Taxation Times

March 2023

UJA | Taxation Times
3Case Laws
4Circulars & Notifications February 2023
5Tax Compliance April 2023
6Tax News from around the World
by Neha Raheja
by Neha Raheja

Partner, Direct Tax

In the era of globalisation, India cannot remain aloof from developments across the globe. Globalisation has led to faster integration of global markets and economies,  impacting countries’ income tax regimes. In the same light, international tax laws have become key pillars in supporting the growth of global economy, as well as in protecting local economy.
In this month’s Taxation Times, we cover:

  •  An article encompassing the concept of thin capitalization and its implications under Income Tax Act, 1961.
  • Case Laws from various courts & jurisdictions;
  • Tax Compliance Calendar – April 2023;
  • Circulars & Notifications – March 2023;
  • Tax News from around the world

We hope that you find this month’s edition of the Taxation Times useful. In case you have any feedback or need us to include any information to make this issue more informative, please feel free to write to us at
A Very Happy New Year 2023-2024 for Finance Enthusiasts!

Happy Reading!
Best Regards,
UJA Tax Team

Thin Capitalisation: The Multinational Tax Avoidance Strategy

The debt and equity have been the fundamental sources of raising funds in any business. Although it is ideal for any business entity to find the right financing mix between debt and equity, but due to certain circumstances, a company may end up being highly leveraged and with a thin capital structure.

This situation in which an entity is financed through a relatively high level of debt compared to equity is referred as ‘thin capitalisation’. It refers to a situation where an entity has a high proportion of debt as compared to equity.

As a result of such high debt, the taxpayer can claim excessive deduction of interest payment on such debt from their taxable income. This is more tax friendly compared to paying a dividend on the equity, which cannot be claimed as a tax-deductible expense. For this reason, debt is often considered to be a more tax efficient method of financing vis-a-vis equity, and often leads to thin capitalization.

A. Now we shall look into how the corporates take advantage of such financing:
  • Multinational entities (MNEs) have actively contributed to the global value chain. These MNEs that have established affiliates or subsidiary companies transacting cross-borders. Let us take an instance of an MNE in India say Company X, which has an associated enterprise (AE), Company Y in a lower or nil tax rated country say UAE. Company X finances itself heavily in debt from Company Y. X can take benefit of the interest payment to Y by claiming it as a tax-deductible expense. Company Y would not be taxed on the interest income received, being set up in a Nil corporate taxed country.
  • Such interest expense deductibility may lead to double non-taxation in both their respective jurisdictions that the parent entity and subsidiaries belong to.
B. Measures taken Internationally to limit the deduction on interest
  • To address this concern, over 125 jurisdictions have adopted the Base erosion and profit shifting (BEPS) initiative taken by the Organization for Economic Co-operation and Development (OECD) with the G20 countries to curb these tax abusive measures.
  • Action Plan 4 under BEPS addresses the ‘Limitation on Interest Deduction’ This action plan was initiated to fluid the money and create a balance between the debt and equity of a controlled entity. ‘Certain methods adopted by different jurisdictions to curb thin capitalization are:
    • Fixed ratios that limit the level of interest expense or debt in the entity with a fixed ratio of debt or equity, interest or earnings therein.
    • Arm’s length basis test that compares the interest rate of such debts of an entity with that of the company charging such interest to a third party.
    • Rules for specific percentage for interest payment that is disallowed irrespective of the nature of payment or the recipient. (Applicable in India, Germany, Luxemburg, Malaysia, UK, USA). The specific percentage ranges from 10 to 50 %.
    • Certain targeted anti-avoidance rules that disallow interest on specific transactions.
C. Induction in Income Tax Act
  • To meet the BEPS commitment, a new Section 94B has been incorporated in the Finance Act, 2017 to regulate Indian laws as per the recommendations made by the OECD under Action Plan 4.
  • Section 94B reads as “where an Indian company, or a PE of a foreign company in India, being the borrower incurs any expenditure by way of interest or of similar nature exceeding one crore rupees which is deductible in computing income chargeable under the head ‘Profits and gains of business or profession’ in respect of any debt issued by a non-resident being an associated enterprise of such borrower, the interest shall not be deductible in computation of income under the said head to the extent that it arises from excess interest. Provided, that where the debt is issued by a lender which is not associated but an AE 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 AE’”.
  • The allowance of interest paid given under this section was – total interest payable in excess of 30% EBITDA (earnings before interest, taxes, depreciation and amortization) of the borrower in the previous year or the interest paid to the AE for that previous year, whichever among these is lesser is taken into account.
  • Practical Illustration
    Let’s take an instance, Company ABC Ltd. has an EBIDTA for the year ending F.Y. 2021-22 of Rs. 12 Cr and a Total interest payable (to Associated Enterprise (AE) and Non-associated Enterprise (Non AE)) is Rs. 5 cr, out of which interest payable to its AE is 1.6 cr.

