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CA Final · Direct Tax Laws & International Taxation · Latest Developments in International Taxation

Case: Mehta Exports Ltd, an Indian company, borrowed Rs 20 crore from its non-resident parent, which holds 100% of its equity. Interest paid during the year is Rs 2.4 crore. EBITDA of Mehta is Rs 6 crore. Assume the debt is not from a bank or NBFC, no other borrowings exist, and section 94B (thin capitalisation) applies with its 30% of EBITDA cap. What interest is disallowed under section 94B?

The disallowed interest is Rs 0.6 crore. Section 94B caps deductible interest to the associated enterprise at 30% of EBITDA, which is Rs 1.8 crore. Interest of Rs 2.4 crore exceeds this by Rs 0.6 crore, which is disallowed and may be carried forward for eight years.

  1. ARs 0.6 croreCorrect
  2. BRs 1.8 crore
  3. CRs 2.4 crore
  4. DNil

Explanation

Cap is 30% of EBITDA = 0.3 x 6 = Rs 1.8 crore. Excess interest = 2.4 - 1.8 = Rs 0.6 crore, disallowed and carried forward for up to 8 assessment years. Rs 1.8 crore is the allowable amount, which is the common error of reporting the allowed part as disallowed.

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