Executive Overview: Base Erosion, Thin Capitalization, and the Genesis of Section 94B
In international tax planning, multinational enterprises (MNEs) have historically deployed high debt-to-equity ratios—commonly termed "thin capitalization"—to shift profits from high-tax source jurisdictions to low-tax or tax-haven jurisdictions. By financing an operating subsidiary with excessive cross-border debt rather than equity capital, the multinational group achieves two substantial fiscal advantages: interest payments are tax-deductible as business expenditure against operating profits in the source country, while equity dividends are not; and interest can be repatriated subject to minimal withholding tax under bilateral Double Tax Avoidance Agreements (DTAAs). In response to this widespread base erosion strategy, the OECD/G20 Base Erosion and Profit Shifting (BEPS) project formulated Action Plan 4: Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, recommending an earnings-stripping rule capping net interest deductions within a fixed corridor of an entity's EBITDA.
To align the Indian direct tax code with BEPS Action Plan 4 recommendations, Parliament introduced Section 94B into the Income-tax Act, 1961 via the Finance Act, 2017, effective from Assessment Year 2018-19. Section 94B operates as a rigid, formulaic anti-avoidance rule that limits the deduction of interest and similar financial financing expenses incurred by an Indian company or a permanent establishment of a foreign company in India in respect of debt issued or guaranteed by a non-resident Associated Enterprise (AE) to a maximum ceiling of 30% of its Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). Any excess, disallowed interest is not permanently lost, but carried forward for set-off for up to eight succeeding assessment years. Chief financial officers, transfer pricing directors, and cross-border tax counsels leveraging assureOffice and its specialized transfer pricing suite assureTP must master the intricate statutory definitions of "debt", the treacherous "deemed debt" rules triggered by third-party bank guarantees, Form 3CEB disclosure schedules, book-tax EBITDA reconciliations, and Section 94B audit defense strategies to eliminate devastating corporate tax additions.
Statutory Framework, Core Applicability Conditions, and Monetary Thresholds
The operative mandate of Section 94B(1) is triggered upon the satisfaction of specific statutory criteria:
1. Eligible Entities (The Borrowers)
- An Indian company; OR
- A Permanent Establishment (PE) of a foreign company in India;
being the borrower, who incurs any expenditure by way of interest or of similar nature exceeding the statutory de minimis monetary threshold.
2. The ₹1 Crore De Minimis Safe Harbour (Section 94B(2))
Under Section 94B(2), the interest deduction limitation provisions shall NOT apply where the expenditure by way of interest or of similar nature payable to non-resident Associated Enterprises does not exceed one crore rupees (₹1,00,00,000) in the relevant previous year. If total qualifying interest is ₹99,99,999, Section 94B does not apply at all, and full interest is deductible subject to standard transfer pricing arm's length principles under Section 92C. However, once qualifying interest reaches ₹1,00,00,001, the entire interest expenditure is subject to the 30% EBITDA cap!
3. The Statutory 30% EBITDA Limitation Formula
Under Section 94B(2), the interest deductible in computing business income is capped at:
Deductible Interest = Lower of: (a) Total Interest paid or payable in respect of qualifying debt; OR (b) 30% of EBITDA of the borrower in the relevant previous year.Any interest expenditure in excess of 30% of EBITDA is statutorily disallowed in the current assessment year and carried forward under Sub-section (4).
4. Statutory Exemptions (Section 94B(3))
Section 94B explicitly exempts from its scope an Indian company or PE of a foreign company engaged in:
- The business of banking; or
- The business of insurance.
- NBFC Relief: Following widespread industry representations regarding capital-raising for non-banking financial entities, the Finance (No. 2) Act, 2024 extended statutory exemption to notified Non-Banking Financial Companies (NBFCs) engaged in the lending business, recognizing that interest expense represents their core operational cost of goods sold.
Corporate treasury teams utilizing assureTax and assureTP can track group external debt and model EBITDA limits before executing cross-border loan drawdowns.
The "Deemed Debt" Trap: Third-Party Bank Loans with Parent Guarantees (Section 94B(1))
The most pervasive and perilous trap in Section 94B jurisprudence is codified in the second sentence of Sub-section (1), which creates an expansive legal fiction of "Deemed Debt":
"Where the debt is issued by a lender which is not an associated enterprise but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise."
