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?
Section 94B(1) applies where an Indian company, or the permanent establishment of a foreign company in India, being the borrower, incurs interest or expenditure of a similar nature EXCEEDING ONE CRORE RUPEES, deductible under "Profits and gains of business or profession", in respect of any debt issued by a non-resident which is an associated enterprise of the borrower; to that extent the interest is not deductible so far as it arises from "excess interest". Sub-section (2) defines excess interest as "an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, WHICHEVER IS LESS". The proviso to sub-section (1) extends the section to third-party debt: where the lender is not an associated enterprise but an associated enterprise "either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender", the debt is deemed to have been issued by an associated enterprise. Sub-section (4) allows the undeducted interest to be carried forward and set off against business profits, subject to the same sub-section (2) ceiling, for not more than EIGHT assessment years immediately succeeding the year in which the excess was first computed. Sub-section (3) takes the borrower out of the section where the Indian company or the permanent establishment is engaged in the business of banking or insurance — and also, by words inserted by Act No. 15 of 2024 with effect from 1 April 2025, where it is "a Finance Company located in any International Financial Services Centre", and, by words inserted by the Finance Act, 2023 with effect from 1 April 2024, "or such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf", no such class having been notified so far as could be established. Sub-section (1A), inserted by Act No. 12 of 2020 with effect from 1 April 2021, is a different and often confused relief: it 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.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Section 94B of the Income-tax Act, 1961, as amended up to 2025. It bears on section 94B, section 94B(1), section 94B(1A), section 94B(2), section 94B(3), section 94B(4), section 94B(5), section 92A, section 92A(1), section 92A(2), section 36(1)(viia) of the Income Tax Act 1961, in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters.
Four points decide most s.94B disputes. First, the one crore rupee figure is a gateway, not an exemption slab: once interest exceeds one crore the whole computation under sub-section (2) is engaged, and the excess interest is not reduced by one crore. Second, "whichever is less" in sub-section (2) is the taxpayer's protection and is routinely misapplied. The disallowance is capped at the interest paid or payable to associated enterprises for the year, so a company with large third-party interest and small associated-enterprise interest cannot be disallowed more than the latter. Third, the guarantee proviso is what brings ordinary bank borrowing into the section — a parent's corporate guarantee to an Indian bank is enough to deem the bank's loan to be associated-enterprise debt, and this is the limb most taxpayers do not see coming. Fourth, the carve-outs are narrower than they look. Sub-section (3) exempts the borrower only if the BORROWER is in banking or insurance, or is a Finance Company located in an International Financial Services Centre from AY 2025-26, or is within a notified class of NBFC from AY 2024-25 — and no class has been notified so far as could be established; sub-section (1A) exempts a particular debt only where the LENDER is the Indian permanent establishment of a non-resident bank. A non-banking Indian company borrowing from an Indian branch of a foreign bank under a parent guarantee is within sub-section (1A); the same company borrowing from an Indian domestic bank under a parent guarantee is not.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Section 94B, as printed on the departmental pages stamped Year 2024 (No. 2) and Year 2025, reads: "94B. (1) Notwithstanding anything contained in this Act, where an Indian company, or a permanent establishment of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head 'Profits and gains of business or profession' in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, the interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest, as specified in sub-section (2): Provided that where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise. (1A) Nothing contained in sub-section (1) shall apply to interest paid in respect of a debt issued by a lender which is a permanent establishment in India of a non-resident, being a person engaged in the business of banking. (2) For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less. (3) Nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance or a Finance Company located in any International Financial Services Centre, or such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf. (4) Where for any assessment year, the interest expenditure is not wholly deducted against income under the head 'Profits and gains of business or profession', so much of the interest expenditure as has not been so deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for that assessment year to the extent of maximum allowable interest expenditure in accordance with sub-section (2): Provided that no interest expenditure shall be carried forward under this sub-section for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed. (5) For the purposes of this section, the expressions— (i) 'associated enterprise' shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A; (ii) 'debt' means any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head 'Profits and gains of business or profession'; (iia) 'non-banking financial company' shall have the meaning assigned to it in clause (vii) of the Explanation to clause (viia) of sub-section (1) of section 36; (iii) 'permanent establishment' includes a fixed place of business through which the business of the enterprise is wholly or partly carried on; (iv) 'Finance Company' means a finance company as defined in clause (e) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019) and which satisfies such conditions and carries on such activities, as may be prescribed; (v) 'International Financial Services Centre' shall have the meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005)."
