TaxTMI 
TaxTMI 
2026 (3) TMI 1227
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....embling, installing, selling, and maintaining wind turbine generators (WTGs) in India, and in supplying WTG components to the Vestas group.Beginning in FY 2015-16, the Appellant availed multiple tranches of External Commercial Borrowings (ECBs) from Vestas Denmark under separate agreements. In Assessment Year (AY) 2018-19 ("the Impugned AY"), it incurred ECB interest expenditure of Rs. 55.83 crore relating to four tranches. For the Impugned AY, the Appellant filed its return of income on 30.11.2018 declaring total income of Rs. 71.26 crore under the normal provisions of the Act, after making a suomotu disallowance of Rs. 9.34 crore u/s. 94B in respect of ECB interest. Section 94B, introduced by the Finance Act, 2017 with effect from 01.04.2018, restricts interest deductions in specified cases (Pg.82 P.B.). As this was the first year of its applicability, the disallowance was made conservatively and without prejudice to the Appellant's right to contest its applicability.The return was selected for complete scrutiny, and the international transactions were referred to the Transfer Pricing Officer (TPO) for arm's length determination. By order dated 21.07.2021 u/s. 92CA(3), the TPO ma....
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....n 94B, the Appellant preferred an appeal against the Final Order before the learned CIT(A), challenging both the applicability of Section 94B to its case and, without prejudice, the correctness of the TPO's computation. In contesting applicability, the Appellant relied on Article 24 (Non-Discrimination) of the India-Denmark Double Taxation Avoidance Agreement (DTAA). The ld. CIT(A), by order dated 27.11.2024 u/s. 250, rejected all grounds raised by the Appellant and upheld the TP Order. The findings may be summarised as follows: a. On the legal issue: The CIT(A) held that the non-discrimination protection under Article 24(4) of the DTAA was unavailable since the transaction was between associated enterprises (AEs), referring to the exception contemplated under Article 12(7) of the DTAA. b. On the computational issue: The CIT(A) observed that the TPO's workings were based on the figures disclosed in the financial statements and found the recomputation to be correct. The Appellant has therefore filed the present appeal before this Tribunal, confined to the sole issue of the disallowance u/s. 94B both in terms of its applicability and, without prejudice, the ma....
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....in excess of thirty per cent of earnings before interest, taxes, depreciation and amortisation of the borrower in the previous year or interest paid or payable to associated enterprises for that previous year, whichever is less. ..... (4) Where for any assessment year, the interest expenditure is not wholly deducted against income under the head "Profits and gains of business or profession", so much of the interest expenditure as has not been so deducted, shall be carried forward to the following assessment year or assessment years, and it shall be allowed as a deduction against the profits and gains, if any, of any business or profession carried on by it and assessable for that assessment year to the extent of maximum allowable interest expenditure in accordance with sub-section (2): Provided that no interest expenditure shall be carried forward under this sub-section for more than eight assessment years immediately succeeding the assessment year for which the excess interest expenditure was first computed." (Emphasis Supplied) Article 24(4) of the India - Denmark DTAA is extracted below: "4. Except where the provisions of paragraph ....
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....Article 24 of the India-Denmark DTAA) pertains to the entire determination of Rs. 18.47 Crores u/s. 94B of the Act and is not limited to the net adjustment of Rs. 9.13 Crores reflected in the Final Order. 5. Without prejudice, and to avoid ambiguity, an additional ground has been raised through a petition dated 26.08.2025, seeking deletion of the entire disallowance including the suomotu disallowance, on the basis that Section 94B read with Article 24(4) of the India-Denmark DTAA is discriminatory. The said 'additional ground' is therefore not a new ground but a clarification/revision of a ground raised before the Ld. CIT(A), which was considered and adjudicated in Para 5.3.4-5.3.6 of the CIT(A) Order. 6. Without prejudice, the Appellant submits that all the relevant facts are on record, and the consideration of the additional ground, which is purely legal in nature, does not require calling for and/or further investigation of records. The Hon'ble Tribunal has wide powers to admit and adjudicate such additional grounds, as per the position of law fortified by the decision of the Hon'ble Supreme Court in National Thermal Power Co. Ltd [229 ITR 383]. The Appellant f....
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....rprise (i.e., the Indian entity), on the same conditions as if the interest is payable to an Indian tax resident. In other words, in the hands of the payer, there should not be any additional conditionalities posed for deductibility of interest payable to a tax resident of Denmark, in comparison with deductibility of interest payable to an Indian tax resident. 11. Article 24(4) of the India - Denmark DTAA embodies the principle of non-discrimination and ensures that payments made by an Indian resident to a resident of Denmark are not placed at a disadvantageous position vis-à-vis payments made to another Indian resident. In other words, the deductibility of interest expenditure cannot be curtailed merely on account of the fact that the recipient of the interest is a resident of Denmark. 12. The provisions of Section 94Bof the Act are therefore discriminatory in so far as they limit the deductibility of interest only where the same is paid to a non-resident AE, and not in cases where it is paid/ payable to a resident AE. In other words, the interest-limitation u/s. 94B of the Act restricts deduction when the payee is a non-resident (AE), whereas the same ded....