Deconstructing the Three "Deemed Debt" Scenarios
Section 94B applies NOT ONLY when an Indian subsidiary borrows directly from its foreign parent, but also in the following common commercial financing structures:
- Explicit Corporate Guarantee: An Indian company borrows ₹100 Crores from an independent commercial bank in India (e.g., State Bank of India or HDFC Bank). The foreign parent company in the US or Germany executes an unconditional corporate parent guarantee in favor of the Indian bank. Legal Reality: Even though the lender is an independent Indian bank, because the non-resident AE provided a guarantee, the entire bank loan is deemed to be debt issued by an Associated Enterprise! The interest paid to the Indian bank is dragged into the Section 94B 30% EBITDA disallowance net!
- Implicit Guarantee / Letter of Comfort: The statute covers "implicit or explicit guarantee". Where an overseas parent issues a Letter of Comfort, non-disposal undertaking, or credit support agreement that enables the Indian subsidiary to secure lower borrowing costs, tax authorities routinely argue that an implicit guarantee exists, triggering Section 94B.
- Back-to-Back Matching Deposits: Where a foreign parent deposits funds with a multinational bank (e.g., Citibank New York), and the bank's Indian branch lends an equivalent amount to the Indian subsidiary, the loan is treated as deemed debt issued by an AE.
Corporate treasuries using assureTP can audit global bank facility agreements, identifying hidden parent guarantee clauses that unintentionally infect domestic rupee borrowings.
Computation of EBITDA and Definition of "Interest or Similar Nature"
Under Explanation to Section 94B(5), the computation of EBITDA and interest follows strict statutory parameters:
1. Definition of "EBITDA"
"EBITDA" means the profits and gains of business or profession computed in accordance with the provisions of Chapter IV-D of the Income-tax Act, BEFORE deducting:
- Expenditure by way of interest or of similar nature;
- Depreciation allowable under Section 32; and
- Taxes paid or payable (income tax).
Critical Tax Adjustment: EBITDA for Section 94B is TAX EBITDA, NOT accounting EBITDA! It starts with the taxable business income computed under the Act, adding back tax depreciation and tax-deductible interest. If an entity has a negative tax EBITDA (operating business loss before interest and depreciation), 30% of negative EBITDA is zero. Consequently, 100% of the interest paid to non-resident AEs is disallowed in that year!
2. Scope of "Interest or of Similar Nature"
The phrase "interest or of similar nature" is defined expansively to include:
- Interest on all forms of debt (secured, unsecured, debentures, bonds);
- Processing fees, loan origination fees, commitment fees, and syndication charges;
- Discount on commercial paper or zero-coupon bonds; and
- Foreign exchange fluctuation differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs under Ind AS 23 (Borrowing Costs) or Paragraph 4(e) of AS 16.
3. Carry-Forward and Set-Off Mechanics (Section 94B(4))
Any interest disallowed under Section 94B(1) is carried forward to the following assessment year and is deemed to be interest expenditure in that succeeding year:
- Maximum Tenure: Can be carried forward for a maximum of eight (8) assessment years immediately succeeding the assessment year for which the disallowance was first computed.
- Set-Off Ordering: In a succeeding year, current-year interest is deducted first up to the 30% EBITDA ceiling. If any headroom remains within the 30% EBITDA limit, brought-forward Section 94B disallowed interest is set off against the remaining headroom.
Finance teams utilizing assureFinancials automate multi-year tax EBITDA models and 8-year carry-forward schedules to optimize tax absorption.
Practical Case Studies and Numerical Illustrations
The following eight comprehensive real-world case studies illustrate the practical application, mathematical calculations, deemed debt traps, and Form 3CEB disclosures under Section 94B.
Case Study 1: Direct Non-Resident AE Loan Breaching 30% Tax EBITDA Limit
Facts: Apex Automotive India Pvt. Ltd. (borrower) took an unsecured external commercial borrowing (ECB) of ₹60,00,00,000 from its parent company in Germany, Apex Auto GMBH (non-resident AE), at an interest rate of 6% p.a. Annual interest payable is ₹3,60,00,000. In FY 2025-26, the company's taxable business profit before interest and tax depreciation was ₹8,00,00,000. Tax depreciation allowable under Section 32 is ₹2,00,00,000.
