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?
Yes. The Tribunal held that the first and foremost criterion for invoking section 94B is to identify whether the enterprise is an associated enterprise or a deemed associated enterprise, and that question must be settled before any arm's length or thin capitalisation computation is made. It remanded the matter for the disallowance to be recomputed on the basis of the revised Form 3CEB, holding that the statute prescribes no time limit for filing that form.
Decided by the ITAT (Amarjit Singh, Accountant Member and Kavitha Rajagopal, Judicial Member (Mumbai "H" Bench)) on 2025-03-26, reported as ITA No. 5862/Mum/2024; Assessment Year 2021-22; heard 5 February 2025. It bears on section 94B, section 94B(1), section 94B(1A), section 94B(3), section 92A, section 92A(2), section 92A(2)(c), section 92CA(3), section 92C of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
Section 94B bites only on interest paid or payable to a non-resident associated enterprise, and the order is a useful corrective to the practice of taking the original Form 3CEB as conclusive. Two practical points come out of it. First, a Form 3CEB filed out of abundant caution naming lenders as associated enterprises can be revised, and a revised form filed before the Transfer Pricing Officer passes his order under section 92CA(3) cannot be rejected as belated, because no time limit is prescribed. Second, the order states the mechanics of section 94B in one place, and states the deeming limb correctly: it is the PROVISO TO SECTION 94B(1), not sub-section (2), that deems a debt to have been issued by an associated enterprise where the loan comes from a third party lender but the associated enterprise provides an explicit or implicit guarantee to that lender or deposits a corresponding or matching amount of funds with it. That is the limb that catches the ordinary Indian subsidiary borrowing from a foreign bank on the parent's comfort letter, and it is the limb most often mislocated. The order also records the threshold of Rs 1 crore, the restriction to 30 per cent of earnings before interest, tax, depreciation and amortisation or the interest paid to the associated enterprise whichever is less, and the carry forward of the disallowed interest for a maximum of eight assessment years under the proviso to section 94B(4).
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee paid interest on non-convertible debentures. In its transfer pricing study report it adopted the comparable uncontrolled price method, benchmarking against the State Bank of India prime lending rate plus 300 basis points, arriving at an arm's length interest rate of 15.90 per cent against an actual rate of 17.18 per cent, and sought a downward adjustment of Rs 25,93,87,674. It contended that having already disallowed interest of Rs 201,11,17,614 under section 94B, no further adjustment for excess interest was called for. Its original Form 3CEB named three enterprises as associated enterprises. It later contended that only Credit Opportunities II PTE Limited was a deemed associated enterprise under section 92A(2)(c) and that the other two did not cross the prescribed 51 per cent limit, and filed a revised Form 3CEB before the Transfer Pricing Officer passed his order. The Transfer Pricing Officer treated the revised form as belatedly filed and proceeded on the original one. The Dispute Resolution Panel had directed that only Credit Opportunities II PTE Limited was a deemed associated enterprise and the other two were to be treated as non-associated enterprises, and the assessee complained that the Assessing Officer had not given effect to that direction.
The appeal was allowed for statistical purposes. The issues were remanded to the Assessing Officer to recompute the adjustment in accordance with the revised Form 3CEB for determination of the arm's length price of the interest payable to the associated enterprise, the assessee being directed to satisfy the Assessing Officer by cogent evidence how the other two entities are not associated enterprises, and the Assessing Officer being directed to decide on the merits and in accordance with law. The Tribunal expressed no view on the merits of any issue.
Section 92A categorises associated enterprises under sub-section (1) and deemed associated enterprises under sub-section (2); here the relevant deeming was clause (c), under which a lender is deemed an associated enterprise of the borrower where the loan advanced is not less than 51 per cent of the book value of the total assets of the borrower (para 12). The statute prescribes no time limit for filing Form 3CEB, and the Transfer Pricing Officer was wrong to rely on the original form and disregard the revised one filed before the order under section 92CA(3), particularly when the Dispute Resolution Panel had already accepted the assessee's position (para 13). For the purpose of computing the disallowance under section 94B, whether an enterprise is an associated enterprise, a deemed associated enterprise or an independent enterprise must be determined before considering whether the transaction is at arm's length. Section 94B restricts interest paid to associated enterprises to 30 per cent of earnings before interest, taxes, depreciation and amortisation or the interest paid to an associated enterprise, whichever is less, permits carry forward of the interest expenditure for a maximum of eight years, applies where the interest payment exceeds Rs 1 crore and where the borrower is an Indian company or a permanent establishment of a foreign company and the payment is to a non-resident associated enterprise, the legislative intention being to limit base erosion involving interest deduction and other financial payments following the OECD BEPS Action 4 recommendation (para 13).
