Related Party Transactions (RPTs)occupy a critical position in the framework of corporate governance, financial reporting, and tax compliance. Given the inherent risk that such transactions may not be conducted at arm’s length, regulators across corporate law, accounting standards, and tax legislation have prescribed detailed and, at times, divergent definitions of related partiesand related party transactions.  

For corporates, auditors, and tax professionals, a nuanced understanding of these definitions is essential not only to ensure statutory compliance but also to mitigate risks of regulatory scrutiny, qualifications in audit reports, transfer pricing adjustments, and allegations of abuse of control or profit shifting. This article provides a comprehensive, comparative analysis of the definition of Related Party Transactions under:  

• The Companies Act, 2013  

• The Income-tax Act, 1961  

• Ind AS 24 – Related Party Disclosures  

• AS 18 – Related Party Disclosures (Indian GAAP)  

   

Related Party Transactions (RPTs)are transactions between entities or individuals that share a pre-existing relationship capable of influencing the terms of the transaction. Such relationships may arise through ownership, control, or family connections. To ensure transparency and prevent misuse of corporate resources, Indian laws and accounting frameworks, namely the Companies Act, 2013, the Income Tax Act, 1961, Indian Accounting Standards (Ind AS), and Indian Generally Accepted Accounting Principles (IGAAP) lay down specific definitions, disclosure requirements, and approval mechanisms for RPTs.  

The definition of term “RELATED PARTY” is not uniform under various laws. In this article, we have tried to a provide a comparative analysis of the definition of “Related Party” under The Companies Act, 2013, Income-Tax Act, 1961, andIndian Accounting Standards (Ind AS-24), Indian GAAP,highlighting both overlaps and key differences, along with practical implications.  

The definition of Related Party varies significantly across the Companies Act, the Income-tax Act and Ind AS due to different legislative objectives. While the Companies Act adopts a restrictive legal approach, the Income-tax Act applies a broad anti-avoidance lens, and Ind AS relies on economic substance and influence.  

Accordingly, each transaction must be evaluated independently under all three frameworks.  

The treatment and regulation of RPTs in India are governed by various statutes and standards, each with its distinct approach. A comparative understanding of these frameworks is essential for ensuring compliance and transparency.  

COMPANIES ACT, 2013  

The Companies Act, 2013 defines related parties comprehensively under Section 2(76) and stipulates that any contract or arrangement with a related party requires approval from the Board or shareholders as per Section 188. Detailed disclosures regarding such transactions must be made in the Board’s report to promote accountability among directors.  

Statutory Reference  

Section 2(76) – Definition of “Related Party”  

Section 188 – Related Party Transactions  

Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014  

Definition – Related Party  

Under Section 2(76), a “related party”, with reference to a company, includes:  

• Directors and their relatives.  

• Key Managerial Personnel (KMP) and their relatives.  

• Firms in which a director, manager, or their relative is a partner.  

• Private companies in which a director or manager is a member or director.  

• Public companies in which a director or manager holds, along with relatives, more than 2% of paid-up share capital.  

• Body corporates whose Board, managing director, or manager is accustomed to act on the advice of a director or manager of the company.  

• Holding, subsidiary, and associate companies.  

• Investing companies or venturers.  

• Related Party Transactions  

Section 188 covers transactions such as:  

• Sale, purchase, or supply of goods or materials.  

• Selling or disposing of property.  

• Leasing of property.  

• Availing or rendering services.  

• Appointment of agents.  

• Appointment to any office or place of profit  

The emphasis is on corporate governance, transparency, and shareholder protection, with specific approval and disclosure mechanisms.  

INCOME TAX ACT, 1961:  

Under the Income Tax Act, related party transactions are scrutinized primarily from a transfer pricing perspective (Sections 92A to 92F). The focus is on preventing tax avoidance through manipulation of prices in transactions with associated enterprises. Documentation requirements are stringent; companies must maintain robust records justifying the arm’s length nature of their dealings.  

Statutory Reference  

Section 40A(2)(b) – Disallowance of excessive or unreasonable expenditure  

Section 92A & 92B – Associated Enterprises and International / Specified Domestic Transactions  

Definition: Related Party  

The Income-tax Act does not use a uniform term “related party” but instead defines specified persons or associated enterprises, depending on the context.  

Under Section 40A(2)(b), related parties include:  

• Directors  

• Partners  

• Persons having substantial interest (generally ≥20% beneficial ownership)  

• Relatives of such persons  

• Concerns in which such persons have substantial interest  

Under Transfer Pricing provisions (Section 92A), the focus is on:  

• Management, control, or capital participation  

• Direct or indirect shareholding  

• Common control or significant influence  

Objective  

The primary objective is prevention of tax avoidance by curbing profit diversion through non-arm’s length pricing.  

INDIAN ACCOUNTING STANDARDS (IND AS):  

Ind AS-24 prescribes detailed disclosure requirements for RPTs. It mandates that entities disclose relationships between parents and subsidiaries, key management personnel compensation, and other material transactions involving related parties. This ensures users of financial statements have sufficient information to assess the impact of such relationships on an entity’s financial position.  