Step-by-Step Mathematical Analysis:
- De Minimis Check: Qualifying AE interest = ₹3,60,00,000. This exceeds the ₹1 Crore threshold under Section 94B(2). Section 94B is applicable.
- Tax EBITDA Computation:
- Taxable Business Profit before interest and depreciation: ₹8,00,00,000
- Tax EBITDA = ₹8,00,00,000.
- Maximum Allowable Interest under 30% Cap: Allowable Interest Ceiling = 30% of Tax EBITDA = ₹8,00,00,000 × 30% = ₹2,40,00,000.
- Disallowance & Current-Year Deduction:
- Total AE Interest Payable = ₹3,60,00,000
- Allowable Interest Deduction in FY 2025-26 = ₹2,40,00,000.
- Disallowance under Section 94B(1) = ₹3,60,00,000 - ₹2,40,00,000 = ₹1,20,00,000.
- Carry Forward: The disallowed interest of ₹1,20,00,000 is carried forward to AY 2027-28 under Section 94B(4) for set-off within the 8-year window. Corporate tax filings via assureITR reflect this adjustment in Schedule ICDS and Schedule CFL.
Case Study 2: The Deemed Debt Trap on Domestic Indian Bank Loan with Foreign Parent Guarantee
Facts: Zenith Solar Solutions Pvt. Ltd. (India) borrowed ₹150 Crores at 8.5% interest from State Bank of India (SBI) in Mumbai to construct a solar park. Total annual interest paid to SBI is ₹12,75,00,000. To sanction the loan, SBI mandated an unconditional parent corporate guarantee from Zenith Solar Inc. (USA), the 100% holding company. Zenith Solar Solutions paid no interest directly to its US parent. In FY 2025-26, Zenith Solar's Tax EBITDA was ₹30,00,00,000.
Analysis of Deemed Debt under Section 94B(1):
- Statutory Fiction: Under Section 94B(1), because the loan from SBI was guaranteed by a non-resident AE (Zenith Solar Inc.), the entire ₹150 Crore bank loan is deemed to be debt issued by an Associated Enterprise!
- Disallowance Computation:
- Interest Paid to SBI (Deemed AE Interest) = ₹12,75,00,000 (> ₹1 Cr threshold).
- Tax EBITDA = ₹30,00,00,000.
- 30% Allowable Interest Ceiling = ₹30,00,00,000 × 30% = ₹9,00,00,000.
- Disallowance under Section 94B = ₹12,75,00,000 - ₹9,00,00,000 = ₹3,75,00,000!
- Tax Impact: Even though SBI is an Indian bank whose interest income is fully taxed in India, Zenith Solar is denied a business tax deduction of ₹3,75,00,000, resulting in an additional corporate tax liability of approx ₹94,38,750! Treasuries use assureTP to structure ring-fenced standalone project security to avoid parent guarantee triggers.
Case Study 3: Negative Tax EBITDA Scenario (100% Interest Disallowance)
Facts: BioGen Labs India Pvt. Ltd. is in its clinical ramp-up phase. For FY 2025-26, it reported an operating business loss before interest and depreciation of -₹3,00,00,000. It paid interest of ₹2,50,00,000 to its UK holding company on research loans.
Computation Dynamics with Negative EBITDA:
- EBITDA Floor: Tax EBITDA is negative (-₹3,00,00,000). In direct tax jurisprudence, where EBITDA is negative or nil, 30% of EBITDA cannot be a negative figure; it is deemed to be NIL (₹0).
- Deductible Interest: Lower of actual interest (₹2,50,00,000) or 30% of EBITDA (₹0) = ₹0.
- Disallowance: The entire interest expenditure of ₹2,50,00,000 is 100% disallowed under Section 94B(1)!
- Carry Forward: The full ₹2.50 Crores is carried forward to succeeding years under Section 94B(4). The company's tax loss for the year remains -₹3.00 Crores (operating loss) without any interest deduction benefit.
