Trex Ltd., an Indian Company, on 01-04-2024 has borrowed 90 crores from M/s Refine Inc, a Company incorporated in Country S, at an interest rate of…

If an Indian company, being the borrower, incurs any expenditure by way of interest in respect of any debt issued by its non-resident associated enterprise (AE) and such interest exceeds 1crore, then, the interest paid or payable by such Indian company in excess of 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise, whichever is lower, shall not be allowed as deduction as per section 94B. Further, where the debt is 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, such debt shall be deemed to have been issued by an associated enterprise and limitation of interest deduction would be applicable. In the present case, since Bright Inc. holds 40% of voting power i.e., 26% or more of voting power in both Trex Ltd and Prestige Inc., Trex Ltd. and Prestige Inc. are deemed to be associated enterprises. Since loan of 90crores taken by Trex Ltd., an Indian company from Refine Inc, is guaranteed by Prestige Inc, an associated enterprise of Trex Ltd., such debt shall be deemed to have been issued by an associated enterprise and interest payable to Refine Inc shall be considered for the purpose of limitation of interest deduction under section 94B. Computation of interest to be allowed in the computation of income under the head profits and gains of business or profession of Trex Ltd. Particulars ₹ Net profit 18,00,00,000 Add: Interest already debited (80crores x 8%) 6,40,00,000 Depreciation 4,00,00,000 Income tax 2,70,00,000 EBITDA 31,10,00,000 Interest paid or payable by Trex Ltd. 6,40,00,000 Less: Excess interest - Lower of Interest paid or payable in excess of 30% of EBITDA -6,40,00,000 (-) ₹ 9,33,00,000 Nil Interest paid or payable to non-resident AE -6,40,00,000 Nil Interest disallowed during the P.Y. 2024-25 can be set-off to the extent of maximum allowable interest after reducing the current year interest i.e.,2,93,00,000 2,93,00,000 Interest allowable as deduction for P.Y. 2025-26 9,33,00,000 Note Since Bright Inc., an associated enterprise of Trex Ltd., has deposited a matching amount with Refine Inc., the interest payable by Trex Ltd. to Refine Inc. on loan of 80crores borrowed from Refine Inc. would be subject to limitation of interest deduction on the basis of this line of reasoning also.