The proviso to Section 94B(1) states that where a loan has been provided by a third party lender, but the AE provides explicit or implicit guarantee to such lender or deposits the corresponding or matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise.
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Handle my notice → Ask a CA on WhatsAppYes. The Tribunal held that the first and foremost criterion for invoking section 94B is to identify whether the enterprise is an associated enterprise or a deemed associated enterprise, and that question must be settled before any arm's length or thin capitalisation computation is made. It remanded the matter for the disallowance to be recomputed on the basis of the revised Form 3CEB, holding that the statute prescribes no time limit for filing that form. This was decided by the ITAT (Amarjit Singh, Accountant Member and Kavitha Rajagopal, Judicial Member (Mumbai "H" Bench)) and bears on section 94B, section 94B(1), section 94B(1A), section 94B(3), section 92A, section 92A(2), section 92A(2)(c), section 92CA(3), section 92C of the Income Tax Act 1961. It is reported as ITA No. 5862/Mum/2024; Assessment Year 2021-22; heard 5 February 2025. Section 94B bites only on interest paid or payable to a non-resident associated enterprise, and the order is a useful corrective to the practice of taking the original Form 3CEB as conclusive. Two practical points come out of it. First, a Form 3CEB filed out of abundant caution naming lenders as associated enterprises can be revised, and a revised form filed before the Transfer Pricing Officer passes his order under section 92CA(3) cannot be rejected as belated, because no time limit is prescribed. Second, the order states the mechanics of section 94B in one place, and states the deeming limb correctly: it is the PROVISO TO SECTION 94B(1), not sub-section (2), that deems a debt to have been issued by an associated enterprise where the loan comes from a third party lender but the associated enterprise provides an explicit or implicit guarantee to that lender or deposits a corresponding or matching amount of funds with it. That is the limb that catches the ordinary Indian subsidiary borrowing from a foreign bank on the parent's comfort letter, and it is the limb most often mislocated. The order also records the threshold of Rs 1 crore, the restriction to 30 per cent of earnings before interest, tax, depreciation and amortisation or the interest paid to the associated enterprise whichever is less, and the carry forward of the disallowed interest for a maximum of eight assessment years under the proviso to section 94B(4). If it applies to you, the first step is this: Before arguing quantum, test each lender against section 92A. Where the deeming is said to arise under section 92A(2)(c), check whether the loan was at any time during the previous year not less than 51 per cent of the book value of the total assets of the borrower.
The assessee paid interest on non-convertible debentures. In its transfer pricing study report it adopted the comparable uncontrolled price method, benchmarking against the State Bank of India prime lending rate plus 300 basis points, arriving at an arm's length interest rate of 15.90 per cent against an actual rate of 17.18 per cent, and sought a downward adjustment of Rs 25,93,87,674. It contended that having already disallowed interest of Rs 201,11,17,614 under section 94B, no further adjustment for excess interest was called for. Its original Form 3CEB named three enterprises as associated enterprises. It later contended that only Credit Opportunities II PTE Limited was a deemed associated enterprise under section 92A(2)(c) and that the other two did not cross the prescribed 51 per cent limit, and filed a revised Form 3CEB before the Transfer Pricing Officer passed his order. The Transfer Pricing Officer treated the revised form as belatedly filed and proceeded on the original one. The Dispute Resolution Panel had directed that only Credit Opportunities II PTE Limited was a deemed associated enterprise and the other two were to be treated as non-associated enterprises, and the assessee complained that the Assessing Officer had not given effect to that direction. The matter was decided on 2025-03-26 by the ITAT (Amarjit Singh, Accountant Member and Kavitha Rajagopal, Judicial Member (Mumbai "H" Bench)). On those facts the ITAT held as follows. The appeal was allowed for statistical purposes. The issues were remanded to the Assessing Officer to recompute the adjustment in accordance with the revised Form 3CEB for determination of the arm's length price of the interest payable to the associated enterprise, the assessee being directed to satisfy the Assessing Officer by cogent evidence how the other two entities are not associated enterprises, and the Assessing Officer being directed to decide on the merits and in accordance with law. The Tribunal expressed no view on the merits of any issue.
