ITAT Holds Section 94B Disallowance Discriminatory Under India–Denmark DTAA; Deletes Entire Interest Limitation Adjustment

The Chennai Tribunal in the case of Vestas Wind Technology India Pvt. Ltd. v. ITO* has held that disallowance u/s 94B of the Incometax Act, 1961 (“the Act”) cannot be sustained since it violates the non-discrimination clause contained in Article 24(4) of the India– Denmark Double Taxation Avoidance Agreement (“DTAA”). The Tribunal observed that Section 94B imposes interest limitation only in respect of borrowings from non-resident associated enterprises (“AEs”), whereas no similar restriction applies to borrowings from resident AEs. Accordingly, such differential treatment based solely on the residence of the lender is discriminatory and overridden by the DTAA.

The Tribunal further held that Article 12(7) of the India–Denmark DTAA, which deals with non-arm’s length interest payments, was not applicable since the Transfer Pricing Officer (“TPO”) had accepted the arm’s length nature of the ECB interest and no transfer pricing adjustment had been made. Consequently, the entire disallowance under Section 94B was directed to be deleted.

FACTS OF THE CASE

• Vestas Wind Technology India Private Limited (“Vestas” or “the Assessee”), a wholly-owned subsidiary of a Danish group entity, had availed External Commercial Borrowings (“ECBs”) from its Danish AE and incurred interest expenditure of approximately INR 55.83 crore during AY 2018-19.
• The Assessee made a suo motu disallowance of INR 9.34 crore under Section 94B while reserving its right to challenge the applicability of the provision.
• The matter was referred to the TPO for determination of arm’s length price. The TPO accepted that the ECB interest was at arm’s length and did not propose any transfer pricing adjustment. However, the TPO recomputed the disallowance u/s 94B at INR 18.47 crore by modifying the EBITDA computation and including certain interest components which the Assessee had already disallowed. The Assessing Officer incorporated the enhanced disallowance in the assessment order.
• Before the Commissioner (Appeals), the Assessee contended that Section 94B was overridden by Article 24(4) of the India–Denmark DTAA. The CIT(A), however, rejected the contention and held that Article 12(7) of the DTAA excluded the application of the nondiscrimination provision.
• Aggrieved, the Assessee preferred an appeal before the Chennai Tribunal.
• The Assessee argued that Article 24(4) of the India–Denmark DTAA requires interest paid to a Danish resident to be deductible under the same conditions as interest paid to an Indian resident. Since Section 94B restricts deduction only where interest is paid to a non-resident AE, while no corresponding limitation exists for resident AE borrowings, the provision results in discriminatory treatment based solely on the residence of the lender. The Assessee relied upon OECD Commentary as well as judicial precedents including Herbalife International India Pvt. Ltd. ¹ , Mitsubishi Corporation India Pvt. Ltd. ² and Cognizant Technology Solutions India Pvt. Ltd. ³ .
• The Revenue contended that Article 12(7) of the DTAA applied since the disallowance under Section 94B represented “excess interest” arising from a special relationship between associated enterprises. Accordingly, the benefit of Article 24(4) was argued to be unavailable.
• Without prejudice, the Assessee also challenged the computation adopted by the TPO, contending that:
  • EBITDA should have been computed using actual depreciation rather than net depreciation after adjusting subvention income; and
  • Notional Ind AS unwinding charges and capitalised interest already disallowed in the return could not be included while computing “total interest paid or payable” under Section 94B.

OBSERVATIONS OF CHENNAI ITAT

• The Tribunal held that Article 24(4) of the India–Denmark DTAA clearly mandates parity in deductibility of interest payments made to residents and non-residents, except where Article 12(7) applies. Since Section 94B applies exclusively to borrowings from non-resident AEs and no similar restriction exists for resident AE borrowings, the provision results in differential treatment based on residence. Relying upon earlier judicial precedents, the Tribunal held that such differential deductibility conditions violate the non-discrimination clause of the DTAA.
• The Tribunal rejected the Revenue’s reliance on Article 12(7), observing that the said provision applies only where interest exceeds arm’s length standards due to a special relationship between the parties. In the present case, the TPO had accepted the arm’s length nature of the ECB interest and had not made any transfer pricing adjustment. The disallowance arose solely on account of the EBITDAbased limitation prescribed under Section 94B. Accordingly, Article 12(7) was held to be inapplicable.
• The Tribunal further noted that certain tax treaties, such as the India– Australia DTAA, contain an express carve-out permitting application of thin-capitalisation rules notwithstanding the non-discrimination article. In the absence of any such carve-out in the India–Denmark DTAA, the protection under Article 24(4) continued to apply. Consequently, the entire disallowance of INR 18.47 crore under Section 94B was directed to be deleted.
• While the Tribunal allowed the appeal on the legal issue, it also observed that the Assessee’s alternative computation arguments were meritorious. It noted that EBITDA should reflect actual depreciation and not accounting netting adjustments, and that only deductible interest can be considered while applying Section 94B. Accordingly, notional Ind AS unwinding charges and capitalised interest already disallowed could not be included in the computation

AURTUS COMMENTS

The ruling is significant for taxpayers availing cross-border funding from associated enterprises in jurisdictions whose DTAAs contain robust nondiscrimination provisions similar to Article 24(4) of the India–Denmark DTAA. The Tribunal has recognised that treaty protection can override domestic interest deduction limitation rules where such rules impose less favourable deductibility conditions solely because the lender is a non-resident.

Footnotes

1. CIT vs. Herbalife International India (P.) Ltd. [2016] 69 taxmann.com 205 (Delhi)

2. CIT vs. Mitsubishi Corporation India (P.) Ltd. [2024] 159 taxmann.com 539 (Delhi)

3. Cognizant Technology Solutions India (P.) Ltd. vs. CIT [2025] 180 taxmann.com 822 (Madras)