The TPO has used the 30 per cent EBITDA cap in s.94B as his benchmarking method and has applied it to interest I capitalised to work in progress rather than claimed. Can he do either?
Neither. Section 94B is a restriction on the deduction of interest, not a method of determining an arm's length price, and it cannot be imported into the 'other method' under Rule 10AB, which requires a price charged or paid in an uncontrolled transaction with or between non-associated enterprises. And s.94B bites only on interest which is deductible in computing business income, so interest capitalised to work in progress and not claimed as a deduction in the year cannot be brought into the disallowance at all.
Decided by the ITAT (Shri Pawan Singh, Judicial Member and Shri Girish Agrawal, Accountant Member) on 2025-05-29, reported as ITA No. 4073/Mum/2024 (ITAT Mumbai 'K' Bench), Assessment Year 2020-21. It bears on section 94B, section 94B(1), section 94B(2), section 92C, section 92CA, section 144C of the Income Tax Act 1961, in Assessment & Scrutiny, Deductions & Disallowances and How Tax Law Is Read matters.
Two separate and commonly encountered errors are dealt with here. The first is structural: transfer pricing benchmarking and thin capitalisation are different exercises, and using the s.94B cap as the 'most appropriate method' collapses them. The Tribunal's reason is precise and portable — Rule 10AB is built on a price in an uncontrolled transaction between non-associated enterprises, whereas s.94B operates on a transaction between associated enterprises, so the one cannot supply the content of the other. The second is timing, and it matters most to real estate and infrastructure borrowers on percentage completion accounting, and to anyone capitalising borrowing costs to inventory or to a capital asset: the word in s.94B(1) is 'deductible', and interest that never enters the profit and loss account in the year is outside the section for that year. The Tribunal expressly recorded that the same interest was recognised and disallowed under s.94B in the later year in which it was charged to the profit and loss account, so the point is one of year, not of permanent escape.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
Read aloud by your device. Press again to stop.
The assessee, engaged in real estate development, reported one international transaction for AY 2020-21 — interest on non-convertible debentures of Rs 32,40,00,000 paid to an associated enterprise. It capitalised Rs 14,60,91,585 of that interest to inventory work in progress, and out of the balance it claimed a deduction of Rs 96,50,963 after applying the restriction in s.94B itself. The TPO issued a show cause notice asking why the arm's length price of the interest paid to the associated enterprise on its borrowings should not be computed as per s.94B, using the 'other method' as the most appropriate method, and in his order recorded that the restriction imposed by s.94B was being taken as the reference for benchmarking the payment of interest on the debentures. He proposed an adjustment of Rs 31,40,82,736. The Dispute Resolution Panel directed that effect be given to the disallowance under s.94B while avoiding double disallowance of the disallowance the assessee had already made. The assessee follows the percentage completion method, and the capitalised interest was recognised in the profit and loss account in AY 2023-24 and disallowed under s.94B in that year.
The appeal was allowed. The TPO erred in taking the restrictions in s.94B as the 'other method' for benchmarking the interest paid on the non-convertible debentures, and the adjustment so proposed is bad in law and was deleted. Separately, interest capitalised to work in progress and not claimed as a deduction in the profit and loss account for the year is not 'deductible' within s.94B(1) and cannot be brought into the disallowance, so the DRP's direction to take the whole Rs 32.40 crores into account for computing the s.94B disallowance was not proper. The addition in respect of interest on the debentures paid to the associated enterprises was deleted (paragraphs 8.2, 9.4 and 10).