Case Study 4: Multi-Year Set-Off of Brought-Forward Disallowed Interest
Facts: Precision Metal Works Ltd. carried forward disallowed Section 94B interest of ₹1,80,00,000 from FY 2024-25. In FY 2025-26, the company's business expanded dramatically, generating a Tax EBITDA of ₹20,00,00,000. In FY 2025-26, current-year interest payable to its foreign parent was ₹3,50,00,000.
Set-Off and Absorption Ordering (Section 94B(4)):
- FY 2025-26 30% EBITDA Ceiling: Maximum Allowable Interest = ₹20,00,00,000 × 30% = ₹6,00,00,000.
- Current Year Interest Deduction: Current AE interest = ₹3,50,00,000. Since ₹3.50 Cr < ₹6.00 Cr, the full current-year interest of ₹3,50,00,000 is allowed.
- Available Absorption Headroom: Remaining Headroom = ₹6,00,00,000 - ₹3,50,00,000 = ₹2,50,00,000.
- Absorption of Brought-Forward Interest:
- Total Brought-Forward Disallowed Interest = ₹1,80,00,000.
- Since available headroom (₹2.50 Cr) exceeds brought-forward interest (₹1.80 Cr), the ENTIRE brought-forward interest of ₹1,80,00,000 is fully set off and allowed as a deduction in FY 2025-26!
- Total Interest Deducted in FY 2025-26 = ₹3,50,00,000 + ₹1,80,00,000 = ₹5,30,00,000. Remaining unabsorbed balance carried forward = Nil. assureTax manages these multi-year absorption matrices seamlessly.
Case Study 5: Combined Debt: Part Independent Domestic Bank, Part Non-Resident AE Loan
Facts: Orion Logistics Ltd. incurred total interest expenditure of ₹10,00,00,000 during FY 2025-26, comprising: (a) ₹4,00,00,000 paid to an independent Indian bank (ICICI Bank) without any foreign parent guarantee; and (b) ₹6,00,00,000 paid to its foreign holding company in Singapore. Tax EBITDA is ₹15,00,00,000.
Allocation & Priority Rules:
- Scope of Section 94B: Section 94B applies strictly to interest paid or payable in respect of debt issued or guaranteed by a non-resident AE. Independent bank interest without an AE guarantee (₹4,00,00,000) is OUTSIDE the scope of Section 94B and is 100% tax-deductible under Section 36(1)(iii)!
- Section 94B Limitation on AE Portion:
- AE Interest = ₹6,00,00,000.
- Tax EBITDA = ₹15,00,00,000.
- 30% EBITDA Ceiling = ₹15,00,00,000 × 30% = ₹4,50,00,000.
- Allowable AE Interest = ₹4,50,00,000.
- Disallowance under Section 94B = ₹6,00,00,000 - ₹4,50,00,000 = ₹1,50,00,000.
- Total Interest Deductible in Return of Income: ICICI Bank Interest (₹4 Cr) + Allowable AE Interest (₹4.5 Cr) = ₹8,50,00,000. Disallowed AE interest carried forward = ₹1,50,00,000.
Case Study 6: Interplay Between Section 92C (Arm's Length Interest) and Section 94B Disallowance
Facts: GlobalTech India Pvt. Ltd. borrowed ₹50 Crores from its US parent at an interest rate of 12% p.a., incurring ₹6,00,00,000 in interest. The Transfer Pricing Officer (TPO) conducted an arm's length benchmarking study under Section 92C using comparable loan data, concluding that the arm's length interest rate was 8% p.a. (Arm's Length Interest = ₹4,00,00,000). GlobalTech's Tax EBITDA was ₹10,00,00,000.
Two-Tier Interlocking Adjustment Sequence:
- Step 1: Primary Transfer Pricing Adjustment under Section 92C: The arm's length principle applies FIRST before Section 94B! Contractual Interest = ₹6,00,00,000 Arm's Length Interest u/s 92C = ₹4,00,00,000 Primary TP Adjustment (Excess Interest Disallowed) = ₹2,00,00,000. (This ₹2.00 Crore primary adjustment is permanently disallowed and subject to secondary adjustment under Section 92CE!).
