{"id":4106,"date":"2017-08-26T09:31:09","date_gmt":"2017-08-26T04:01:09","guid":{"rendered":"https:\/\/taxclick.org\/?p=4106"},"modified":"2017-08-26T09:33:42","modified_gmt":"2017-08-26T04:03:42","slug":"interest-limitations-case-international-transactions","status":"publish","type":"post","link":"https:\/\/taxclick.org\/type\/income-tax\/interest-limitations-case-international-transactions\/","title":{"rendered":"Interest Limitations in case of International Transactions"},"content":{"rendered":"

Introduction<\/h3>\n

\u201cArise,\u00a0awake, and\u00a0stop not\u00a0till the goal is reached\u201d<\/strong> said by Swami Vivekanada seems to be the motto of the Indian government which is relentlessly working on bringing India at Global footing as far as the taxation laws are concerned. Along with India many other nations have joined hands to develop and strengthen the anti- tax avoidance measures.<\/span><\/p>\n

India as a country actively participating in the BEPS G20 Action plan which has issued its final reports in October 2015.It is expected that all the members make relevant changes in their domestic laws in order to align them with the recommendations of this plan.<\/span><\/p>\n

India, via\u00a0 Fiscal Budget 2017 has inserted a new section 94B, in line with the recommendations of OECD BEPS Action Plan 4, to provide that interest expenses claimed by an entity to its associated enterprises shall be restricted to 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise, whichever is less.<\/span><\/p>\n

The most common practise of shifting its profit out of India without tax or by suffering lower tax is by charging interest expense to its Associated Enterprise (AE). This results in reduction of profits of AE and the resultant effect is low tax burden on AE due to reduced profits and the interest shifted to the Non-Resident AE in the form of interest may not be taxed or may be taxed at a lower rate. This leads to base erosion in India. To curb such practises BEPS action Plan 4 suggested the countries to introduce provisions limiting the deductions on interest from expenditure. This triggered the introduction of the new section 94B in the Income Tax Act ,1961<\/span><\/p>\n

Analysis of Section 94B of the Act<\/span><\/h3>\n\n\n\n\n\n\n
Applicability of provision<\/span><\/td>\nSub-section 1 & 3<\/span><\/td>\n<\/tr>\n
Computation of disallowance<\/span><\/td>\nSub-section 2<\/span><\/td>\n<\/tr>\n
Carry Forward of disallowed amount<\/span><\/td>\nSub-section 4<\/span><\/td>\n<\/tr>\n
Definitions of terms used<\/span><\/td>\nSub-section 5<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

Applicability of provision<\/strong><\/span><\/p>\n

Sub-section (1) & (3) of Section 94 B of the Income Tax Act, 1961(hereinafter referred as the Act) lays down that \u00a0notwithstanding anything contained in this Act, where an Indian company, or a permanent establishment of a foreign company in India, being the borrower, incurs any expenditure by way of interest or of similar nature exceeding one crore rupees<\/strong> which is deductible in computing income chargeable under the head “Profits and gains of business or profession” in respect of any debt issued by a non-resident,<\/strong> being an associated enterprise<\/strong> of such borrower, the interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest as specified in sub-section (2):
\n<\/strong><\/span><\/p>\n

Provided\u00a0<\/strong>that where the debt is issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee<\/strong> to such lender or deposits<\/strong> a corresponding and matching amount of funds with the lender, such debt shall be deemed to have been issued by an associated enterprise.<\/span><\/p>\n

These provisions shall be applicable to an Indian company or a permanent establishment of a foreign company engaged in the business off banking and insurance (sub-section 3).<\/span><\/p>\n

One can deduce the conditions of applicability from the above provisions. Only on fulfilment of the conditions cumulatively, the restriction on interest shall be applicable<\/span><\/p>\n

    \n
  1. Interest is payable by an Indian Company or a permanent establishment of a foreign company in India. Banking and insurance company as well as non-corporate assesses are outside the purview of this section.<\/span><\/li>\n
  2. Interest is payable to the Non- resident AE or to a third-party lender to whom such Non-resident AE has provided guarantee or deposited matching funds. (this point shall be discussed in detail below)<\/span><\/li>\n
  3. The interest received by the non-resident AE or the lender as mentioned above exceeds the threshold limit of INR one crore in the particular financial year.<\/span><\/li>\n
  4. Interest is claimed as deductible expenditure against income taxable under the head \u201cProfit & Gains from Business and Profession\u201d.<\/span><\/li>\n<\/ol>\n

    Section 94B (1) provides that, the debt shall be deemed to be treated as issued by an AE where it provides an implicit or explicit guarantee to the lender or deposits a corresponding and matching amount of funds with the lender.
    \n<\/strong><\/span><\/p>\n

    Borrowing from third party<\/strong><\/span><\/p>\n

    A Non- resident associated AE can arrange for loans to its Indian AE in two ways<\/span><\/p>\n