Limitation of Interest Deduction - Section 94B - International Taxation - Income Tax

Limitation of Interest Deduction - Section 94B Provision of Income Tax Act, 1961 in line with BEPS Action Plan 4 : Section 94B has been inserted in the Income Tax Act, 1961, in line with the recommendations of OECD BEPS Action Plan 4, to provide interest expenses or similar expense like guarantee commission etc.) claimed by an Indian company or a permanent establishment of a Foreign company in India in respect of any debt issued by a non-resident being an associated enterprises shall not deductible in computation of income under the Profits Gains of business or profession to the extent that it arises from excess interest. Limit of Interest: Provision of this section applies only where Interest expense exceeds Rs.1 crore. Provision of Guarantee and deposit of matching amount deemed to be debt issued: Where the debt is issued by a lender which is not associated by an associated enterprise- 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. Meaning of Debt - 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 Exclusion from provision of Section 94B: The following has been excluded from the applicability of the provisions of section 94B(1) Interest paid in respect of debt issued by a lender which is PE in India of Non-resident, being a person engaged in the business of banking. [Section 94B(1A) ] an Indian company or 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( (w.e.f. 01.04.2025 Inserted vide Finance (No. 2) Act, 2024 ) ] or ; such class of non-banking financial companies as may be notified by the Central Government in the Official Gazette in this behalf. [ Section 94B(3) ] Meaning of non- banking financial company [ meaning assigned to it in clause (f) of section 45-I of the Reserve Bank of India Act, 1934 ] (i) a financial institution which is a company; ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify. Calculation of Excess Interest [ Section 94B(2) ] Total Interest paid or payable in excess of 30% of its earnings before interest, taxes, depreciation and amortization (EBIDTA) of the borrower in the previous year or Interest paid or payable to Associated Enterprises whichever is LOWER. Carry Forward of Excess Interest [ Section 94B(4) ] The amount of interest expenditure disallowed under this provision, shall be carried forward upto 8 AYs immediately succeeding the assessment year for which excess interest first computed. 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 section 94B(2). Conditions and activities for the Finance Company located in any International Financial Services Centre for section 94B [ w.e.f. 27.01.2025 Rule 21ACA Inserted vide Notification No. 10/2025 dated 27-01-2025 ] As per section 94B(5)(iv) Finance Company means a finance company as defined in regulation 2(1)(e) of the International Financial Services Centres Authority (Finance Company) Regulations, 2021 made under the International Financial Services Centres Authority Act, 2019 and which satisfies such conditions and carries on such activities, as may be prescribed; (1) For the purposes of section 94B(5)(iv) , the Finance Company located in any International Financial Services Centre shall only carry out one or more of the following activities , namely:- (i) lending in the form of loans, commitments and guarantees, credit enhancement, securitisation, financial lease; (ii) factoring and forfaiting of receivables; or (iii) functions of Global or Regional Corporate Treasury Centre such as borrowings, lending, hedging of currency or commodity risk or investments, cash management, structured credit, intra group financing, financial budgeting and similar other such treasury services and activities. (2) The interest being paid by such Finance Company, being the borrower, in respect of any debt issued by a non-resident, shall be in foreign currency.