Not a judgment. The statutory position is that interest of more than one crore rupees paid or payable by an Indian company or an Indian permanent establishment of a foreign company on debt issued by a non-resident associated enterprise is disallowed to the extent of excess interest, being the lesser of the amount by which total interest exceeds thirty per cent of EBITDA and the interest paid or payable to associated enterprises for that year; that a guarantee or matching deposit by an associated enterprise brings third-party debt within the section; that the disallowed amount may be carried forward for not more than eight assessment years; that borrowers engaged in banking or insurance are outside the section, as are a Finance Company located in an International Financial Services Centre from 1 April 2025 and any notified class of non-banking financial companies from 1 April 2024, no such class having been notified so far as could be established; and that interest on debt issued by a lender which is a permanent establishment in India of a non-resident bank is outside the section from 1 April 2021.
Not a judgment; no judicial reasoning is stated for the section itself.
(2) For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less.
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Handle my notice → Ask a CA on WhatsAppSection 94B(1) applies where an Indian company, or the permanent establishment of a foreign company in India, being the borrower, incurs interest or expenditure of a similar nature EXCEEDING ONE CRORE RUPEES, deductible under "Profits and gains of business or profession", in respect of any debt issued by a non-resident which is an associated enterprise of the borrower; to that extent the interest is not deductible so far as it arises from "excess interest". Sub-section (2) defines excess interest as "an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, WHICHEVER IS LESS". The proviso to sub-section (1) extends the section to third-party debt: where the lender is not an associated enterprise but an associated enterprise "either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender", the debt is deemed to have been issued by an associated enterprise. Sub-section (4) allows the undeducted interest to be carried forward and set off against business profits, subject to the same sub-section (2) ceiling, for not more than EIGHT assessment years immediately succeeding the year in which the excess was first computed. Sub-section (3) takes the borrower out of the section where the Indian company or the permanent establishment is engaged in the business of banking or insurance — and also, by words inserted by Act No. 15 of 2024 with effect from 1 April 2025, where it is "a Finance Company located in any International Financial Services Centre", and, by words inserted by the Finance Act, 2023 with effect from 1 April 2024, "or such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf", no such class having been notified so far as could be established. Sub-section (1A), inserted by Act No. 12 of 2020 with effect from 1 April 2021, is a different and often confused relief: it 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. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 94B, section 94B(1), section 94B(1A), section 94B(2), section 94B(3), section 94B(4), section 94B(5), section 92A, section 92A(1), section 92A(2), section 36(1)(viia) of the Income Tax Act 1961. It is reported as Section 94B of the Income-tax Act, 1961, as amended up to 2025. Four points decide most s.94B disputes. First, the one crore rupee figure is a gateway, not an exemption slab: once interest exceeds one crore the whole computation under sub-section (2) is engaged, and the excess interest is not reduced by one crore. Second, "whichever is less" in sub-section (2) is the taxpayer's protection and is routinely misapplied. The disallowance is capped at the interest paid or payable to associated enterprises for the year, so a company with large third-party interest and small associated-enterprise interest cannot be disallowed more than the latter. Third, the guarantee proviso is what brings ordinary bank borrowing into the section — a parent's corporate guarantee to an Indian bank is enough to deem the bank's loan to be associated-enterprise debt, and this is the limb most taxpayers do not see coming. Fourth, the carve-outs are narrower than they look. Sub-section (3) exempts the borrower only if the BORROWER is in banking or insurance, or is a Finance Company located in an International Financial Services Centre from AY 2025-26, or is within a notified class of NBFC from AY 2024-25 — and no class has been notified so far as could be established; sub-section (1A) exempts a particular debt only where the LENDER is the Indian permanent establishment of a non-resident bank. A non-banking Indian company borrowing from an Indian branch of a foreign bank under a parent guarantee is within sub-section (1A); the same company borrowing from an Indian domestic bank under a parent guarantee is not. If it applies to you, the first step is this: Test the gateway first: is the interest or similar expenditure deductible under the head "Profits and gains of business or profession" and does it exceed one crore rupees? If not, the section does not apply.
