Section 94B

Section 94B — the law in short

What the courts have decided on section 94B, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Vestas Wind Technology India P Ltd v ITO ITATHelps taxpayerNo later treatment found
  The AO disallowed interest paid to my foreign parent under s.94B. Does the treaty help?
  It did here. Section 94B restricts deduction only where the lender is a non-resident associated enterprise and not where the lender is domestic, which the Tribunal held is discrimination caught by Article 24(4) of the India-Denmark treaty; the treaty prevailed and the entire disallowance was deleted, including the amount the assessee had disallowed itself.
• Noida Towers Private Limited v DCIT ITATHelps taxpayerNo later treatment found
  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?
  Not on these facts. Where the assessee had itself added back the entire interest paid to its associated enterprises on non-convertible debentures under s.94B in its computation of income and paid tax on it, the Tribunal held that a further disallowance out of the same interest by way of a transfer pricing adjustment would amount to double taxation of the same income and was not permissible, and it directed the adjustment to be deleted.
• Beauty Etoile Private Limited v Assessment Unit ITATHelps taxpayerNo later treatment found
  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.
• SP Imperial Star Private Limited v National Faceless Assessment Centre ITATCuts both waysUnder appeal
  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.
• 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 CBDT Circulars & InstructionsCuts both ways
  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.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.