Section 94B — Limitation on Interest Deduction (Thin Capitalisation)

STATUTORY ARCHITECTURE — 18-ROW MAP

HISTORICAL CONTEXT

Section 94B — Thin Capitalisation rules — was inserted by Finance Act, 2017 (w.e.f. AY 2018-19) to give effect to BEPS Action 4 (limiting base erosion via interest deductions). It restricts deduction of interest expense in respect of borrowings from non-resident AEs (or borrowings guaranteed by NR AE) to 30% of EBITDA or actual interest, whichever is lower.

Operative architecture — section 94B(1): Indian company / PE of foreign company paying interest to NR-AE or on debt guaranteed by NR-AE; the 'excess interest' (interest in excess of 30% EBITDA) is disallowed in computation of business income. Section 94B(2) — disallowed interest carries forward for 8 AYs and may be set off against subsequent years' headroom.

Section 94B(3) — exclusion: banks and insurance businesses are outside section 94B. Section 94B(1A) (FA 2020) — extends to interest on debt issued by non-resident PE in India. Threshold: interest expense up to Rs 1 cr per AY is exempt from section 94B. The framework aligns India with international BEPS standards; the 2025 Act preserves it.

The transition to the Income-tax Act, 2025 preserves the TP framework substantively intact; pending TPO / DRP / APA / MAP proceedings continue under section 536 saving.

FINANCE ACT AMENDMENT TIMELINE

■ Finance Act 2001 — Sections 92 to 92F inserted; TP framework effective AY 2002-03.

■ Finance Act 2002 — Drafting amendments; AE definition refined.

■ Finance Act 2009 — Section 92CA(2A) — TPO can review AE issues incidental to ALP determination.

■ Finance Act 2012 — Section 92BA inserted — Specified Domestic Transactions framework.

■ Finance Act 2014 — Range concept introduced (Rule 10CA); use of multi-year data.

■ Finance Act 2015 — Master File / CbCR framework (sections 286 + Rules 10DA / 10DB).

■ Finance Act 2017 — SDT scope narrowed; Master File thresholds operationalised.

■ Finance Act 2017 — Secondary Adjustment (s. 92CE) inserted — repatriation framework.

■ Finance Act 2019 — Section 92CE secondary-adjustment refinements + one-time settlement.

■ Finance Act 2020 — Safe Harbour Rules extended; APA Rules refined.

■ Finance Act 2021 — Section 144C — DRP framework refined; faceless DRP optional.

■ Finance Act 2023 — Master File / CbCR amendments — disclosure refinements.

■ Finance Act 2024 — Procedural refinements to TPO order timelines.

■ Finance Act 2025 — Framework preserved; Income-tax Act 2025 s. 536 saving.

JUDICIAL EVOLUTION — VERIFIED LANDMARK AUTHORITIES

▸ Vodafone International Holdings B.V. v. Union of India (2012) 341 ITR 1 ; (2012) 6 SCC 613 (Supreme Court — 3-Judge Bench)

Facts. Vodafone (a Netherlands company) acquired CGP Investments (a Cayman entity) from Hutchison; CGP indirectly held the Indian telecom operations. The Department asserted Indian tax on the offshore share transfer.

Issue. Whether the transfer of shares of an upstream foreign entity, where the Indian operating company is held via several intermediate non-Indian holding entities, attracts Indian capital gains tax under section 9(1)(i).

HELD. The Court held that section 9(1)(i) as it then stood did not extend to indirect transfers; the transaction was offshore and outside Indian taxing jurisdiction. (Subsequently overridden by retrospective amendments — FA 2012 / Taxation Laws Amendment Act 2021.)

“Look at as a whole, the look-at, not look-through approach, is appropriate in tax planning. Tax avoidance and tax evasion are distinct; tax planning within the framework of law is legitimate.”

Relevance. Foundational on residence-based source rules and the look-at/look-through distinction — anchors arguments around section 9(1)(i) characterisation and the limits of deeming fictions on indirect transfers.

▸ GE India Technology Centre (P) Ltd. v. Commissioner of Income-tax (2010) 327 ITR 456 ; (2010) 10 SCC 29 (Supreme Court)

Facts. The assessee made payments to non-residents and contended that section 195 obliged deduction only if the payment was chargeable to tax in India; the Department argued that section 195 required deduction on all payments subject only to subsequent refund.