On the method question the Tribunal read Rule 10AB, under which the 'other method' means any method taking into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transactions with or between non-associated enterprises under similar circumstances. It held that the restrictive conditions in s.94B do not satisfy that requirement because they involve no price charged or paid with or between non-associated enterprises; s.94B is a limitation on the deduction of interest paid to an associated enterprise in excess of 30 per cent of EBITDA and is not a method at all for the purposes of Rule 10AB. It added that s.94B applies to transactions between two associated enterprises whereas Rule 10AB requires a price in an uncontrolled transaction between non-associated enterprises, so the one cannot be imputed into the other. On the quantum question the Tribunal set out s.94B(1) and (2) and extracted the ingredients, among them that the expenditure must be deductible in computing income chargeable under the head profits and gains of business or profession. Since 'deductible' is not defined, it took the ordinary sense of an item that may be subtracted from or adjusted in gross income in determining taxable income, and reasoned that what is not claimed in the first place cannot be disallowed. Interest allocated to work in progress which does not form part of the expenditure in the profit and loss account is therefore outside the section for that year. The Tribunal supported this from the department's own explanatory material: paragraph 46.3 of Circular No. 2/2018 dated 15 February 2018 explaining the Finance Act 2017, which speaks of interest expenses claimed by an entity being restricted, and paragraph 38.1 of Circular No. 1/2024 dated 23 January 2024 explaining the Finance Act 2023, which describes s.94B as a restriction on deduction of interest expense.
What has not been claimed as deduction under the profit and loss account but has been capitalized, cannot be brought into the provisions of section 94B for the purpose of making disallowance.
Upload it and we will read it, work out your deadline and draft the reply. A CA reviews before anything is filed.
Handle my notice → Ask a CA on WhatsAppNeither. Section 94B is a restriction on the deduction of interest, not a method of determining an arm's length price, and it cannot be imported into the 'other method' under Rule 10AB, which requires a price charged or paid in an uncontrolled transaction with or between non-associated enterprises. And s.94B bites only on interest which is deductible in computing business income, so interest capitalised to work in progress and not claimed as a deduction in the year cannot be brought into the disallowance at all. This was decided by the ITAT (Shri Pawan Singh, Judicial Member and Shri Girish Agrawal, Accountant Member) and bears on section 94B, section 94B(1), section 94B(2), section 92C, section 92CA, section 144C of the Income Tax Act 1961. It is reported as ITA No. 4073/Mum/2024 (ITAT Mumbai 'K' Bench), Assessment Year 2020-21. Two separate and commonly encountered errors are dealt with here. The first is structural: transfer pricing benchmarking and thin capitalisation are different exercises, and using the s.94B cap as the 'most appropriate method' collapses them. The Tribunal's reason is precise and portable — Rule 10AB is built on a price in an uncontrolled transaction between non-associated enterprises, whereas s.94B operates on a transaction between associated enterprises, so the one cannot supply the content of the other. The second is timing, and it matters most to real estate and infrastructure borrowers on percentage completion accounting, and to anyone capitalising borrowing costs to inventory or to a capital asset: the word in s.94B(1) is 'deductible', and interest that never enters the profit and loss account in the year is outside the section for that year. The Tribunal expressly recorded that the same interest was recognised and disallowed under s.94B in the later year in which it was charged to the profit and loss account, so the point is one of year, not of permanent escape. If it applies to you, the first step is this: Separate the two objections in your grounds: that s.94B cannot be the most appropriate method, and that the quantum on which s.94B operates is limited to interest actually claimed as a deduction in the year.