- Step 2: Section 94B Limitation on Arm's Length Interest: Section 94B is now applied to the remaining arm's length interest of ₹4,00,00,000: Tax EBITDA = ₹10,00,00,000 30% EBITDA Cap = ₹10,00,00,000 × 30% = ₹3,00,00,000 Allowable Interest u/s 94B = ₹3,00,00,000 Disallowance u/s 94B = ₹4,00,00,000 - ₹3,00,00,000 = ₹1,00,00,000!
- Final Tax Position: Total P&L interest was ₹6 Crores. Total interest allowed in tax computation = ₹3,00,00,000. Total additions = ₹3 Crores (₹2 Cr permanent TP adjustment + ₹1 Cr carry-forward Section 94B disallowance). assureTP automates this two-tier sequencing in Form 3CEB workpapers.
Case Study 7: Impact of Foreign Exchange Loss on Borrowings as "Interest of Similar Nature"
Facts: Delta Manufacturing Ltd. took a 5-year foreign currency loan of $10,000,000 from its parent company in Singapore. In FY 2025-26, it paid stated coupon interest of ₹2,20,00,000. Due to rupee depreciation, the company incurred a foreign exchange loss of ₹1,50,00,000 on the loan. Under Ind AS 23 (Paragraph 6(e)), ₹80,00,000 of this forex loss was classified as an adjustment to borrowing/interest costs in the audited financial statements. Tax EBITDA was ₹8,00,00,000.
Scope of Section 94B Computation:
- Aggregating Financing Costs: Under Explanation to Section 94B(5), interest includes expenditure of a similar nature. Because ₹80,00,000 forex loss was treated as an interest cost adjustment under Ind AS 23, the tax department aggregates it with coupon interest: Qualifying Interest Base = Coupon Interest (₹2.20 Cr) + Forex Interest Adjustment (₹0.80 Cr) = ₹3,00,00,000.
- EBITDA Ceiling: 30% of ₹8,00,00,000 = ₹2,40,00,000.
- Disallowance: ₹3,00,00,000 - ₹2,40,00,000 = ₹60,00,000 is disallowed under Section 94B and carried forward! Corporate accountants use assureFinancials to track Ind AS 23 forex borrowing cost allocations.
Case Study 8: Defending Scrutiny Notices under Section 148A / 143(3) for Form 3CEB Disclosures
Facts: Sunrise Infotech Pvt. Ltd. reported ₹1,80,00,000 interest paid to its foreign AE in Clause 21 of Form 3CEB for AY 2023-24. In the ITR, the accountant deducted the full ₹1.80 Crores without computing Section 94B disallowance. The Assessing Officer issued a notice under Section 148A(b) alleging escaped income of ₹1,80,00,000.
Litigation Defense Architecture using assureNotice:
- Factual Audit: Re-computing the tax computation in assureTax revealed that Sunrise's actual Tax EBITDA in AY 2023-24 was ₹7,50,00,000. 30% EBITDA Cap = ₹7,50,00,000 × 30% = ₹2,25,00,000.
- Legal Reality: Because the allowable ceiling (₹2.25 Crores) was HIGHER than the actual interest paid (₹1.80 Crores), the allowable interest was the full ₹1.80 Crores! Actual Section 94B disallowance was ZERO (₹0)!
- Section 148A(b) Representation: Counsel filed an indexed submission via assureNotice demonstrating the EBITDA calculation. Because no income had escaped assessment, the AO dropped reassessment proceedings under Section 148A(d), eliminating costly appellate litigation.