Issue. Whether section 195 mandates withholding on every payment to a non-resident or only on those payments which are chargeable to tax under the Act in the hands of the recipient.

HELD. Section 195 obliges deduction only where the sum is chargeable to tax in India in the hands of the non-resident recipient. The payer is entitled to form a bona-fide view on chargeability; if not chargeable, no withholding is required. The recipient's exemption / treaty relief is to be considered.

“The expression 'chargeable under the provisions of this Act' in section 195(1) shows that the remittance has got to be of a trading receipt, the whole or part of which is liable to tax in India. The payer is bound to deduct tax at source only if the tax is assessable in India.”

Relevance. Foundational on the scope of section 195 — anchors arguments around withholding on cross-border payments, software royalties, FTS, and treaty exempt receipts; followed in Engineering Analysis.

▸ Engineering Analysis Centre of Excellence (P) Ltd. v. Commissioner of Income-tax (2021) 432 ITR 471 ; (2022) 3 SCC 321 (Supreme Court — 3-Judge Bench)

Facts. Indian end-users imported shrink-wrap / off-the-shelf software. The Department characterised the payments as 'royalty' attracting section 195 withholding; the assessees contended that what was sold was a copyrighted article, not the copyright itself, hence no royalty.

Issue. Whether payments for off-the-shelf software amount to royalty under DTAA (Article 12) and trigger section 195 withholding.

HELD. The amounts paid by resident Indian end-users / distributors to non-resident software manufacturers / suppliers for the use of computer software are not payments of royalty for the use of copyright. No section 195 obligation arises; section 9(1)(vi) read with DTAA Article 12 governs.

“Once a DTAA applies, the provisions of the Act can only apply to the extent that they are more beneficial to the assessee… The amounts paid by resident end-users are not the consideration for the use of or the right to use copyright.”

Relevance. Definitive authority on cross-border software royalty — eliminates section 195 obligation on most B2B software import payments; broad implications for licensing, SaaS, cloud-services characterisation.

▸ Mathuram Agrawal v. State of Madhya Pradesh (1999) 8 SCC 667 ; (2000) 1 SCR 1 (Supreme Court)

Facts. A municipal levy was challenged on the ground that the charging provision did not clearly specify the rate, the persons charged, and the measure of tax.

Issue. Whether a tax can be imposed in the absence of a clear, unambiguous charging provision identifying the subject, measure, rate, and incidence.

HELD. Article 265 demands that tax be levied only by clear authority of law. The four components — taxable event, person, rate, and measure — must be clearly discernible from the charging provision; ambiguity is fatal to the levy.

“The intention of the Legislature in a taxation statute is to be gathered from the language of the provisions, particularly when the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose other than what is given expression to.”

Relevance. Foundational authority on the rigour required of charging sections — underpins arguments that ambiguous deeming fictions, surcharge formulas, and rate prescriptions must be strictly construed.

▸ Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 ; (2004) 10 SCC 1 (Supreme Court)

Facts. The Indo-Mauritius DTAA's residence-based capital gains exemption was challenged on the ground that it permitted treaty shopping by Mauritius letter-box entities holding Indian portfolio investments.

Issue. Whether CBDT Circular No. 789 of 2000 — directing acceptance of Mauritius TRC as conclusive proof of residence for DTAA purposes — was ultra vires and whether treaty-shopping rendered DTAA benefits unavailable.

HELD. The Court held the Circular intra vires and binding on Revenue. Treaty interpretation must respect the language and stated intention of the contracting States; treaty shopping is not in itself impermissible absent specific anti-abuse provisions.

“The principles adopted for interpretation of treaties are not the same as those in interpretation of statutory legislation. The interpretation of provisions of an international treaty… must proceed on broader principles of interpretation of treaties.”

Relevance. Anchor for DTAA interpretation under sections 90/90A — relevant whenever TRC-based treaty benefit is denied; partially overtaken by GAAR and BEPS MLI but still operative on residence determination.

CBDT CIRCULARS — ECOSYSTEM

▸ CBDT Circular No. 14(XL-35) of 1955 dated 11 April 1955

Subject. Duty of officers to assist assessees in claiming and securing relief

Substance. Foundational circular directing that the AO should not exploit assessee ignorance to deny legitimate reliefs; officer is required to draw attention to refunds or reliefs to which the assessee is entitled. The circular has been judicially noted in several appellate decisions and remains operative for first-appellate practice.