The amount to be disallowed while calculating the taxable income of ABC Ltd. will be

ParticularsAmount (Rs. In Crores)
Total Interest (AE and Non AE)5
(-) 30% of EBIDTA (30% of 12 cr)(3.6)
Total interest payable to AE1.6
Whichever is lower needs to disallowed1.4
  • Carry Forward of unutilized Deductible Interest:
    The excess interest so disallowed would be allowed to be carried forward for eight assessment years and be set off against the profits of subsequent years, subject to the maximum allowable interest expenditure in any particular year.The Act does not specify the order of utilization of brought forward interest, however, it is preferred to utilize the higher amounts of brought forward interest first.
  • Cases where Section 94B is not applicable:
    There are two exceptions where the disallowance u/s 94B (1) towards excess interest will not be applicable. Sub-section (1A) and sub-section (3) of section 94B provides the said exceptions as below:
    • This section shall not apply to interest in respect of debt issued by person engaged in the banking business.
    • This section shall not apply to an Indian company or permeant establishment of a foreign company engaged in the business of banking or insurance.
    • For example: Citigroup (USA) has a 100% wholly owned subsidiary in India named Citibank (engaged in banking business in India). Citigroup (USA) gives a loan of Rs. 1,000 crores to Citibank India for its banking operations on which Citibank India incurs interest cost of Rs. 80 crores. EBITDA of Citibank India is Rs. 200 crores. 30% of EBITDA is Rs. 60 crores. Thus, the excess interest of Rs. 20 crores (80-60) is subject to disallowance u/s 94B (1). But, due to application of sub-section (3), the disallowance under section 94B(1) shall not be called for.

1. The threshold limit for the non-deductibility of interest expense may affect the private equity funds and angel investments in India where the investors have to be re-assured to invest in Indian entities considering the disallowance of interest payments, criteria in carrying forward and setting off against future profits. 

2. As a result of section 94B, the foreign investors who were earlier making huge investments in Indian companies including startups in the form of debt will have to re-think their strategies and re-design investment strategies in such a manner that disallowance of excess interest under section 94B is not attracted. Further, it is to be noted that only Indian companies or PE of a foreign company in India is covered under ‘thin capitalization’ provisions. Presently, Indian partnership firms and LLPs are not covered by section 94B (unless these are PE of a foreign company) so we might see alteration in organizational structure of Indian companies to LLPs to save from the heat of the provisions of section 94B.

Case Laws

Social Security Scheme of GICEA v/s Commissioner of Income Tax (Exemptions) [2023] 147 283 (Gujarat)
Section: 12A read with section 119 of the Income Tax Act 1961

Facts: The assessee is a public charitable trust registered with the charity commissioner as well as income tax authorities. For the relevant year the assessee trust obtained audit report from a chartered accountant but made an inadvertent mistake of not filing the audit report along with the return of income.

In absence of any audit report the Central Processing Centre (CPC) had not granted exemption under section 11 of the Act which otherwise was available to it since many years and raised demand. The assessee trust filed a rectification application under section 154 of the Income Tax Act, 1961 against CPC but the same was rejected.

The assessee trust filed an application before Central Board of Direct Taxes (CBDT) to condone the delay in filing the audit report in Form 10B but the application was rejected by the CBDT.

Aggrieved by the order passed by the CBDT the assessee trust filed an appeal before Hon. High Court.

Held: Hon. High Court held that, Section 12A, read with section 119, of the Income-tax Act, 1961 – Charitable trust – Registration Procedure (Condonation of delay in filing Form 10B). Assessee a Public Charitable Trust had been filing returns of income in time along with audit report under section 12A(1)(B). For relevant assessment year, assessee obtained audit report from Chartered Accountant well before time, however, same could not be uploaded along with return of income inadvertently – In absence of any audit report, Central Processing Centre had not granted exemption under section 11 which otherwise was available to it since many years and resultantly demand was raised – Assessee therefore filed a rectification application under section 154, seeking to place on record audit report to Central Processing Centre but same was rejected on ground that Form No. 10B audit report, was not filed in time – Assessee filed an application before CBDT to condone delay in filing Form No. 10B audit report, however same was rejected – Whether since assessee was a public charitable trust for past 30 years and substantially satisfied conditions for availing exemption under section 11 it should not be denied exemption merely on bar of limitation especially when legislature had conferred wide discretionary powers to condone such delay – Held, yes – Whether thus, impugned order of rectification under section 154 was quashed and set aside and application for condonation of delay filed by assessee before respondent was allowed

In Favour of: The Assessee.

The Commissioner of Income Tax v/s Ad2pro Media Solutions (P) Ltd. [2023] 148 226 (Karnataka)
Section: 9 read with Articles 12 and 16 of India-USA DTAA

Facts: The assessee is a private limited company engaged in the business of providing graphic design solutions for advertising and marketing communications. On verification of Form 15CA data, it was observed that the assessee remitted huge amounts to its parent company in USA and TDS was not deducted on the same. During the assessment proceedings the Ld. Assessing Officer passed an order holding that the payments made by the assessee for marketing services to USA company is taxable in India as Fees for Technical Services (FTS)

Aggrieved by the assessment order passed by the Ld. Assessing Officer the assessee an appeal before Commissioner of Income Tax (Appeals) which granted the partial relief to the assesee.