Section 92A categorises associated enterprises under sub-section (1) and deemed associated enterprises under sub-section (2); here the relevant deeming was clause (c), under which a lender is deemed an associated enterprise of the borrower where the loan advanced is not less than 51 per cent of the book value of the total assets of the borrower (para 12). The statute prescribes no time limit for filing Form 3CEB, and the Transfer Pricing Officer was wrong to rely on the original form and disregard the revised one filed before the order under section 92CA(3), particularly when the Dispute Resolution Panel had already accepted the assessee's position (para 13). For the purpose of computing the disallowance under section 94B, whether an enterprise is an associated enterprise, a deemed associated enterprise or an independent enterprise must be determined before considering whether the transaction is at arm's length. Section 94B restricts interest paid to associated enterprises to 30 per cent of earnings before interest, taxes, depreciation and amortisation or the interest paid to an associated enterprise, whichever is less, permits carry forward of the interest expenditure for a maximum of eight years, applies where the interest payment exceeds Rs 1 crore and where the borrower is an Indian company or a permanent establishment of a foreign company and the payment is to a non-resident associated enterprise, the legislative intention being to limit base erosion involving interest deduction and other financial payments following the OECD BEPS Action 4 recommendation (para 13). In the words reproduced by the source cited on this page: "The proviso to Section 94B(1) states that where a loan has been provided by a third party lender, but the AE provides explicit or implicit guarantee to such lender or deposits the corresponding or matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise."
It was decided by the ITAT on 2025-03-26 and is reported as ITA No. 5862/Mum/2024; Assessment Year 2021-22; heard 5 February 2025. 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(1A), section 94B(3), section 92A, section 92A(2), section 92A(2)(c), section 92CA(3), section 92C, 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 cuts both ways and is cited by both sides. The appeal was allowed for statistical purposes. The issues were remanded to the Assessing Officer to recompute the adjustment in accordance with the revised Form 3CEB for determination of the arm's length price of the interest payable to the associated enterprise, the assessee being directed to satisfy the Assessing Officer by cogent evidence how the other two entities are not associated enterprises, and the Assessing Officer being directed to decide on the merits and in accordance with law. The Tribunal expressed no view on the merits of any issue. It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 94B, section 94B(1), section 94B(1A), section 94B(3), section 92A, section 92A(2), section 92A(2)(c), section 92CA(3), section 92C of the Income Tax Act 1961, and was decided by Amarjit Singh, Accountant Member and Kavitha Rajagopal, Judicial Member (Mumbai "H" Bench). 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 Form 3CEB overstated the position, file a revised Form 3CEB before the Transfer Pricing Officer passes his order under section 92CA(3) and rely on this order for the proposition that no time limit is prescribed. Where a Dispute Resolution Panel direction has already accepted that some entities are not associated enterprises, check that the Assessing Officer has actually given effect to it — non-compliance with the direction was the live grievance here. For the deeming limb, look for a guarantee or a matching deposit by the non-resident associated enterprise and cite the proviso to section 94B(1). Do not cite sub-section (2), which defines excess interest. Keep the EBITDA working ready. The assessee here made a suo motu disallowance under section 94B in the absence of EBITDA details, which is a poor position from which to argue about the arm's length rate. Check the exclusions before assuming section 94B applies at all. Section 94B(3) takes out an Indian company or permanent establishment of a foreign company engaged in banking or insurance, a Finance Company located in an International Financial Services Centre, and such class of non-banking financial companies as the Central Government notifies; and section 94B(1A), which is a separate limb, takes out interest on a debt issued by a lender which is a permanent establishment in India of a non-resident engaged in the business of banking.
Validity check could not be completed. Validity check could not be completed. The order is recent and I found nothing citing it. The proposition that no time limit is prescribed for filing Form 3CEB is stated without authority in the order and I did not test it against any contrary decision; a reader should not treat it as settled. The exposition of section 94B at paragraph 13 is obiter. 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.
Paragraph 13 describes the restriction as 30 per cent of "the revenue before any interest, taxes, depreciation and amortization", where the statutory expression is earnings before interest, taxes, depreciation and amortisation; treat the Tribunal's wording as a slip and work from the statute. The order does not itself decide anything about the proviso to section 94B(1) — the passage describing it is part of the Tribunal's exposition of the section, not a holding on guarantee facts, and I have not found a decision that applies the proviso to actual guarantee facts. I read paragraphs 6 and 9 to 14 verbatim; I did not read paragraphs 1 to 5, 7 and 8, so the facts below are as they appear in the paragraphs I read. The disallowance of Rs 201,11,17,614 made suo motu under section 94B and the transfer pricing adjustment figures are taken from paragraph 6. 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 for statistical purposes. The issues were remanded to the Assessing Officer to recompute the adjustment in accordance with the revised Form 3CEB for determination of the arm's length price of the interest payable to the associated enterprise, the assessee being directed to satisfy the Assessing Officer by cogent evidence how the other two entities are not associated enterprises, and the Assessing Officer being directed to decide on the merits and in accordance with law. The Tribunal expressed no view on the merits of any issue.
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