▸ CBDT Circular No. 549 dated 31 October 1989

Subject. Explanatory notes — Finance Act 1989 amendments (incl. PY unification)

Substance. Explained the FA 1987 / FA 1989 amendments unifying the previous year with the financial year preceding the AY, including transitional provisions for assessees with different accounting years. Useful in any controversy on the timing of accrual / chargeability for early post-1989 AYs.

▸ CBDT Circular No. 5 of 2014 dated 11 February 2014

Subject. Section 14A — dis-allowance even where no exempt income earned (since modulated)

Substance. Initially directed AOs to apply Rule 8D disallowance under section 14A even where no exempt income was earned in the year; subsequently modulated by Cheminvest (Del HC) and Maxopp (SC). FA 2022 amendment to section 14A re-asserted the position but remains under litigation.

▸ CBDT Circular No. 6 of 2019 dated 20 March 2019

Subject. Withdrawal of low-tax-effect appeals — monetary thresholds

Substance. Revised monetary thresholds for departmental appeals — ITAT (Rs 50L), HC (Rs 1 Cr), SC (Rs 2 Cr); subsequently further revised. Operates as a non-statutory limitation on the Revenue's appellate engagement, binding under section 119.

▸ CBDT Circular No. 5 of 2024 dated 15 March 2024

Subject. Procedure for transitional reassessment notices post-Ashish Agarwal / Rajeev Bansal

Substance. Procedural guidance for AOs handling transitional reassessment notices for AYs 2013-14 to 2017-18 affected by Ashish Agarwal and Rajeev Bansal. Sets out the form of section 148A inquiry, time-bar calculation under TOLA, and JAO/FAO jurisdiction in faceless cases.

WORKED EXAMPLES

PRACTITIONER PLANNING NOTES

■ TP planning starts at structure design — substance > paperwork.

■ AE definition includes both equity test (>=26%) and de-facto control test.

■ Specified Domestic Transaction (SDT) — currently narrowed post-FA 2017 (only specific cases).

■ Most appropriate method (MAM) selection critical; document why selected over others.

■ TNMM most common for routine functions; CUP best where comparables available.

■ Profit Split (PSM) for highly integrated / unique-asset transactions.

■ Safe Harbour — lower compliance cost; tighter margin bands.

■ APA — Unilateral / Bilateral / Multilateral; certainty for 5 years + 4 roll-back.

■ MAP — government-to-government dispute resolution; competent authority.

■ DRP — alternative to direct CIT(A) for TP additions (section 144C).

■ Master File (Rule 10DA) — Rs 50 cr international transaction OR Rs 500 cr revenue.

■ CbCR (Rule 10DB) — Rs 5,500 cr consolidated revenue.

■ OECD Guidelines 2022 — interpretive aid; not binding but persuasive.

■ Engineering Analysis ratio — narrow construction; royalty / FTS definitions strict.

■ Documentation 8 years — contemporaneous + indexed + signed.

LITIGATION DEFENCE

■ Mathuram Agrawal — strict construction of charging / TP-deeming provisions.

■ Vodafone International — look-at primacy; corporate-form respected absent sham.

■ Engineering Analysis — narrow royalty / FTS definitions for cross-border payments.

■ GE India — withholding obligation only if income is chargeable to tax in India.

■ Azadi Bachao — treaty benefits available; LOB / MLI PPT independently checked.

■ Section 92(3) — ALP shall not apply if reduces taxable income / increases loss.

■ Section 92C(2) — most appropriate method selection — taxpayer's choice respected if reasoned.

■ Section 92C(2) proviso — +/-1% (wholesale traders) / +/-3% range — statutory tolerance.

■ Comparability adjustments — economic / functional / contractual adjustments permitted.

■ Use of multi-year data — Rule 10B(4) — current year + prior 2 years.

■ Internal comparables preferred over external where available.

■ TPO order under 92CA(3) — challenge before DRP / CIT(A) / ITAT.

■ DRP order — finality; direct appeal to ITAT u/s 253(1)(d).

■ APA / MAP — alternative dispute resolution paths.

■ Section 92E Form 3CEB — Certified Accountant report; substantive defence document.

■ TP documentation 8 years — Rule 10D — bona-fide documentation defence.

STEP-BY-STEP PROCEDURE — 15 STEPS

Step 1. Identify international transaction / SDT

Determine if transaction is between AEs (s. 92A) and is an international transaction (s. 92B) or SDT (s. 92BA).