The assessee filed an appeal before Income Tax Appellate Tribunal (ITAT) which passed an order favouring the assessee. The Income department chalanged the order of ITAT before Hon. High Court. 

Held: Where assessee made payments to US Company for marketing services and scope of work was to generate customer leads using/subscribing customer data base, market research, analysis, and online research data and that service provider had not made available any technical knowledge, experience, knowhow, process or develop and transfer technical plan or technical design, in view of admitted fact that services were utilized in USA, payments so made could not be considered as royalty or FTS and hence, no TDS was required to be deducted.

In Favour of: The Assessee

Credit Suisse AG v/s Deputy Commissioner of Income Tax [2023] 148 409 (Mumbai - Trib.)
Section: 92C of the Income Tax Act, 1961 read with articles 7 and 11 of India-Switzerland DTAA

Facts: The assessee is a company incorporated in Switzerland and is a tax resident of Switzerland. The Singapore branch office of the assessee, i.e. Credit Suisse Singapore Branch (“CSSB”) is registered with the Securities and Exchange Board of India (“SEBI”) as a Foreign Institutional Investor (“FII”) and conducts portfolio investments in Indian securities in its capacity as a SEBI registered FII. The assessee has a bank branch office in Mumbai, i.e. Credit Suisse Mumbai Branch (“CSMB”), which is registered with the Reserve Bank of India and undertaking Banking Operations in India. Since the assessee is a tax resident of Switzerland, the assessee had opted for benefit of the India-Swiss Confederation Double Taxation Avoidance Agreement (“Indo-Swiss DTAA”) in respect of income earned by CSSB and CSMB. The Indian branch office, i.e., CSMB, constitutes a fixed place Permanent Establishment (“PE”) of the assessee in India as per Article 5 and it has offered its income under Article 7 of the Indo-Swiss DTAA.

The Ld. Assessing Officer passed an assessment order by disallowing the interest paid by the PE to the head office and other branches etc. is an interest sourced in India and is liable to be taxed under source rule in India.

Aggrieved by the assessment order the assessee filed an appeal before CIT(A), which in turn upheld the order of the Ld. Assessing Officer.

Aggrieved by the order passed by CIT(A) the assessee filed an appeal before the Hon. Tribunal. 

Held: Section 9 of the Income-tax Act, 1961, read with articles 7 and 11 of the DTAA between India and Switzerland – Income – Deemed to accrue or arise in India (Interest – Interest paid by branch to head office). Assessee had a bank branch office in India which constituted its PE – Indian AE procured loans from Singapore branch and London branch of assessee – In relevant assessment year, Indian PE paid interest to both branches – Assessee filed return and claimed said interest paid as deduction while computing business profits on Indian PE – Assessing Officer denied said claim on ground that income attributable to head office/overseas branches could not be considered as expense as there was no concept of income from self and thus, was to be taxed in hands of assessee – Whether fiction of hypothetical independence of PE and head office/overseas branch was to be restricted only for computation of profit attributable to PE – Whether thus, interest paid by Indian branch to head office/overseas branch would not be taxable in India and independent fiction approach could not be used for purpose of determining total profits of enterprise as a whole

In Favour of:  The Assessee

Circulars & Notifications March 2023


CBDT notifies powers, functions and jurisdiction of income-tax authorities to facilitate conduct of E-Appeal proceedings

Press Release

a. Roll out of ‘AIS for Taxpayer’ Mobile App

b. 72,42,156 is the highest number of ITR filing in a day on 31st July 2022

c. Direct Tax Collections for F.Y. 2022-23 up to 10th March 2023

d. CBDT’s e-Verification Scheme harnesses information technology to facilitate voluntary compliance

Tax Compliance April 2023

14 April 2023

  • Due date for issue of TDS Certificate for tax deducted under section 194-IA/194-IB /194M in the month of February, 2023

30 April 2023

  • Due date for furnishing of chllan-cum statement in respect of tax deducted under section 194-IA/194-IB /194M in the month of March, 2023 
  • Due date for deposit of Tax deducted by an assessee other than an office of the Government for the month of March, 2023
  • Due date for e-filing of a declaration in Form No. 61 containing particulars of Form No. 60 received during the period October 1, 2022 to March 31, 2023
  • Due date for uploading declarations received from recipients in Form. 15G/15H during the quarter ending March, 2023

Tax News from Around the World

France eyes tax incentives for green industry investment

What’s in Biden’s budget: taxes on buybacks, rail safety, childcare

Australia report calls for tax, migration reforms as productivity stalls

UK finance minister Hunt says he can’t rush into tax cuts
HSBC turns Silicon Valley Bank calamity into gold
Ukraine Parliament Approves Multilateral Agreement on Automatic Exchange of Financial Account Information
Kenya’s Cabinet Approves BEPS MLI

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