Section 94B, as printed on the departmental pages stamped Year 2024 (No. 2) and Year 2025, reads: "94B. (1) Notwithstanding anything contained in this Act, where an Indian company, or a permanent establishment of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head 'Profits and gains of business or profession' in respect of any debt issued by a non-resident, being an associated enterprise of such borrower, the interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest, as specified in sub-section (2): Provided that where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise. (1A) Nothing contained in sub-section (1) shall apply to interest paid in respect of a debt issued by a lender which is a permanent establishment in India of a non-resident, being a person engaged in the business of banking. (2) For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less. (3) Nothing contained in sub-section (1) shall apply to an Indian company or a permanent establishment of a foreign company which is engaged in the business of banking or insurance or a Finance Company located in any International Financial Services Centre, or such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf. (4) Where for any assessment year, the interest expenditure is not wholly deducted against income under the head 'Profits and gains of business or profession', so much of the interest expenditure as has not been so deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for that assessment year to the extent of maximum allowable interest expenditure in accordance with sub-section (2): Provided that no interest expenditure shall be carried forward under this sub-section for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed. (5) For the purposes of this section, the expressions— (i) 'associated enterprise' shall have the meaning assigned to it in sub-section (1) and sub-section (2) of section 92A; (ii) 'debt' means any loan, financial instrument, finance lease, financial derivative, or any arrangement that gives rise to interest, discounts or other finance charges that are deductible in the computation of income chargeable under the head 'Profits and gains of business or profession'; (iia) 'non-banking financial company' shall have the meaning assigned to it in clause (vii) of the Explanation to clause (viia) of sub-section (1) of section 36; (iii) 'permanent establishment' includes a fixed place of business through which the business of the enterprise is wholly or partly carried on; (iv) 'Finance Company' means a finance company as defined in clause (e) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 (50 of 2019) and which satisfies such conditions and carries on such activities, as may be prescribed; (v) 'International Financial Services Centre' shall have the meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005)." It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that interest of more than one crore rupees paid or payable by an Indian company or an Indian permanent establishment of a foreign company on debt issued by a non-resident associated enterprise is disallowed to the extent of excess interest, being the lesser of the amount by which total interest exceeds thirty per cent of EBITDA and the interest paid or payable to associated enterprises for that year; that a guarantee or matching deposit by an associated enterprise brings third-party debt within the section; that the disallowed amount may be carried forward for not more than eight assessment years; that borrowers engaged in banking or insurance are outside the section, as are a Finance Company located in an International Financial Services Centre from 1 April 2025 and any notified class of non-banking financial companies from 1 April 2024, no such class having been notified so far as could be established; and that interest on debt issued by a lender which is a permanent establishment in India of a non-resident bank is outside the section from 1 April 2021.
Not a judgment; no judicial reasoning is stated for the section itself. In the words reproduced by the source cited on this page: "(2) For the purposes of sub-section (1), the excess interest shall mean an amount of total interest paid or payable in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less."
It was decided by the CBDT Circulars & Instructions and is reported as Section 94B of the Income-tax Act, 1961, as amended up to 2025. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 94B, section 94B(1), section 94B(1A), section 94B(2), section 94B(3), section 94B(4), section 94B(5), section 92A, section 92A(1), section 92A(2), section 36(1)(viia), 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. Not a judgment. The statutory position is that interest of more than one crore rupees paid or payable by an Indian company or an Indian permanent establishment of a foreign company on debt issued by a non-resident associated enterprise is disallowed to the extent of excess interest, being the lesser of the amount by which total interest exceeds thirty per cent of EBITDA and the interest paid or payable to associated enterprises for that year; that a guarantee or matching deposit by an associated enterprise brings third-party debt within the section; that the disallowed amount may be carried forward for not more than eight assessment years; that borrowers engaged in banking or insurance are outside the section, as are a Finance Company located in an International Financial Services Centre from 1 April 2025 and any notified class of non-banking financial companies from 1 April 2024, no such class having been notified so far as could be established; and that interest on debt issued by a lender which is a permanent establishment in India of a non-resident bank is outside the section from 1 April 2021. It arises in Deductions & Disallowances, Assessment & Scrutiny and How Tax Law Is Read matters, on section 94B, section 94B(1), section 94B(1A), section 94B(2), section 94B(3), section 94B(4), section 94B(5), section 92A, section 92A(1), section 92A(2), section 36(1)(viia) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. 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. Compute BOTH limbs of sub-section (2) — total interest less thirty per cent of EBITDA, and interest paid or payable to associated enterprises for the year — and disallow only the LESSER. Officers frequently apply the first limb alone. Trace every third-party loan back to any implicit or explicit guarantee or matching deposit by an associated enterprise; the proviso deems such debt to be associated-enterprise debt and this is usually where the exposure is. Where the lender is the Indian permanent establishment of a non-resident bank, take the s.94B(1A) point for assessment year 2021-22 onwards, and keep it distinct from the s.94B(3) carve-out, which turns on the borrower's own business. For assessment year 2024-25 onwards, if you are a non-banking financial company, check whether your class has actually been notified under s.94B(3) in the Official Gazette. The words inserted by the Finance Act, 2023 confer relief only on a NOTIFIED class, so the carve-out is inoperative for you until such a notification exists. For assessment year 2025-26 onwards, check whether the borrower is a Finance Company located in an International Financial Services Centre within s.94B(5)(iv) read with s.94B(5)(v). Those words were inserted in s.94B(3) by Act No. 15 of 2024 with effect from 1 April 2025 and take such a company outside the section altogether — unlike the NBFC limb, this one needs no notification. Track the eight-year limit in the proviso to sub-section (4) from the assessment year in which the excess interest expenditure was FIRST computed, and set the carried-forward amount off only within the sub-section (2) ceiling for the later year.