Step 2. Determine functions / risks / assets (FAR)

Document functions performed, assets used, risks assumed by each party.

Step 3. Select Most Appropriate Method (MAM)

Per Rule 10B — CUP / RPM / CPM / PSM / TNMM / Other; justify selection.

Step 4. Identify comparables

Internal first, then external; databases (Prowess, Capitaline, BvD Orbis).

Step 5. Compute ALP

Apply selected MAM to comparables; arithmetic mean +/- tolerance band.

Step 6. Prepare TP documentation

Rule 10D — contemporaneous documentation; FAR analysis + comparables + computation.

Step 7. Master File / CbCR (if applicable)

Rule 10DA / 10DB — Forms 3CEAA / 3CEAC; thresholds Rs 50 cr / Rs 5,500 cr.

Step 8. File Form 3CEB

Section 92E — TP audit report; due 31-October with assessment.

Step 9. Return + Schedule TP

Income computed at ALP; Schedule TP discloses transactions + adjustments.

Step 10. Scrutiny — section 143(2)

If AO selects for TP scrutiny, refers to TPO u/s 92CA(1).

Step 11. TPO proceedings (s. 92CA(3))

TPO determines ALP; passes order within 60 days before assessment time-bar.

Step 12. Draft assessment order

AO incorporates TPO order; passes draft order under section 144C(1).

Step 13. DRP route (s. 144C)

Assessee may file objections to DRP within 30 days; DRP order final, binding on AO.

Step 14. ITAT appeal (s. 253(1)(d))

Direct appeal to ITAT against assessment incorporating DRP / TPO order.

Step 15. Further appeal / APA / MAP

HC u/s 260A; SC u/s 261; APA u/s 92CC; MAP under treaty Article 25.

PRACTITIONER CHECKLIST — 19 ITEMS

CROSS-REFERENCES (28+)

CROSS-REFERENCES

▸ Section 92 — Computation of income at ALP.

▸ Section 92A — Associated Enterprise (AE) definition.

▸ Section 92B — International transaction definition.

▸ Section 92BA — Specified Domestic Transaction (SDT).

▸ Section 92C — ALP computation methods.

▸ Section 92CA — Reference to TPO.

▸ Section 92CB — Safe Harbour Rules.

▸ Section 92CC — Advance Pricing Agreement (APA).

▸ Section 92CD — Modified Return post-APA.

▸ Section 92CE — Secondary Adjustment.

▸ Section 92D — TP Documentation (Master File / CbCR).

▸ Section 92E — Audit report u/s 92E (Form 3CEB).

▸ Section 92F — TP Definitions.

▸ Section 93 — Avoidance via transfer of income to NR.

▸ Section 94 — Securities transactions (dividend stripping / bond washing).

▸ Section 94A — Notified Non-cooperative jurisdiction.

▸ Section 94B — Thin capitalisation (interest cap 30% EBITDA).

▸ Sections 95-102 — Chapter X-A GAAR framework.

▸ Section 144C — DRP (Dispute Resolution Panel).

▸ Section 245N(a)(iv) — Advance ruling on IAA / TP.

▸ Section 270A(9)(f) — Mis-reporting penalty for TP failures.

▸ Section 271AA — Penalty for TP documentation failure.

▸ Section 271BA — Penalty for failure to furnish Form 3CEB.

▸ Section 271G — Penalty for failure to furnish TP documentation.

▸ Section 276C — Wilful evasion (prosecution).

▸ Rule 10A-10THD — TP machinery rules (Master File, CbCR, Safe Harbour, APA).

▸ Rule 10A — Methods of ALP determination.

▸ Rule 10B — Computation of ALP (CUP, RPM, CPM, PSM, TNMM, Other).

▸ Rule 10D — TP Documentation requirements.

▸ Rule 10TA-10TG — Safe Harbour Rules (operational).

▸ Rule 10THA-10THD — APA Rules.

▸ Form 3CEB — TP audit report (DT certification).

▸ Form 3CEAA — Master File (Part A + B).

▸ Form 3CEAC — Country-by-Country Report (CbCR).

▸ Form 3CEF / 3CEG — APA application forms.

▸ OECD Transfer Pricing Guidelines (2022) — interpretive aid.

▸ OECD BEPS Action 13 — TP documentation standards (3-tier).

▸ MLI Article 9 — Associated enterprises (treaty-level).

▸ Income-tax Act, 2025 — Section 536 saving for TP proceedings.