The assessee, engaged in real estate development, reported one international transaction for AY 2020-21 — interest on non-convertible debentures of Rs 32,40,00,000 paid to an associated enterprise. It capitalised Rs 14,60,91,585 of that interest to inventory work in progress, and out of the balance it claimed a deduction of Rs 96,50,963 after applying the restriction in s.94B itself. The TPO issued a show cause notice asking why the arm's length price of the interest paid to the associated enterprise on its borrowings should not be computed as per s.94B, using the 'other method' as the most appropriate method, and in his order recorded that the restriction imposed by s.94B was being taken as the reference for benchmarking the payment of interest on the debentures. He proposed an adjustment of Rs 31,40,82,736. The Dispute Resolution Panel directed that effect be given to the disallowance under s.94B while avoiding double disallowance of the disallowance the assessee had already made. The assessee follows the percentage completion method, and the capitalised interest was recognised in the profit and loss account in AY 2023-24 and disallowed under s.94B in that year. The matter was decided on 2025-05-29 by the ITAT (Shri Pawan Singh, Judicial Member and Shri Girish Agrawal, Accountant Member). On those facts the ITAT held as follows. The appeal was allowed. The TPO erred in taking the restrictions in s.94B as the 'other method' for benchmarking the interest paid on the non-convertible debentures, and the adjustment so proposed is bad in law and was deleted. Separately, interest capitalised to work in progress and not claimed as a deduction in the profit and loss account for the year is not 'deductible' within s.94B(1) and cannot be brought into the disallowance, so the DRP's direction to take the whole Rs 32.40 crores into account for computing the s.94B disallowance was not proper. The addition in respect of interest on the debentures paid to the associated enterprises was deleted (paragraphs 8.2, 9.4 and 10).
On the method question the Tribunal read Rule 10AB, under which the 'other method' means any method taking into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transactions with or between non-associated enterprises under similar circumstances. It held that the restrictive conditions in s.94B do not satisfy that requirement because they involve no price charged or paid with or between non-associated enterprises; s.94B is a limitation on the deduction of interest paid to an associated enterprise in excess of 30 per cent of EBITDA and is not a method at all for the purposes of Rule 10AB. It added that s.94B applies to transactions between two associated enterprises whereas Rule 10AB requires a price in an uncontrolled transaction between non-associated enterprises, so the one cannot be imputed into the other. On the quantum question the Tribunal set out s.94B(1) and (2) and extracted the ingredients, among them that the expenditure must be deductible in computing income chargeable under the head profits and gains of business or profession. Since 'deductible' is not defined, it took the ordinary sense of an item that may be subtracted from or adjusted in gross income in determining taxable income, and reasoned that what is not claimed in the first place cannot be disallowed. Interest allocated to work in progress which does not form part of the expenditure in the profit and loss account is therefore outside the section for that year. The Tribunal supported this from the department's own explanatory material: paragraph 46.3 of Circular No. 2/2018 dated 15 February 2018 explaining the Finance Act 2017, which speaks of interest expenses claimed by an entity being restricted, and paragraph 38.1 of Circular No. 1/2024 dated 23 January 2024 explaining the Finance Act 2023, which describes s.94B as a restriction on deduction of interest expense. In the words reproduced by the source cited on this page: "What has not been claimed as deduction under the profit and loss account but has been capitalized, cannot be brought into the provisions of section 94B for the purpose of making disallowance." The decision followed or applied CBDT Circular No. 2/2018 dated 15 February 2018, para 46.3 — relied on; CBDT Circular No. 1/2024 dated 23 January 2024, para 38.1 — relied on.
It was decided by the ITAT on 2025-05-29 and is reported as ITA No. 4073/Mum/2024 (ITAT Mumbai 'K' Bench), Assessment Year 2020-21. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 94B, section 94B(1), section 94B(2), section 92C, section 92CA, section 144C, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was allowed. The TPO erred in taking the restrictions in s.94B as the 'other method' for benchmarking the interest paid on the non-convertible debentures, and the adjustment so proposed is bad in law and was deleted. Separately, interest capitalised to work in progress and not claimed as a deduction in the profit and loss account for the year is not 'deductible' within s.94B(1) and cannot be brought into the disallowance, so the DRP's direction to take the whole Rs 32.40 crores into account for computing the s.94B disallowance was not proper. The addition in respect of interest on the debentures paid to the associated enterprises was deleted (paragraphs 8.2, 9.4 and 10). It arises in Assessment & Scrutiny, Deductions & Disallowances and How Tax Law Is Read matters, on section 94B, section 94B(1), section 94B(2), section 92C, section 92CA, section 144C of the Income Tax Act 1961, and was decided by Shri Pawan Singh, Judicial Member and Shri Girish Agrawal, Accountant Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the TPO has purported to use the 'other method', ask him to identify the uncontrolled transaction and the price charged or paid between non-associated enterprises that Rule 10AB requires; the absence of one is the answer. Reconcile, year by year, the total interest paid to the associated enterprise, the part capitalised to work in progress or to an asset, and the part charged to the profit and loss account, and show which year each part is disallowed in. Watch for double disallowance where the DRP directs that the whole interest be taken into account: show that the capitalised part is disallowed under s.94B in the later year of recognition. Check the gateway conditions before conceding s.94B applies at all — an Indian company or Indian permanent establishment of a foreign company as borrower, interest or expenditure of a similar nature exceeding Rs 1 crore, deductible under the head profits and gains of business or profession, on debt issued by a non-resident associated enterprise. Banking and insurance companies are outside the section.
