Meaning of ‘total interest’ under Section 94B of the Income Tax Act, 1961


Under the initiative of the G-20 countries, the Organization for Economic Co-operation and Development (OECD) in its Base Erosion and Profit Shifting (BEPS) project had taken up the issue of base erosion and profit shifting by way of excess interest deductions by the MNEs in Action plan 4.

In view of the above, a new Section 94B, was inserted by the Finance Act, 2017, w.e.f. 01.04.2018 which provides that interest expenses claimed by a Company 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.

Section 94B

Section 94B provides that where an Indian company or permanent establishment of a foreign company being a borrower incurs any expenditure by way of interest or similar nature exceeding rupees 1 crore to its Non-resident Associated Enterprises in respect of any debt issued as mentioned in the following cases then excess interest shall be disallowed:

1) Debt issued by Associated Enterprises or,

2) Debt issued by a lender which is not associated but an associated enterprise either provides an implicit or explicit guarantee to such lender or deposits a corresponding and matching amount of funds with the lender,

Interest shall be calculated in the following manner:

Excess interest shall be disallowed whereas excess interest shall mean lower of the followings:

i) Total interest paid or payable in excess of thirty percent of EBITDA (earnings before interest, taxes, depreciation and amortization) of the borrower in the previous year or,

ii) Interest paid or payable to associated enterprises for that previous year

It may be noted that the provision uses the term total interest paid or payable and there is doubt whether the total interest includes only interest paid to non-resident associated enterprises or interest includes interest paid or payable by the entity to banks, financial institution, third party or any other resident related entities etc.

It may be pertinent to note that the objective of the provision to restrict the amount of interest paid to Non–resident associated enterprises and therefore, a view can be taken that the total interest means interest paid or payable to Non-Resident Associated Enterprises. Total interest will not include interest paid or payable to banks, financial institution, third party or any other resident related entities etc.

It may also be noted that the para 46.1 of the Circular No. 2/2018 dated 15.02.2018 issued by CBDT clearly clarifies that the provision of Section 94 B was brought to counter cross-border shifting of profit through excessive interest payments, and thus aim to protect a country’s tax base. Therefore, it is clear that the total interest should include only total interest means interest paid or payable to Non-Resident Associated Enterprises.


Considering the fact that there is lack of clarity with regards to meaning of total interest in aforesaid Section it is advisable that assesses may take view that total interest will include only interest paid or payable to Non-Resident Associated Enterprises.

An illustration depicting deduction of interest under Section 94B is given in the table below:


Profit & Loss Account for Company X

Particulars Amount(in crores) Particulars Amount(in crores)
Expenses 70 Sales 150
Depreciation 10
Total Interest Expenses:

  –Interest to NR Associated Enterprises

– Interest to Non Associated Enterprises



Taxes 15
Amortization of deferred revenue expenditure 2
Net Profit 7
Total 150 Total 150

EBITDA 7 crores+ 2 crores + 15 crores + 15 crores + 31 crores + 10 crores = 80 crores


Particulars                 Amount(in crores)
Total interest paid to NR Associated Enterprises (A) 31
Less: Lower of-

i) 30 % of EBITDA (30% * 80 crores)

ii) Interest paid to NR Associated Enterprises

(B) 24



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  1. Sriram says:

    But i think the workings should be like this
    Total int paid 46 (31+15) / 30 % EBITDA i.e 30 % of 80 which is 24. So excess of 30 % is 22 (46-22) & Int paid to AE is 15 crores so which ever is lower should be disallowed. Pls clarify

  2. Amit says:

    The wording of section say total interests in excess of 30 % of Ebitda which is (46-24=22) or interest paid to associated enterprises which is 31 whichever is less. Hence disallowance shall be 22 and not 7

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