India: Thin capitalization rules violated non-discrimination clause under Denmark treaty (tribunal decision)
Thin capitalization rules only apply to payments made to nonresident associated enterprises.
The Chennai Bench of the Income-tax Appellate Tribunal held that the thin capitalization rules under section 94B of the Income-tax Act, 1961 violated the non-discrimination clause under the India-Denmark income tax treaty.
The tribunal held that section 94B discriminates based on the tax residency of the lender because the restriction on interest deductibility applies only to payments made to nonresident associated enterprises. The limited exception to the non-discrimination clause under the treaty applies when interest is excessive due to a deviation from the arm’s length standard. However, in the instant case, the interest was accepted to be at arm’s length by the tax authority, and the disallowance arose solely due to the EBITDA threshold. In the absence of a specific carve out under the treaty for the application of thin capitalization rules (as exists under India-Australia income tax treaty), the tax authority could not apply the thin capitalization rules because their application was discriminatory.
The case is: Vestas Wind Technology India Private Limited v. ITO (ITA No. 320/Chny/2025)
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