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....icted solely on the basis that the lender is a non-resident. Where both a domestic and a non-resident lender offer equivalent arm's length loans, disallowing interest for the non-resident lender constitutes a breach of Article 24. 15. This interpretative guidance directly supports the Appellant's position and further strengthens the Appellants argument that the provisions of section 94B of the Act are inherently discriminatory and therefore violative of Article 24(4) of the India- Denmark DTAA. 16. The Appellant further relies on the judicial precedents of Hon'ble Madras High Court in the case of Cognizant Technology Solutions India Pvt Ltd [180 taxmann.com 822] [refer pg. 118 of the case law compilation] and also on the Hon'ble Delhi Tribunal's decision in the case of and LinkedIn Technology Information Pvt Ltd [ITA No. 2492/DEL/2024] [refer pg. 157 of the case law compilation] which has followed the decisions of the Hon'ble Delhi High Court in the case of Herbalife International India Pvt Ltd [384 ITR 276] [refer pg. 54 of the case law compilation] and Mitsubishi Corporation India Pvt Ltd [463 ITR 335] [refer pg. 73 of the case law compilation]. All these de....
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....ra). The relevant paragraphs of the decision are reproduced below for ease of reference [refer pg. 70 of the case law compilation]: "56. The argument of the Revenue also overlooks the fact that the condition under which deductibility is disallowed in respect of payments to non-residents, is plainly different from that when made to a resident. u/s. 40 (a) (i), as it then stood, the allowability of the deduction of the payment to a non-resident mandatorily required deduction of TDS at the time of payment. On the other hand, payments to residents were neither subject to the condition of deduction of TDS nor, naturally, to the further consequence of disallowance of the payment as deduction. The expression 'under the same conditions' in Article 26 (3) of the DTAA clarifies the nature of the receipt and conditions of its deductibility. It is relatable not merely to the compliance requirement of deduction of TDS. The lack of parity in the allowing of the payment as deduction is what brings about the discrimination. The tested party is another resident Indian who transacts with a resident making payment and does not deduct TDS and therefore in whose case there would be no ....
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....he hon'ble jurisdictional Delhi High Court in the case of Herbalife India (P.) Ltd (supra) held in favour of the Assessee as under:... 15. Though for AY 2018-19, the provision of law provides for disallowance of payments of FTS made to non-resident as well as resident, to that extent section 40(a)(i) is no longer discriminatory. In view of the hon'ble Delhi High Court in the Herbalife (supra) as above however, the application of disallowance @100% u/s 40(a)(i) is held as discriminatory in so far as quantum of disallowance is concerned. The quantum of disallowance for resident is restricted to 30% u/s 40(a)(ia), and therefore to meet the requirement of discriminatory clause of Article 26(3) of DTAA, the disallowance for payment made to non-resident, without deducting TDS, should as well be restricted to 30% u/s 40(a)(i) of the Act. We have seen that the AO has made a disallowance @ 30% of remittance which is similar to the rate of disallowance @30% under the non-discriminatory clause of Article 26(3) of the DTAA, therefore there is no occasion to say that the revenue is prejudiced as far as quantum of disallowance is concerned. We are therefore of the considered vie....
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....]: "(6) This Article shall not apply to any provision of the laws of a Contracting State which: (a) is designed to prevent the avoidance or evasion of taxes, including measures designed to address thin capitalization or to ensure that taxes can be effectively collected or recovered; or (b) provides tax incentives to eligible taxpayers for expenditure on research or development, provided that a company that is a resident of one Contracting State and is wholly or partly owned by residents of the other State can access such incentives on the same terms and conditions as any other company that is a resident of the first-mentioned State; or (c) is agreed between the Contracting States through an Exchange of Notes." (Emphasis Supplied) 23. The Appellant submits that the provisions of Article 24(6) of the India - Australia DTAA are imperative in understanding the intention and the scope of the India - Denmark DTAA. The Appellant submits that the carve-out for thin capitalization under the India-Australia DTAA serves as a decisive indicator regarding the applicability of the non-discrimination clause in the absence of the exception. If thin c....
