diff --git a/pkg/app/app.go b/pkg/app/app.go
index cdc31745..95a0bf3d 100644
--- a/pkg/app/app.go
+++ b/pkg/app/app.go
@@ -169,7 +169,7 @@ func (a *App) Diff(c DiffConfigProvider) error {
 			IncludeCRDs:            &includeCRDs,
 			Validate:               c.Validate(),
 			Concurrency:            c.Concurrency(),
-			IncludeTransitiveNeeds: c.IncludeNeeds(),
+			IncludeTransitiveNeeds: c.IncludeTransitiveNeeds(),
 		}, func() {
 			msg, matched, affected, errs = a.diff(run, c)
 		})
@@ -240,7 +240,7 @@ func (a *App) Template(c TemplateConfigProvider) error {
 			SkipCleanup:            c.SkipCleanup(),
 			Validate:               c.Validate(),
 			Concurrency:            c.Concurrency(),
-			IncludeTransitiveNeeds: c.IncludeNeeds(),
+			IncludeTransitiveNeeds: c.IncludeTransitiveNeeds(),
 			Set:                    c.Set(),
 			Values:                 c.Values(),
 			KubeVersion:            c.KubeVersion(),
@@ -317,7 +317,7 @@ func (a *App) Lint(c LintConfigProvider) error {
 			SkipDeps:               c.SkipDeps(),
 			SkipCleanup:            c.SkipCleanup(),
 			Concurrency:            c.Concurrency(),
-			IncludeTransitiveNeeds: c.IncludeNeeds(),
+			IncludeTransitiveNeeds: c.IncludeTransitiveNeeds(),
 		}, func() {
 			ok, lintErrs, errs = a.lint(run, c)
 		})
@@ -417,7 +417,7 @@ func (a *App) Sync(c SyncConfigProvider) error {
 			WaitRetries:            c.WaitRetries(),
 			WaitForJobs:            c.WaitForJobs(),
 			IncludeCRDs:            &includeCRDs,
-			IncludeTransitiveNeeds: c.IncludeNeeds(),
+			IncludeTransitiveNeeds: c.IncludeTransitiveNeeds(),
 			Validate:               c.Validate(),
 			Concurrency:            c.Concurrency(),
 		}, func() {
@@ -455,7 +455,7 @@ func (a *App) Apply(c ApplyConfigProvider) error {
 			SkipCleanup:            c.SkipCleanup(),
 			Validate:               c.Validate(),
 			Concurrency:            c.Concurrency(),
-			IncludeTransitiveNeeds: c.IncludeNeeds(),
+			IncludeTransitiveNeeds: c.IncludeTransitiveNeeds(),
 		}, func() {
 			matched, updated, es := a.apply(run, c)
 
diff --git a/pkg/app/app_template_test.go b/pkg/app/app_template_test.go
index f2e5f50c..3266f509 100644
--- a/pkg/app/app_template_test.go
+++ b/pkg/app/app_template_test.go
@@ -205,9 +205,8 @@ releases:
 			error:     ``,
 			selectors: []string{"app=test"},
 			// Issue #2309: --kube-context is now added to template flags
+			// Issue #1003: --include-needs should only include direct dependencies, not transitive
 			templated: []exectest.Release{
-				// TODO: Turned out we can't differentiate needs vs transitive needs in this case :thinking:
-				{Name: "logging", Flags: []string{"--kube-context", "default", "--namespace", "kube-system"}},
 				{Name: "kubernetes-external-secrets", Flags: []string{"--kube-context", "default", "--namespace", "kube-system"}},
 				{Name: "external-secrets", Flags: []string{"--kube-context", "default", "--namespace", "default"}},
 				{Name: "my-release", Flags: []string{"--kube-context", "default", "--namespace", "default"}},
diff --git a/test/integration/run.sh b/test/integration/run.sh
index 80099707..946e595e 100755
--- a/test/integration/run.sh
+++ b/test/integration/run.sh
@@ -138,6 +138,7 @@ ${kubectl} create namespace ${test_ns} || fail "Could not create namespace ${tes
 . ${dir}/test-cases/issue-2431.sh
 . ${dir}/test-cases/kubedog-tracking.sh
 
+. ${dir}/test-cases/include-needs-transitive.sh
 # ALL DONE -----------------------------------------------------------------------------------------------------------
 