Searched for later treatment; none was found. That is not the same as a source affirming it. Indian Kanoon's citation graph shows nothing, and the one later order that mentions this decision does not apply it. In Vestas Wind Technology India Pvt. Ltd. v. ITO, Corporate Circle-3(1), Chennai (9 March 2026) the order is cited as [TS-312-ITAT-2025(Mum)-TP] only in the assessee's written submissions and rebuttal - for the propositions that interest which is not deductible in computing business profits cannot be disallowed under s.94B, and that s.94B is not a benchmarking method for rule 10AB - and the Bench, whose own findings are set out under the heading 'Our adjudication', decides the appeal on Article 24(4) without referring to it. So the order remains untested: nothing overrules, doubts or distinguishes it, but nothing has adopted it either, and no s.260A appeal to the Bombay High Court was traced. It should be cited for what it is, a single Mumbai Bench order that no later Bench has yet taken up. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The report cites Rule 10AB as being of 'the Income-tax Rules, 1961'; the Rules are of 1962, and the slip is in the printed text. The verbatim extract of s.94B(1) and (2) set out in paragraph 9 of the order is not the whole section: it omits the proviso to s.94B(1) which deems debt issued by a non-associated lender to have been issued by an associated enterprise where an associated enterprise gives an implicit or explicit guarantee to the lender or deposits a corresponding and matching amount of funds with it. That proviso was not in issue in this case and is noted here only so the reader does not take the quoted extract as complete. Paragraphs 8 to 10 were obtained as a strict transcription after an earlier retrieval of the same URL returned only a summary with detached quoted fragments; the transcription is what is relied on. The earlier paragraphs of the order, including the DRP's directions, were read only in the summarised retrieval and the figures taken from them should be treated as indicative. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed. The TPO erred in taking the restrictions in s.94B as the 'other method' for benchmarking the interest paid on the non-convertible debentures, and the adjustment so proposed is bad in law and was deleted. Separately, interest capitalised to work in progress and not claimed as a deduction in the profit and loss account for the year is not 'deductible' within s.94B(1) and cannot be brought into the disallowance, so the DRP's direction to take the whole Rs 32.40 crores into account for computing the s.94B disallowance was not proper. The addition in respect of interest on the debentures paid to the associated enterprises was deleted (paragraphs 8.2, 9.4 and 10).
TaxSphere, “Beauty Etoile Private Limited v Assessment Unit”, https://taxnotice.vittsphere.com/caselaw/case/beauty-etoile-94b-capitalised-interest-not-deductible/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
Every entry in this library links to where it was found, so you can check it yourself rather than take our word for it.
The officer has disallowed part of my interest under s.94B. Does the section even apply to me, how is the excess actually computed, and can I carry the disallowance forward?
I already disallowed the whole of the interest paid to my associated enterprise under s.94B in my own computation. The TPO has still made a transfer pricing adjustment on the same interest. Can he?
The Transfer Pricing Officer has treated all the lenders named in my Form 3CEB as associated enterprises and applied section 94B to the whole interest. Can I still show that two of them are not associated enterprises?
The AO disallowed interest paid to my foreign parent under s.94B. Does the treaty help?
