Section 94B of the Income-tax Act, 1961 – Unanswered Questions.

Section 94B of the Act was introduced by the Finance Act, 2017 to give effect to 'OECD BEPS Action Plan 4 - Limiting Base Erosion Involving Interest Deductions and Other Financial Payments.

The section is applicable if any previous year ('PY'), interest on any amount borrowed from non-resident Associated Enterprise ('AE') exceeds INR 1 crore and such expense is claimed as a business deduction.

Excess interest is disallowed under this section. Excess interest is lower of
(a) Total interest paid in excess of 30% EBITDA; or
(b) interest paid/payable to non-resident AE.

Disallowed interest can be carried forward for a period of 8 P.Y.s from the PY in which such interest is disallowed.

However, some questions that merit consideration/require further clarity are as follows:

1. Condition for applicability of this section is interest payable on the amount borrowed from non-resident AE whereas, for calculation of excess interest, total interest paid in excess of 30% of EBITDA is to be considered.

2. If any particular PY, amount of interest paid/payable to non-resident AE is less than INR 1 crore but there is a carry forward of disallowed interest, should the section be applicable in that case as well?

3. What will be the implications in cases where EBITDA is negative? What should be the amount of excess interest to be disallowed in such cases? Whether disallowing the entire amount of interest paid/payable to non-resident AE be justified in such a case?

4. What will be the implications if the assessee cannot claim the benefit of carrying forward the disallowed interest even after 8 years? Whether the same be considered a sunk tax cost?

- These are some of the questions which may be answered by way of suitable amendments to the Act.