 all_tests_passed
diff --git a/test/integration/test-cases/include-needs-transitive.sh b/test/integration/test-cases/include-needs-transitive.sh
new file mode 100755
index 00000000..74e33f6a
--- /dev/null
+++ b/test/integration/test-cases/include-needs-transitive.sh
@@ -0,0 +1,100 @@
+#!/usr/bin/env bash
+
+# Test case for issue #1003: --include-needs should only include direct dependencies
+# while --include-transitive-needs should include both direct and transitive dependencies
+
+test_case_dir="${cases_dir}/include-needs-transitive"
+input_dir="${test_case_dir}/input"
+output_dir="${test_case_dir}/output"
+
+tmp_dir=$(mktemp -d)
+trap "rm -rf ${tmp_dir}" EXIT
+
+test_start "include-needs vs include-transitive-needs"
+
+info "https://github.com/helmfile/helmfile/issues/1003"
+
+# Test 1: --include-needs should only include direct dependencies
+info "Test 1: template with --include-needs should only include direct dependencies"
+template_output="${tmp_dir}/include-needs.log"
+${helmfile} -f ${input_dir}/helmfile.yaml -l name=release3 template --include-needs > ${template_output} 2>&1
+code=$?
+if [ ${code} -ne 0 ]; then
+    cat ${template_output}
+    fail "helmfile template with --include-needs should not fail"
+fi
+
+# Should include release2 (direct dependency) and release3 (selected)
+# Should NOT include release1 (transitive dependency)
+if grep -q "release1" ${template_output}; then
+    fail "--include-needs should NOT include transitive dependency release1"
+fi
+
+if ! grep -q "release2" ${template_output}; then
+    fail "--include-needs should include direct dependency release2"
+fi
+
+if ! grep -q "release3" ${template_output}; then
+    fail "--include-needs should include selected release release3"
+fi
+
+info "PASS: --include-needs only includes direct dependencies"
+
+# Test 2: --include-transitive-needs should include all dependencies
+info "Test 2: template with --include-transitive-needs should include all dependencies"
+template_output="${tmp_dir}/include-transitive-needs.log"
+${helmfile} -f ${input_dir}/helmfile.yaml -l name=release3 template --include-transitive-needs > ${template_output} 2>&1
+code=$?
+if [ ${code} -ne 0 ]; then
+    cat ${template_output}
+    fail "helmfile template with --include-transitive-needs should not fail"
+fi
+
+# Should include all: release1, release2, and release3
+if ! grep -q "release1" ${template_output}; then
+    fail "--include-transitive-needs should include transitive dependency release1"
+fi
+
+if ! grep -q "release2" ${template_output}; then
+    fail "--include-transitive-needs should include direct dependency release2"
+fi
+
+if ! grep -q "release3" ${template_output}; then
+    fail "--include-transitive-needs should include selected release release3"
+fi
+
+info "PASS: --include-transitive-needs includes all dependencies"
+
+# Test 3: Verify same behavior for lint command
+info "Test 3: lint with --include-needs should only include direct dependencies"
+lint_output="${tmp_dir}/lint-include-needs.log"
+${helmfile} -f ${input_dir}/helmfile.yaml -l name=release3 lint --include-needs > ${lint_output} 2>&1
+code=$?
+if [ ${code} -ne 0 ]; then
+    cat ${lint_output}
+    fail "helmfile lint with --include-needs should not fail"
+fi
+
+if grep -q "release1" ${lint_output}; then
+    fail "lint with --include-needs should NOT include transitive dependency release1"
+fi
+
+info "PASS: lint with --include-needs only includes direct dependencies"
+
+# Test 4: Verify same behavior for diff command  
+info "Test 4: diff with --include-needs should only include direct dependencies"
+diff_output="${tmp_dir}/diff-include-needs.log"
+${helmfile} -f ${input_dir}/helmfile.yaml -l name=release3 diff --include-needs > ${diff_output} 2>&1
+code=$?
+if [ ${code} -ne 0 ]; then
+    cat ${diff_output}
+    fail "helmfile diff with --include-needs should not fail"
+fi
+
+if grep -q "release1" ${diff_output}; then
+    fail "diff with --include-needs should NOT include transitive dependency release1"
+fi
+
+info "PASS: diff with --include-needs only includes direct dependencies"
+
+test_pass "include-needs vs include-transitive-needs"
diff --git a/test/integration/test-cases/include-needs-transitive/README.md b/test/integration/test-cases/include-needs-transitive/README.md
new file mode 100644
index 00000000..013ee54b
--- /dev/null
+++ b/test/integration/test-cases/include-needs-transitive/README.md
@@ -0,0 +1,35 @@
+# Test Case: include-needs vs include-transitive-needs
+
+This test case validates the fix for issue #1003.
+
+## Issue
+`--include-needs` flag was incorrectly including transitive dependencies when it should only include direct dependencies.
+
+## Expected Behavior
+
+### --include-needs
+When selecting `release3` with `--include-needs`:
+- **Should include**: `release2` (direct dependency) and `release3` (selected release)
+- **Should NOT include**: `release1` (transitive dependency of release3 through release2)
+
+### --include-transitive-needs
+When selecting `release3` with `--include-transitive-needs`:
+- **Should include**: `release1`, `release2`, and `release3` (all dependencies in the chain)
+
+## Dependency Chain
+```
+release1 (no dependencies)
+    ↑
+release2 (needs release1)
+    ↑
+release3 (needs release2)
+```
+
+## Tests Performed
+1. `helmfile template --include-needs` - verifies only direct dependencies are included
+2. `helmfile template --include-transitive-needs` - verifies all dependencies are included
+3. `helmfile lint --include-needs` - verifies consistency across commands
+4. `helmfile diff --include-needs` - verifies consistency across commands
+
+## References
+- Issue: https://github.com/helmfile/helmfile/issues/1003
diff --git a/test/integration/test-cases/include-needs-transitive/input/helmfile.yaml b/test/integration/test-cases/include-needs-transitive/input/helmfile.yaml
new file mode 100644
index 00000000..bf4b6a11
--- /dev/null
+++ b/test/integration/test-cases/include-needs-transitive/input/helmfile.yaml
@@ -0,0 +1,23 @@
+repositories:
+  - name: incubator
+    url: https://charts.helm.sh/incubator
+
+releases:
+  # release1 has no dependencies - this is a transitive dependency of release3
+  - name: release1
+    chart: incubator/raw
+    namespace: default
+
+  # release2 depends on release1 - this is a direct dependency of release3
+  - name: release2
+    chart: incubator/raw
+    namespace: default
+    needs:
+      - default/release1
+
+  # release3 depends on release2 (and transitively on release1)
+  - name: release3
+    chart: incubator/raw
+    namespace: default
+    needs:
+      - default/release2