Statutory Reference:  

Ind AS 24, notified under the Companies (Indian Accounting Standards) Rules, 2015  

Definition: Related Party  

A related party is a person or entity related to the reporting entity if:  

1. Persons:  

• Has control or joint control  

• Has significant influence  

• Is a member of KMP of the entity or its parent  

2. Entities:  

• Parent, subsidiary, fellow subsidiary  

• Associate or joint venture  

• Entity controlled or jointly controlled by a related person  

• Post-employment benefit plans  

Key Feature:  

Ind AS 24 is principles-based and aligned with IAS 24, focusing on economic substance over legal form.  

Related Party Transactions: Any transfer of resources, services, or obligations between related parties, regardless of whether a price is charged.  

INDIAN GAAP:  

AS-18 under Indian GAAP also deals with related party disclosures but has less stringent requirements compared to Ind AS. While identification criteria for related parties remain similar to Ind AS-24, disclosure thresholds are generally less rigorous under Indian GAAP.  

Statutory Reference:  

Accounting Standard (AS) 18 – Related Party Disclosures  

Definition: Related Party  

AS-18 identifies related parties based on:  

• Control  

• Significant influence  

• Key management personnel and their relatives  

It covers:  

• Holding, subsidiary, and fellow subsidiaries  

• Associates  

• Individuals with control or significant influence  

• Enterprises owned or controlled by such individuals  

Limitations:  

AS 18 is rule-based and narrower compared to Ind AS 24, with fewer disclosure and interpretation complexities.  

RELATIVE:  

The concept of “relative” plays a crucial role in determining the scope of Related Party Transactions under Indian laws. The Companies Act, 2013 provides a specific and limited list of relatives, ensuring clarity in corporate governance. The Income Tax Act, 1961 adopts a broader definition to prevent tax avoidance through family-controlled entities. Ind AS 24 uses a principle-based approach focusing on influence, while AS 18 restricts the definition to immediate family members. The comparative analysis highlights that while the scope and intent differ, all frameworks collectively aim to ensure transparency, accountability, and fairness in transactions influenced by familiar or personal relationships.  

Companies Act, 2013  

Definition of Relative  

Section 2(77) of the Companies Act, 2013 defines a “relative” as anyone related to another if they are:  

• Members of a Hindu Undivided Family (HUF);  

• Husband and wife; or  

• Related as per the list prescribed in Rule 4 of the Companies (Specification of Definitions Details) Rules, 2014.  

The rule specifies the following relationships:  

1. Father (including step-father)  

2. Mother (including step-mother)  

3. Son (including step-son)  

4. Son’s wife  

5. Daughter  

6. Daughter’s husband  

7. Brother (including step-brother)  

8. Sister (including step-sister)  

The inclusion of “relatives” ensures that transactions involving family members of directors or KMPs are also subject to scrutiny.  

Income Tax Act, 1961  

Related Party Transactions under the Income Tax Act, 1961  

Definition of Related Party:  

Section 40A(2)(b) of the Income Tax Act, 1961 defines related parties for the purpose of disallowing excessive or unreasonable payments. Related parties include:  

• Directors, partners, or members of the assessee.  

• Relatives of such persons.  

• Entities in which such persons have a substantial interest (20% or more voting power or profit share).  

Definition of Relative:  

Section 2(41) of the Income Tax Act defines a “relative” in relation to an individual as:  

• Spouse;  

• Brother or sister;  

• Brother or sister of the spouse;  

• Brother or sister of either of the parents;  

• Any lineal ascendant or descendant of the individual;  

• Any lineal ascendant or descendant of the spouse;  

• Spouse of the persons referred to above.  

This definition is broader than that under the Companies Act, as it includes extended family members such as in-laws, uncles, aunts, nephews, nieces, and lineal ascendants or descendants.  

Key Provisions in Income Tax Act, 1961  

• Section 40A(2): Disallows excessive or unreasonable expenditure paid to related parties.  

• Transfer Pricing (Sections 92–92F): Ensures that international and specified domestic transactions between related parties (associated enterprises) are conducted at arm’s length prices.  

• Documentation: Taxpayers must maintain prescribed documentation and file Form 3CEB for specified transactions.  

The inclusion of relatives in the definition ensures that tax authorities can scrutinize transactions that may be structured to shift profits within family-controlled entities.  

Indian Accounting Standards:  

Definition of Relative:  

Under Ind AS 24, a “close member of the family” of a person is one who may be expected to influence, or be influenced by, that person in their dealings with the entity. This includes:  

• The person’s domestic partner and children;  

• Children of the person’s domestic partner; and  

• Dependents of the person or their domestic partner.  

This definition is principle-based and focuses on the potential for influence rather than a fixed list of relationships. It is broader in concept than the Companies Act definition, as it includes dependents and domestic partners.  

Indian GAAP:  

Definition of Relative as per Indian GAAP:  

AS-18 defines a “relative” as:  

• Spouse;  

• Son;  

• Daughter;  

• Brother;  

• Sister;  

• Father;  

• Mother.  

This definition is narrower than that under the Companies Act or the Income Tax Act, focusing only on immediate family members.    
Comparative Overview of Related Party Frameworks

Comparative Analysis of the Definition of “Relative”

Conclusion:  

In summary, while all these frameworks aim to regulate RPTs for enhanced transparency and fairness in business practices, there are significant differences in scope and disclosure requirements among the Companies Act, Income Tax Act provisions on transfer pricing, Ind AS-24 disclosures for listed companies adopting IFRS converged standards, and traditional Indian GAAP practices. Understanding these differences is crucial for corporates to ensure full compliance across legal statutes and accounting standards.  

Written & Compiled by : By CA. Vijay Rama Raju