10-Step Audit Verification Matrix for Section 94B Compliance
Transfer pricing auditors issuing Form 3CEB, tax audit partners certifying Form 3CD (Clause 34B), and CFOs must follow a structured verification program. The following 10-step matrix details the audit verification protocol:
| Step | Audit Dimension | Verification Protocol & Substantive Testing | Compliance Deliverable |
|---|---|---|---|
| 1 | Non-Resident AE Debt Census | Extract all foreign currency and rupee loans, ECBs, debentures, and credit facilities availed from non-resident Associated Enterprises. | AE Debt Master Schedule |
| 2 | Deemed Debt & Guarantee Audit | Review all third-party bank loan agreements. Identify any implicit or explicit corporate guarantees or matching deposits provided by foreign AEs. | Guaranteed Debt Exception Register |
| 3 | ₹1 Crore De Minimis Test | Aggregate total interest and financing costs paid or payable on AE debt and deemed debt. Confirm if aggregate exceeds ₹1,00,00,000. | Threshold Applicability Memo |
| 4 | Statutory Industry Exemption Check | Confirm whether the entity is engaged in banking, insurance, or qualifying NBFC lending business exempt under Section 94B(3). | Statutory Exemption Certificate |
| 5 | Tax EBITDA Mathematical Audit | Compute Tax EBITDA starting with P&L profit, adding back tax depreciation, interest, and taxes, adjusting for negative EBITDA floors. | Tax EBITDA Computation Sheet |
| 6 | Primary TP Adjustment Sequencing | Ensure transfer pricing arm's length adjustments under Section 92C are computed and applied FIRST before applying the 30% EBITDA cap. | Two-Tier TP/94B Reconciliation |
| 7 | Current Year Disallowance Quantification | Calculate 30% EBITDA ceiling. Compute current-year Section 94B disallowance and verify tax computation add-back in ITR-6. | Section 94B Disallowance Workpaper |
| 8 | Brought-Forward Set-Off Verification | Audit unabsorbed Section 94B interest from the preceding 8 assessment years. Reconcile set-off against current-year remaining EBITDA headroom. | 8-Year Carry Forward Matrix |
| 9 | Form 3CD Clause 34B & Form 3CEB Audit | Verify disclosure of Section 94B particulars in Form 3CD Clause 34B and ensure alignment with international transaction reporting in Form 3CEB. | Form 3CD/3CEB Disclosure Dossier |
| 10 | Digital Audit Defense Archive | Archive all loan agreements, parent guarantee deeds, RBI ECB returns, and EBITDA models in assurePractice. | Section 94B Audit Defense File |
Statutory Reporting in Form 3CD, Form 3CEB, and Automation via assureTP
Proper compliance with Section 94B requires interlocking disclosures across statutory tax filings:
- Tax Audit Report (Form 3CD Clause 34B): The tax auditor must certify: (a) whether the company has incurred expenditure by way of interest or similar nature exceeding ₹1 Crore; (b) the amount of interest expenditure; (c) the EBITDA of the company; (d) the amount of interest exceeding 30% of EBITDA; and (e) details of brought forward and carried forward interest under Section 94B(4).
- Transfer Pricing Report (Form 3CEB): All loans availed from non-resident AEs and corporate guarantee arrangements must be fully disclosed in the international transaction schedules, backed by local file documentation under Rule 10D.
By leveraging assureTP, cross-border tax teams can model multi-year EBITDA projections, optimize debt-to-equity ratios, automate Section 94B disallowance and carry-forward ledgers, and defend against TPO scrutiny notices with comprehensive transfer pricing documentation.
Frequently Asked Questions (FAQs) for Transfer Pricing Practitioners
Below are 16 detailed, practitioner-grade answers to the most common technical and practical questions regarding Section 94B:
Q1: Does Section 94B apply to loans taken from resident Associated Enterprises?
Answer: No. Section 94B applies strictly where the debt is issued or guaranteed by a non-resident Associated Enterprise. Transactions between two resident Indian entities are outside the scope of Section 94B (though domestic transfer pricing under Section 92BA may apply if specified domestic transactions thresholds are met).
Q2: Does Section 94B apply if total interest paid to non-resident AEs is exactly ₹1 Crore?
Answer: Under Section 94B(2), the section does NOT apply where the interest expenditure does not exceed ₹1 Crore. If interest is exactly ₹1,00,00,000, Section 94B is not triggered. The section applies only when interest exceeds ₹1 Crore (₹1,00,00,001 or more).
Q3: Does a parent guarantee on a loan from an Indian commercial bank attract Section 94B?
