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CA Final · Direct Tax Laws & International Taxation · Fundamentals of BEPS

Bharat Components Ltd is an Indian subsidiary of a Dutch group. For the year its earnings before interest, tax, depreciation and amortisation (as computed for the interest limitation rule) are Rs 20 crore. It paid interest of Rs 9 crore to its non-resident associated enterprise on a loan. There is no other interest expense and no brought-forward disallowance. Applying the interest limitation rule derived from BEPS Action 4 (deduction capped at 30% of EBITDA, applicable as the interest exceeds Rs 1 crore), what amount of interest is disallowed in the current year and how is it treated?

Rs 3 crore is disallowed this year. The deduction limit is 30% of EBITDA, which is Rs 6 crore on Rs 20 crore, so the excess of Rs 3 crore over the Rs 9 crore paid can be carried forward for up to eight assessment years.

  1. ARs 9 crore disallowed permanently
  2. BRs 3 crore disallowed in the current year, and available for carry forward for up to eight assessment years against future capacityCorrect
  3. CRs 6 crore disallowed in the current year and carried forward
  4. DNil, because the cap is only an absolute limit of Rs 1 crore

Explanation

The cap is 30% of Rs 20 crore = Rs 6 crore. Interest of Rs 9 crore less Rs 6 crore leaves Rs 3 crore disallowed. This excess can be carried forward for up to eight assessment years and deducted within the cap in those years. Rs 6 crore is the allowed amount, not the disallowed amount, so the third option is wrong. Check: 6 allowed + 3 disallowed = 9 paid.

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