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Limitation on Interest Deduction in Certain Cases section 94B

Section 94B was introduced via the Finance Act, 2017, and became effective from Assessment Year 2018-19. It aims to counter Base Erosion and Profit Shifting (BEPS) — a global tax avoidance strategy used by multinational companies to shift profits from high-tax jurisdictions to low or no-tax jurisdictions by inflating interest expenses.

India adopted this anti-abuse measure in line with Action Plan 4 of the OECD BEPS Project, which recommends limiting interest deductions to curb excessive interest payments made to associated enterprises (AEs).

 

Objective of Section 94B

  • Prevent profit shifting through interest payments to related parties outside India.
  • Disallow deduction of excessive interest payments to associated enterprises that reduce taxable income in India.

 

Applicability of Section 94B

✅Applies to:

  • Indian companies or permanent establishments (PEs) of foreign companies in India.
  • When such entities incur interest expenses (or similar expenditure) in respect of any form of debt issued by a non-resident associated enterprise.

❌ Does NOT apply to:

  • Banking and Insurance companies (specifically excluded from the applicability).

 

Key Provisions of Section 94B

  1. Threshold Condition:
    • The interest expense must exceed ₹1 crore in the relevant previous year.
  2. Interest Deduction Limitation:
    • Deduction for interest (or similar expense) paid or payable to an AE shall be restricted to 30% of EBITDA of the borrower.
  3. Disallowed Portion:
    • The disallowed portion of interest can be carried forward for up to 8 assessment years, and can be claimed as deduction in future years (subject to the same 30% cap).
  4. Third-Party Debt Deemed as AE Debt:
    • If a loan is taken from a third party, but the AE provides an implicit or explicit guarantee, or deposits corresponding funds with the lender, it will be deemed debt from AE.

 

Computation Process – Step-by-Step

  1. Compute EBITDA from financials.
  2. Calculate 30% of EBITDA.
  3. Determine total interest paid to AEs.
  4. Compare interest to 30% of EBITDA:
    • If interest ≤ 30% → fully deductible.
    • If interest > 30% → excess is disallowed, but can be carried forward.
  5. Carry forward disallowed interest for 8 years.

 

Example 1: Third-party loan but AE guarantee

  • Company C Ltd. borrows ₹10 crores from XYZ Bank.
  • AE of Company C gives corporate guarantee to XYZ Bank.
  • Interest paid on loan = ₹1.8 crores.
  • EBITDA = ₹5 crores → 30% = ₹1.5 crores.

Since AE guaranteed the debt → deemed AE debt, so:

  • ₹1.5 crores allowed.
  • ₹30 lakhs disallowed and carried forward.

 

Conclusion

Section 94B is a significant anti-abuse provision aimed at curbing excessive interest deductions paid to foreign associated enterprises. Taxpayers must carefully examine their interest expense structures, especially where guarantees or funding links with AEs exist, to ensure compliance. While it disallows excessive deductions in the current year, it provides relief by permitting a carry-forward mechanism.

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