Answer: Yes. Under the "deemed debt" rule in Section 94B(1), if an Indian bank lends to an Indian subsidiary and the foreign parent provides an implicit or explicit guarantee, the entire bank debt is deemed to be debt issued by an AE, and interest paid to the Indian bank is subject to the 30% EBITDA cap!
Q4: For how many years can disallowed Section 94B interest be carried forward?
Answer: Under Section 94B(4), disallowed interest can be carried forward for set-off for up to eight (8) assessment years immediately succeeding the assessment year for which the disallowance was first computed.
Q5: How is EBITDA computed if the company has a business loss before interest and depreciation?
Answer: If the company has a negative operating profit before interest and depreciation, Tax EBITDA is treated as NIL (₹0). Consequently, 30% of EBITDA is zero, and 100% of the interest paid to non-resident AEs is disallowed in that year and carried forward.
Q6: Does Section 94B apply to Non-Banking Financial Companies (NBFCs)?
Answer: Following the amendment introduced by the Finance (No. 2) Act, 2024, notified NBFCs engaged in the business of lending are exempt from Section 94B, alongside banking and insurance companies.
Q7: Does Section 94B apply to a Permanent Establishment (PE) of a foreign bank in India?
Answer: PEs of foreign banking companies are exempt from Section 94B under Sub-section (3)(a), as they are engaged in the business of banking.
Q8: Which provision applies first: Section 92C (Arm's Length Interest) or Section 94B (30% EBITDA Cap)?
Answer: Section 92C applies FIRST. The Transfer Pricing Officer benchmarks the loan to establish the arm's length interest rate. Any excess interest above the arm's length rate is permanently disallowed under Section 92C. Section 94B is then applied on the remaining arm's length interest amount.
Q9: Can brought-forward Section 94B interest be set off if the company has zero current-year AE debt?
Answer: Yes. Under Section 94B(4), brought-forward disallowed interest is deemed to be interest expenditure in the succeeding year. If the company has positive EBITDA and sufficient headroom under the 30% cap, the brought-forward interest can be set off even if no fresh AE interest was incurred.
Q10: Are processing fees and loan arrangement fees included in "interest" for Section 94B?
Answer: Yes. Under Section 2(28A) and Explanation to Section 94B(5), interest includes any service fee, commitment charge, or other charge incurred in respect of the moneys borrowed, as well as borrowing cost adjustments under Ind AS 23.
Q11: Does Section 94B apply to interest paid on trade payables to foreign suppliers?
Answer: If trade payables to a foreign AE remain overdue and carry interest beyond normal commercial credit periods, tax authorities treat the extended credit as an advance/debt, bringing the interest under Section 94B.
Q12: Is EBITDA computed based on accounting P&L or taxable business income?
Answer: EBITDA under Section 94B is strictly Tax EBITDA, computed as taxable profits and gains of business under Chapter IV-D before deducting tax depreciation, allowable interest, and taxes.
Q13: Does an implicit guarantee by a foreign parent trigger Section 94B deemed debt?
Answer: Yes. Section 94B(1) explicitly encompasses an "implicit or explicit guarantee". Letters of comfort or non-disposal undertakings that facilitate loan sanctions are routinely treated by tax authorities as implicit guarantees.
Q14: Where is Section 94B disallowance disclosed in the Income Tax Return (ITR-6)?
Answer: In Form ITR-6, Section 94B disallowance is added back in Schedule BP (Computation of income from business or profession) and tracked in Schedule CFL (Carried forward losses and allowances).
Q15: Can a company claim a refund of disallowed Section 94B interest?
Answer: Disallowed interest cannot be refunded; it is carried forward as an unabsorbed interest deduction to be adjusted against taxable profits within the 30% EBITDA headroom in succeeding years.
Q16: How does assureTP streamline Section 94B compliance and transfer pricing defense?
Answer: assureTP provides an integrated thin capitalization workbench: it models cross-border debt structures, benchmarks arm's length interest rates under Section 92C, computes Tax EBITDA from assureFinancials ledgers, auto-populates Form 3CD Clause 34B and Form 3CEB disclosures, tracks 8-year carry-forward schedules, and integrates with assureNotice to defend against Section 148A reassessment and TPO adjustment notices.