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

Kaveri Textiles Ltd, an Indian company, borrowed from its non-resident associated enterprise (AE) and paid interest of INR 3.2 crore for the year. Its EBITDA for the year is INR 8 crore. Assume the interest is otherwise deductible and that the interest limitation rule for excess interest to a non-resident AE (in line with BEPS Action 4) applies, with the cap at 30% of EBITDA. What amount of interest is disallowed for the year, and what happens to it?

INR 0.8 crore is disallowed and can be carried forward for up to 8 assessment years. The cap is 30% of EBITDA, which is INR 2.4 crore, so the INR 3.2 crore of interest paid to the AE exceeds the cap by INR 0.8 crore.

  1. AINR 0.8 crore disallowed; it can be carried forward for up to 8 assessment years against future limit headroomCorrect
  2. BINR 2.4 crore disallowed; it cannot be carried forward
  3. CINR 0.8 crore disallowed; it cannot be carried forward
  4. DINR 3.2 crore disallowed because it exceeds INR 1 crore

Explanation

The cap is 30% of INR 8 crore, which is INR 2.4 crore. Interest paid to the AE is INR 3.2 crore, so the excess is INR 3.2 crore minus INR 2.4 crore, which is INR 0.8 crore. This excess is disallowed in the year but may be carried forward for up to 8 assessment years and set off against future income to the extent of unused headroom. Option B wrongly disallows the permitted amount, and option D ignores that the INR 1 crore figure is only the threshold for applicability.

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