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....interest to the extent it constitutes "excess interest" as defined in section 94B(2) of the Act. 29. u/s. 94B(2) of the Act, the lower of (a) and (b) constitutes the "excess interest" for the purposes of section 94B(1) of the Act, which is computed as follows: a. The amount by which the total interest paid or payable exceeds 30% of EBITDA of the assessee for the relevant previous year; or b. The total interest paid or payable to non-resident during the relevant previous year; 30. The interest corresponding to such "excess interest" is not allowable as a deduction in computing total income, though any disallowed amount may be carried forward for deduction in subsequent years in accordance with the proviso to section 94B of the Act. EBITDA computation - TPO's consideration of incorrect Depreciation 31. For the purposes of section 94B of the Act, the Ld. TPO considered depreciation of Rs. 66.60 Crores directly from the face of the Profit and Loss Statement [refer pg. 4 of the paperbook], where depreciation is presented on a net basis, instead of the actual gross depreciation of Rs. 89.74 Crores debited to the Profit and Loss statem....
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....to make an entry in the books of account and although, under the law, a deduction must be allowed by the Income-tax Officer, the assessee will lose the right of claiming or will be debarred from being allowed that deduction. Whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter. The assessee who was maintaining accounts on the mercantile system was fully justified in claiming deduction of the sum of Rs. 1,49,776 being the amount of sales tax which it was liable under the law to pay during the relevant accounting year. It may be added that the liability remained intact even after the assessee had taken appeals to higher authorities or courts which failed. The appeal is consequently allowed and the judgment of the High Court is set aside. The question which was referred is answered in favour of the assessee and against the revenue. The assessee will be entitled to costs in this court and in the High Court." (Emphasis Supplied) 34. Accordin....
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....otu disallowed the same in the return of income, as evident from the Statement of Total Income and supporting schedules [Pg. 80 and 93 of the paperbook]. 39. Section 94B of the Act applies only where interest expenditure is "claimed as a deduction" in computing income under the head "Profits and Gains of Business or Profession." Interest which has already been disallowed - whether as capital in nature, or otherwise - and is not claimed as an allowable deduction, cannot again be subjected to limitation u/s. 94B of the Act. This position flows from the plain language of the statute and is fortified by the ruling of the Mumbai Bench of Hon'ble Tribunal in Beauty Etoile Pvt. Ltd. [TS-312-ITAT-2025(Mum)-TP]. The relevant excerpts of the said decision in the case of Beauty Etoile Pvt Ltd (supra) are reproduced below [refer pg. 102 of the case law compilation]: "9.2. From the above, it is noted that unless and until the expenditure on interest is deductible in computing the income chargeable under the head 'profits and gains of business or profession', the said expenditure cannot be disallowed u/s. 94B of the Act. What has not been claimed as deduction under the profit a....
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.... between the payer and the beneficial owner, the interest paid exceeds the amount that would have been agreed between independent parties, such excess shall be disregarded. In this context, the Ld. DR contended that the disallowance u/s. 94B of the Act constitutes such excess interest arising from the special relationship between associated enterprises, thereby attracting Article 12(7) in the present case. It was further argued that under the scheme of the India-Denmark DTAA, once Article 12(7) is invoked, the benefit of Article 24(4) relating to non-discrimination would not be available. Accordingly, since a disallowance u/s. 94B has been made in the instant case, Article 12(7) stands triggered and, as a result, Article 24(4) becomes wholly inapplicable. On the issue of computation, the Ld. DR submitted that the disallowance determined by the Ld. TPO is accurate and requires no modification. Specifically, with regard to EBITDA computation, it was contended that depreciation of INR 66.60 crores, as reflected in the Profit and Loss Account (refer page 4 of the paper-book), alone should be considered for the purpose of computing disallowance u/s. 94B. The higher depreciation figur....
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....le 12 of the India - Denmark DTAA. Article 12(7) of the India-Denmark DTAA applies only where the excessive portion of interest arises where the interest rate in light of the other terms of the loan deviate from what independent parties would have agreed under arm's-length conditions, due to a special relationship between the payer and the payee. The Appellant relies on Para 32 and 33 of the OECD Commentary (enclosed as Annexure 2 - Pg. 28 and 29) on Article 11 of the Model Convention (enclosed as Annexure 3 - Pg. 30), dealing with 'Interest', in this regard, which categorically clarifies the said position. The relevant extracts are reproduced below: "...32. The purpose of this paragraph is to restrict the operation of the provisions concerning the taxation of interest in cases where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid exceeds the amount which would have been agreed upon by the payer and the beneficial owner had they stipulated at arm's length. 33. It is clear from the text that for this clause to apply the interest held excessive must be due ....
