Associated Enterprises
Associated Enterprises – Income Tax
Section 92 of the Income Tax Act specifies that and “Associated Enterprise” in relation to another enterprise, means an enterprise which participates, directly or indirectly, or through one or more intermediaries, in the management, control, or capital of the other enterprise. Hence, if an entity participates in the management, capital or control of another enterprise, the latter will be regarded as an associated enterprise of the participating enterprise. The participation mentioned in the Act may be direct or indirect, or through one or more intermediaries. Moreover, if one or more persons participate in the management, capital or control of one enterprise and the same personnel perform these functions in another enterprise, both the enterprises will be termed as associated enterprises. In this article, we mention some of the conditions based on which an enterprise would be considered as an associated enterprise.
Voting Power in Another Enterprise
Two enterprises would be deemed to be associated if an enterprise holds, directly or indirectly, holds shares carrying at-least 26% of voting power in the other enterprise. It may be noted that preference shares do not have voting rights except in terms of resolutions affecting their rights, and thus should not be considered for the purpose of the limit of 26%.
Voting Power in Multiple Companies
Two enterprises would be considered to be associated if any person or enterprise holds, directly or indirectly, holds shares carrying a minimum of 26% of the voting power in each of such enterprises.
Advancing of Loan
Two enterprises would be deemed to be associated if a loan advanced by an enterprise to another constitutes atleast 51% of the book value of total assets of the latter (the borrowing enterprise).
Guarantee for Borrowings
Two enterprises would be deemed to be associated if an enterprise guarantees at least 10% of the total borrowings of another enterprise.
Appointment of Personnel
Two enterprises would be deemed to be associated if more than 50% of the Board of Directors or members of the Governing Board, or one or more Executive Directors or Members of the Governing Board of an enterprise is appointed by another enterprise. On the other hand, if the aforementioned persons are appointed by the same person for both the enterprises, the principle of association comes into force.
Dependability
Two enterprises would be deemed to be associated if manufacturing or processing of goods or articles of an enterprise is wholly reliant on the use of certain intangible assets of another enterprise. On the other hand, if atleast 90% of raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise are supplied by the other enterprise and the prices and other vital terms are fixed by the other enterprise, such enterprises will befit the term associated enterprises.
Sale of Manufactured Goods to Other Enterprise
Two enterprises would be deemed to be associated if the goods or articles manufactured or processed by an enterprise are sold to another enterprise, and the prices and other vital terms are fixed by the other enterprise.
Control of Another Enterprise
Two enterprises would be deemed to be associated if two such enterprises are controlled by the same individual or by his/her relatives. On the other hand, if an enterprise is controlled by a Hindu Undivided Family (HUF) and the other enterprise is controlled by a member of such HUF or their relatives, those enterprises would also be classed under the head “Associated Enterprises”.
Post by Sreeram Viswanath
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