Still good law. The text is current so far as it can be established here, and the entry is written against the latest text located. Successive texts of section 94B spanning 2017 to 2025 have been compared, and the latest of them carries both carve-outs in sub-section (3) and five definitions in sub-section (5). A still later text cannot be excluded on this evidence. No class of non-banking financial company is recorded as notified under s.94B(3), and the 2023 NBFC-layer notifications are made under s.43B and s.43D and not under this section. Judicial treatment of the section has not been checked. For a live dispute, settle three things before arguing the computation: whether the interest exceeds one crore rupees at all, whether the lender is an associated enterprise or is brought in by the guarantee or matching-deposit proviso, and which text of sub-section (3) governs your year. 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 text is taken from section 94B of the Income-tax Act, 1961, under the heading "Limitation on interest deduction in certain cases", and checked against successive earlier texts of the section. The earliest carry no sub-section (1A) at all; sub-section (1A) carries the footnote "Ins. by the Act No. 12 of 2020, w.e.f. 1-4-2021." THE NBFC POINT. Sub-section (3) carries the additional words "or such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf", footnoted in the text that first prints them as "Italicised words shall be inserted by the Finance Act, 2023, w.e.f. 1-4-2024" and, in a later text, as "Ins. by the Act No. 8 of 2023, w.e.f. 1-4-2024"; Act No. 8 of 2023 is the Finance Act, 2023. So the NBFC carve-out exists, it dates from 1 April 2024, and it operates only on a NOTIFIED class. No notification specifying a class of non-banking financial companies for the purposes of s.94B(3) is recorded, and a reader must not assume one has been issued. CBDT Notifications No. 79/2023 and No. 80/2023, both of 22 September 2023, which classify NBFCs into Top, Upper and Middle Layers, are issued for the purposes of s.43B and s.43D and NOT s.94B. Until a s.94B(3) notification exists the NBFC carve-out is inoperative. THE IFSC CARVE-OUT. The current text of sub-section (3) carries a further carve-out that the earlier texts do not — "or a Finance Company located in any International Financial Services Centre" — with the footnote "Italicised words shall be ins. by the Act No. 15 of 2024, w.e.f. 1-4-2025." Act No. 15 of 2024 is the Finance (No. 2) Act, 2024. Sub-section (5) in the current text carries FIVE definitions, not three — clause (iia) "non-banking financial company", inserted with the NBFC carve-out, and clauses (iv) "Finance Company" and (v) "International Financial Services Centre", inserted with the IFSC carve-out. If the copy you are reading shows three definitions in sub-section (5), it predates both carve-outs. decided_on is null: no footnote dates the insertion of s.94B itself, and its commencement is not verified here from any government instrument, so the entry deliberately states no start date for the section. The two amendments inside it ARE dated, from the footnotes printed with the section. 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.
Not a judgment. The statutory position is that interest of more than one crore rupees paid or payable by an Indian company or an Indian permanent establishment of a foreign company on debt issued by a non-resident associated enterprise is disallowed to the extent of excess interest, being the lesser of the amount by which total interest exceeds thirty per cent of EBITDA and the interest paid or payable to associated enterprises for that year; that a guarantee or matching deposit by an associated enterprise brings third-party debt within the section; that the disallowed amount may be carried forward for not more than eight assessment years; that borrowers engaged in banking or insurance are outside the section, as are a Finance Company located in an International Financial Services Centre from 1 April 2025 and any notified class of non-banking financial companies from 1 April 2024, no such class having been notified so far as could be established; and that interest on debt issued by a lender which is a permanent establishment in India of a non-resident bank is outside the section from 1 April 2021.
TaxSphere, “Statutory position — s.94B: the thirty per cent of EBITDA cap on interest paid to a non-resident associated enterprise, the one crore gateway, the guarantee proviso that catches third-party debt, the eight-year carry forward, and the three carve-outs in sub-section (3) — banking and insurance, a notified class of NBFC from 1 April 2024, and an IFSC Finance Company from 1 April 2025”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-94b-thirty-per-cent-of-ebitda-the-guarantee-extension-the-eight-year-carry-forward-and-the-three-carve-outs/ (validity last checked 2026-09-09)
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.
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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?
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 TPO says I control the foreign party in substance, so we are associated enterprises. Is de facto control enough under s.92A?
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?