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....said provisions cannot be extended to cover the adjustments prescribed under the domestic thin capitalisation provisions of Section 94B of the Act. 47. The domestic law provisions of Section 94B of the Act operate as a general limitation on interest deductibility by referencing it solely tothe resident payer's level of EBITDA, and not based on any deviation from arm's-length conditions. Consequently, the disallowance arising u/s. 94B of the Act is not attributable to a special relationship between the payer and the payee, which is the specific trigger envisaged in Article 12(7) of the India-Denmark DTAA. Further, considering such domestic law-based interest restrictions as covered by said exception under Article 12(7) of the DTAA which will render the non-discrimination clause under Article 24(4) of the India-Denmark DTAA otiose. 48. The Appellant relies on para 35 of the OECD Commentary on Article 11 (enclosed as Annexure 2 - Pg. 29), dealing with 'Interest', in this regard, which categorically clarifies the said position. The relevant extracts are reproduced below: "35. With regard to the taxation treatment to be applied to the excess part of the intere....
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.... TPO, vide the TP Order dated 21.07.2021, has accepted the interest on ECB to be at arm's length [refer pg. 59 and 60 of the paperbook]. Instead, only the provisions of section 94B of the Act have been applied, with no further adjustments made regarding the arm's length price. 51. In this regard, the Mumbai bench of the Hon'ble Tribunal categorically held that section 94B does not constitute a benchmarking method in the case of Beauty Etoile Pvt Ltd [TS-312-ITAT-2025Mum-TP] (see case law compilation, page 89). This matter is specifically addressed in paragraph 8 (page 99) and paragraph 8.2 (page 100). The relevant paragraphs of the decision of the Mumbai bench of the Hon'ble Tribunal are reproduced below: "8. On the contention of the assessee that restrictive provisions, of section 94B cannot be used for benchmarking exercise to arrive at ALP of an international transaction under the "other method", reference is made to Rule 10AB of the Income-tax Rules, 1961 (The Rules) which provides that the other method for determination of ALP shall be any method which takes into account the price which has been charged or paid or would have been charged or paid for the s....
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.... a permanent disallowance. 53. Reference is also drawn to the Memorandum explaining the provisions of the Finance Bill 2017(refer Pg 48 of the Case Law Compilation), wherein the legislative intent for the introduction of Section 94B of the Act is discussed. The said provisions are stated to have been introduced as a domestic thin capitalisation measure, in view of and in line with, the recommendations of the OECD's BEPS Action Plan 4 Report of 2015 (enclosed as Annexure 4 - Pg. 31). It is equally pertinent to note that the India-Denmark DTAA was signed on September 25, 1989, and was subsequently amended in 2015 to include provisions related to the exchange of information, through the protocol dated May 25, 2015 (enclosed as Annexure 5 - Pg. 33). Against this backdrop, it would be an overreach to contend that Article 12(7) of the India- Denmark DTAA concluded in 1989 could have contemplated or anticipated an excess-interest limitation based on thin-capitalization standards that were formulated decades later, more so, in the absence of any amendments/ clarifications in this regard, despite other changes being carried out in 2015. 54. Without prejudice to the above, ....
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....on of interest payments to a non-resident AE, while permitting deductions for the entire interest paid to a resident AE. Hence, the same is covered by the beneficial provisions of Article 24(4) of the India- Denmark DTAA read with Section 90 of the Act. iv. The Appellant's ECB-interest for the Impugned AY was subsequently agreed to be arms' length by the Revenue, under the Appellant's BAPA. 57. It is a settled position of law that the provisions the tax treaty are applicable over the provisions of the Act, to the extent that they are more beneficial to the Assessee, in terms of Section 90(2) of the Act. Reliance is placed on circular 333, Engineering Analysis Center of Excellence [432 ITR 471 -SC] and Azadi Bachao Andolan[263 ITR 706 - SC]. 58. Based on the above, the disallowance of Rs. 18.47 Crores u/s. 94B of the Act is discriminatory in nature and violative of Article 24(4) of the India-Denmark DTAA and accordingly the entire disallowance should be deleted. B. Subvention income 59. The Appellant respectfully submits that, the Ld. DR's contention that the addition of subvention income to the net block of assets would inflate depreciat....
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....he India-Denmark DTAA mandates that interest paid by an Indian enterprise to a Danish resident shall be deductible under the same conditions as if paid to an Indian resident. Section 94B restricts deductibility only where interest is paid to a non-resident AE and does not apply where interest is paid to a resident AE. Hence, it discriminates solely on the basis of residential status. Reliance was placed on OECD Commentary on Article 24 and judicial precedents including Herbalife International India Pvt. Ltd, Mitsubishi Corporation India Pvt. Ltd, Cognizant Technology Solutions India Pvt. Ltd and LinkedIn Technology Information Pvt. Ltd referred supra. It was contended that thin capitalization rules applying only to non-resident creditors fall foul of non-discrimination clauses unless specifically carved out (as in India-Australia DTAA)(Pg. 28 of Paper Book). 11. With regard to the 'Inapplicability of Article 12(7)' the ld.AR for the assessee argued that Article 12(7) applies only where interest exceeds arm's length due to special relationship. In the present case the TPO accepted the arm's length nature of ECB interest. No transfer pricing adjustment was made. Section 94B operat....