Section 94B of the Income Tax Act, 1961, provides that any interest paid/ payable by the assessee to its Associated Enterprise (“AE”) , shall not be deductible in computation of income under the head “profit and gains of business or profession” , to the extent such interest constitutes “excess interest”.
Excess Interest for the purpose of Section 94B shall mean : –
- Total Interest paid or payable (i.e. total interest paid/ payable to AE and non-AE) in excess of 30% of its earning before interest, taxes, depreciation, and amortization (EBITDA) of the borrower in the PY ; or
- Interest paid/ payable to AE for that previous year
whichever is less.
APPLICABILITY OF SECTION 94B – PERSON COVERED
Where the borrower is an Indian company, or a permanent establishment of a foreign company in India, who incurs any expenditure by way of interest or similar nature in respect of any form of debt issued by a non-resident AE of the borrower. However, provision of section 94B shall not be applicable to an Indian company or permanent establishment of a foreign company which is engaged in the business of banking or Insurance. AE shall have the same meaning as assigned to it in the provision of Transfer Pricing u/s 92A
However, such provisions would be applicable only when : –
- Interest is deductible in computing income chargeable under the head profit and gains of business and profession
- Where expenditure by way of interest or of similar nature exceeds Rs. 1 crore, in respect of any form of debt issued by a non-resident AE of such borrower.
MEANING OF DEBT – SECTION 94B
For the purpose of Section 94B , 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”.
INTEREST EXPENSE INCURRED FOR AE AND NON-AE – SECTION 94B
EXAMPLE 1 : –
| Particulars | Amount (in crores) |
| EBITDA of ICO (Borrower) | 200 |
| 30% of EBITDA | 60 |
| Interest paid to foreign AE | 10 |
| Interest paid to non-AE | 70 |
| Total interest expense | 80 |
| Total interest in excess of 30% of EBITDA (80-60) (A) | 20 |
| Interest paid to AE (B) | 10 |
| Lower of A and B | 10 |
| Interest to be disallowed u/s 94B | 10 |
INTEREST EXPENSE INCURRED ONLY FOR AE – SECTION 94B
EXAMPLE 2 : –
| Particulars | Amount (in crores) |
| EBITDA of ICO (Borrower) | 200 |
| 30% of EBITDA | 60 |
| Interest paid to foreign AE | 80 |
| Interest paid to non-AE | 0 |
| Total interest expense | 80 |
| Total interest in excess of 30% of EBITDA (80-60) (A) | 20 |
| Interest paid to AE (B) | 80 |
| Lower of A and B | 20 |
| Interest to be disallowed u/s 94B | 20 |
INTEREST EXPENSE INCURRED ONLY FOR NON AE – SECTION 94B
EXAMPLE 3 : –
| Particulars | Amount (in crores) |
| EBITDA of ICO (Borrower) | 200 |
| 30% of EBITDA | 60 |
| Interest paid to foreign AE | 0 |
| Interest paid to non-AE | 90 |
| Total interest expense | 90 |
| Total interest in excess of 30% of EBITDA (90-60) (A) | 30 |
| Interest paid to AE (B) | 0 |
| Lower of A and B | 0 |
| Interest to be disallowed u/s 94B | 0 |
DEBT DEEMED TO BE ISSUED BY AE – SECTION 94B
In certain cases, the AE, instead of giving direct debt to the Indian party, may provide certain guarantees, or deposit funds against which such independent party may grant loan to the Indian party. To deal with such situation, it is provided that where the debt is issued by a lender which is not AE , 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.
Provision of section 94B shall not be applicable to an Indian company or permanent establishment of a foreign company which is engaged in the business of banking or Insurance
IMPACT OF SECTION 40(A)(I) DISALLOWANCE ON SECTION 94B
EXAMPLE 4 : –
| Particulars | Amount (in crores) |
| EBITDA of ICO (Borrower) | 100 |
| 30% of EBITDA | 30 |
| Interest paid to foreign AE 1 | 70 |
| Interest paid to foreign AE 2 | 10 |
| Total interest expense (A) | 80 |
| Disallowance under section 40(a)(i) (B) | 10 |
| Interest deductible (A-B) | 70 |
| Total interest in excess of 30% of EBITDA (80-30) | 50 |
| Interest paid to AE | 80 |
| Lower of A and B (C) | 50 |
| Disallowance u/s 94B (50-10) (C – B) | 40 |
NOTE : –
Provision of section 94B would be applicable where interest is deductible in computing income chargeable under the head profit and gains of business and profession. In example 4 interest paid to AE 2 of Rs. 10 crore is not deductible due to disallowance under section 40(a)(i). Accordingly such interest of Rs. 10 crore should not be consider for disallowance under section 94B.