ITO Section 106A | Restriction on deduction of profit on debt payable to associated enterprise.

ITO Section 106A

Restriction on deduction of profit on debt payable to associated enterprise.-

(1) Subject to sections 108 and 109, a part of deduction for foreign profit on debt claimed by a foreign-controlled resident company(other than an insurance company, or a banking company) during a tax year, shall be disallowed according to the following formula, namely:-

[B] – [(A+B) x 0.15]

where

• A is the taxable income before depreciation and amortization; and
• B is the foreign profit on debt claimed as deduction (2) This section shall not apply to a foreign-controlled resident company if the total foreign profit on debt claimed as deduction is less than ten million rupees for a tax year.

(3) Where in computing the taxable income for a tax year, full effect cannot be given to a deduction for foreign profit on debt, the excessive amount shall be added to the amount of foreign profit on debt for the following tax year and shall be treated to be part of that deduction, or if there is no such deduction for that tax year, be treated to be the deduction for that tax year, be treated to be the deduction for that tax year and so on for three tax years.

(4) Notwithstanding the provisions of section 106, where deduction of foreign profit on debt is disallowed under this section and also under section 106, the disallowed amount shall be the higher of the disallowed amount under this section and section 106.

(5) This section shall apply in respect of foreign profit on debt accrued with effect from the first day of July, 2020, ever if debts were contracted before the first day of July, 2020.

(6) In this section-

(a) “foreign-controlled resident company” means a resident company in which fifty per cent or more of the underlying ownership of the company is held by a non-resident person either alone or together with an associate or association; and

(b) “foreign profit on debt” means interest paid or payable to a nonresident person or an associate of the foreign-controlled resident company and includes-

• (i) interest on all forms of debt;
• (ii) payments made which are economically equivalent to interest; (i) expenses incurred in connection with the raising of finance; (ii) payments under profit participating loans;
• (iii) imputed interest on instruments such as convertible bonds and zero coupon bonds;
• (iv) amounts under alternative financing arrangements such as Islamic finance;
• (v) the finance cost element of finance lease payments;
• (vi) capitalized interest included in the balance sheet value of related asset, or the amortisation of capitalised interest;
• (vii) amounts measured by reference to a funding return under transfer pricing rules;
• (viii) where applicable, national interest amounts under derivative instruments or hedging arrangements related to an entity’s borrowings;
• (ix) certain foreign exchange gains and losses on borrowings and instruments connected with the raising of finance;
• (x) guarantee fees with respect to financing arrangements; and
• (xi) arrangements fee and similar cost related to the borrowing funds.]