at arm's length price, with the related compliance.

Quickest way: Threshold-first checklist

When to use it: Use it for case-scenario MCQs and short-note questions where the facts give numbers.

Underline every percentage and amount in the case.
Match each to its test: 26% voting, 51% loan, 10% guarantee, 90% raw material, entitlement to not less than 10% of a firm's, AOP's or BOI's income, more than half the board, ₹20 crore SDT.
Check the direction of each base. Loan is against the borrower's total assets. Guarantee is against the borrower's total borrowings.
One deeming test met is enough for AE status. One failed test does not mean no AE, since you must check the others.
Ask whether a non-resident is involved. Yes means international transaction. No means check SDT.

Common mistakes in Associated Enterprises and Specified Domestic Transactions

Treating a holding of more than 26% as the test, so 26% exactly is missed.
Students remember '26%' as a majority-type limit.
Fix: Write the test as 'at least 26%'. Exactly 26% qualifies.
Assuming AE status needs a transaction between the two enterprises.
Students mix the relationship test with the transaction test.
Fix: First decide the relationship on the facts. Then decide whether a transaction between them is an international transaction.
Applying the AE test to specified domestic transactions.
Transfer pricing is usually linked to AEs.
Fix: For SDTs, the gate is the type of transaction and the ₹20 crore aggregate, not AE status.
Using the lender's assets for the 51% loan test, or the lender's borrowings for the guarantee test.
The wrong base is picked under time pressure.
Fix: Both bases belong to the enterprise that received the loan or guarantee.
Applying the ₹20 crore threshold to each SDT separately, or treating exactly ₹20 crore as covered.
The word 'aggregate' is skipped.
Fix: Add all SDTs for the year. The total must exceed ₹20 crore.
Treating the raw material or sales dependence tests as purely numerical.
Students remember '90%' and ignore the second condition.
Fix: Check that prices and conditions are influenced by the other enterprise. Without that influence, the test fails.

Worked examples

Example 1

Zeta Inc., a foreign company, lends ₹52 crore to Indian company Yash Ltd. Yash Ltd's total assets have a book value of ₹100 crore. Zeta also guarantees ₹9 crore of Yash's total borrowings of ₹100 crore and holds 20% of its voting power. Yash Ltd pays Zeta interest on the loan. Are they AEs, and is the interest an international transaction?

Show the solution

Parties: Zeta is non-resident. Yash is resident.
Voting power: 20% is below 26%, so that test is not met.
Loan test: 52 ÷ 100 = 52%, which is at least 51%, so the test is met.
Guarantee test: 9 ÷ 100 = 9%, which is below 10%, so that test fails. One test is already met, so this does not matter.
Zeta and Yash Ltd are deemed AEs because of the loan.
The interest on the loan is a transaction between AEs with one non-resident party, so it is an international transaction.

Answer: Yes. They are AEs under the loan test (52% of total assets). The interest paid is an international transaction and must be at arm's length price.

Example 2

Delta Ltd, an Indian company, pays ₹13 crore as purchase price for goods to a company in which its director holds a substantial interest, and ₹8 crore as service fees to a relative of a director. Both payments are to persons specified under section 40A(2)(b) and are claimed as expenditure in the year. Delta has no other SDTs. Are these specified domestic transactions?

Show the solution

Both parties are resident, so the AE test is not relevant.
The transaction type is expenditure payment to persons specified under section 40A(2)(b), which is a current SDT category.
Aggregate: 13 + 8 = ₹21 crore.
Compare with the threshold: 21 > 20, so the threshold is crossed.
Because the aggregate exceeds ₹20 crore, the payments are SDTs and income must be computed at arm's length price.

Answer: Yes. The total of ₹21 crore exceeds ₹20 crore, so the payments are specified domestic transactions and are subject to arm's length price rules.

Exam tips

In MCQs, the threshold is the trap. Check whether the figure is exactly on the limit, and whether the test says 'at least' or 'more than'.
In descriptive answers, list the deeming tests with their numbers in a short list, then apply them to the facts. This earns most of the marks.
Write the difference between an international transaction and an SDT as a short comparison: parties, AE requirement, threshold, and trigger.
Where several tests are met, name the first one and mention the others briefly. Do not skip the conclusion.
Always end with the effect: income computed at arm's length price.

Practice questions from Transfer Pricing

Associated Enterprises and Specified Domestic Transactions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ProfessionalAssociated Enterprises and International Transactions

Associated Enterprises and Specified Domestic Transactions: frequently asked questions

When are two enterprises associated enterprises?

They are AEs when one participates in the management, control or capital of the other, directly or indirectly, or the same persons do so for both. The law also deems them AEs in specific cases, such as 26% voting power, a 51% loan or a 10% guarantee.

What is the difference between an international transaction and a specified domestic transaction?

An international transaction is between AEs where at least one is a non-resident. A specified domestic transaction is a listed type of resident-to-resident deal, mainly expenditure payments to persons specified under section 40A(2)(b), above ₹20 crore in aggregate. The AE test is not needed for an SDT.

Does one deeming test enough to make enterprises AEs?

Yes. If any one deeming condition is met in full, they are treated as AEs. Failing one test does not rule out AE status because the others must still be checked.

Is the SDT threshold of ₹20 crore applied per transaction?

No. It is the aggregate of all specified domestic transactions in the year. The total must exceed ₹20 crore for the SDT rules to apply.