Loading judgment…
No AI summary yet for this case.
Before: SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
PER PRABHASH SHANKAR [A.Μ.] :- The present appeal arising from the appellate order dated 17.05.2023 is filed by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)"] pertaining to the order u/s.201(1)/ 201(1A)of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 12.03.2020 as passed by the TDS Officer O , TDS Circle 1(2), Mumbai for the Assessment Year [A.Y.] 2019- 20.There is delay of 48 days in filing this appeal. In this regard, vide an affidavit on record, it is submitted that appellate order was not received by it on registered e-mail. It only came to its knowledge while browsing through the portal. We notice that the assessee did not delay deliberately but on account of bonafide reasons. Accordingly, in view of the judgement of the Hon'ble Supreme Court in the case of claim to have vested right in injustice being done because of a non- deliberate delay. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. Accordingly, the delay is hereby condoned. Now, we proceed to decide the grounds raised in the appeal on merits.
The grounds of appeal are as under:-
Ground No 1: Invalid delivery of CIT(A) order. On the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) ['learned CIT(A)'] from the National Faceless Appeal Centre erred in not communicating the order to the Appellant on registered email address of the Appellant and the order was only uploaded on the e-portal of department.
Ground No 2: Appellant not liable to deduct taxes under section 194LBC The learned CIT(A) erred on facts and in law in upholding the order of the learned AO that tax was required to be deducted at source under section 194LBC of the Act on the amount of excess interest spread paid by the Appellant to the originator.
Ground No 3: Levy of interest under section 201(1A) of the Act The CTT(A) erred on facts and in law in levying interest under section 201(1A) of the Act.
Brief facts of the case are that the assessee is a Securitisation Trust. It was set up by IDBI Trusteeship Services Limited (trustee) as a special purpose vehicle to raise monies to finance the acquisition of a loan portfolio of one Indian School Finance Company Private Limited (i.e. the originator) by issuing securities ('pass through certificates' or ‘PTCs') to investors. Pursuant to the assignment of loan portfolio, it became the legal owner of the receivables and received all cash flows from borrowers (i.e. principal repayment and interest). The cash received by the assessee was utilised in a pre-determined manner (known as the waterfall mechanism for utilisation of cash).The Excess Interest Spread (EIS') is the surplus remaining with it after meeting all other commitments, which is then paid to the Originator. The only issue involved in this case pertains to liability to deduct TDS under section 194LBC of the Act on EIS paid by the assessee to the originator.
According to the assessment order, the AO held that EIS was income arising on account of Securitisation of underlying assets and, therefore, distribution of such income by the assessee required deduction of tax at source under section 194LBC of the Act. He further held that MRR and EIS were interlinked because if MRR is not kept the question of EIS would not arise. Therefore, it ought to have deducted tax under section 194LBC of the Act on EIS paid to the originator. Since it was not done he levied interest u/s 201(1A) of the Act.
1 In the subsequent appeal, the ld.CIT(A) deliberated upon the issue and held that the payee holds investment in the form of Pass Through Certificates on which there is assured return in the form of interest @12%. EIS being a residue over and above the committed return and a variable factor depending upon the expenditure incurred by the appellant and not exceeding 3% of the amount of Portfolio assigned by the Originator. The appellant declares to have deducted tax on payments made to the Originator in the form of committed returns. The EIS spread is the payment on which TDS is not deducted. It was observed by him that the Act does not differentiate between these two streams of income which is received by the Originator by virtue of being an investor with differential rights. Therefore, the contention of the appellant that the payment by way of EIS is not exigible to TDS under 194LBC does not sound to be convincing. Once it becomes determined that there is an obligation to deduct Tax, the order under section 201(1) and 201(1A) has to be upheld in its entirety. Accordingly, the order of the AO was upheld.
In the course of hearing before us, the ld.AR contented that the assessee was following well laid guidelines of RBI in the matter as the process of securitisation is governed by the Reserve Bank of India ('RBI'); Guidelines on Securitisation of Standard Assets dated February 1, 2006; and Revision to Guidelines on Securitisation Transactions dated August 21, 2012.
1 One of the conditions mentioned in the aforesaid guidelines is that the originator must retain certain continuing stake in the loan portfolio assigned (i.e. the skin in the game). The originator has the choice to maintain the continuing stake either by way of subscribing to PTCs like any other investor or in any other manner such as providing cash collaterals, over collateralisation of receivables, etc. In the present case, the originator maintained the continuing stake by providing cash collateral. In other words, it did not subscribe to the PTCs issued by the Appellant.
2 It is further submitted that Section 194LBC of the Act casts an obligation for deduction of tax at source if the following two conditions are satisfied: • The income is payable to an investor; and • The income is in respect of investment in the securitisation trust.
3 It is submitted that in the present case, the originator has not subscribed to any PTCs issued by the trust and, hence, it cannot be regarded as an investor in the trust. The originator has fulfilled the MRR by way of cash collateral. EIS is the residual amount that is paid over to the originator and is not in respect of any investment in the securitization trust. If there is any surplus left with the ST, such surplus or EIS flows to the Originator. EIS is paid even if there is no investment made by the originator in the securitization trust, as in the present case. The MRR requirement was introduced by RBI for the first time in the year 2012 and prior to that there was no requirement for the originator to comply with MRR. Even then, that is, prior to 2012, EIS was paid to the originator irrespective of whether or not the originator subscribed to the PTCs. This shows that the payment of EIS to the originator is completely independent of the investment in the securitization trust. Therefore, there would be no obligation on the assessee to deduct tax at source from the payment of EIS to the originator. The ld.AR has also placed reliance on various decisions of the ITAT, Mumbai Bench claiming that the issue in hand is squarely covered in favour of the assessee by these decisions as well since facts are identical. The ld.DR has relied on the orders of lower authorities.
We have carefully considered all the relevant facts of the case, perused the contents of the orders, materials relied upon by the assessee and the rival submissions. We find sufficient merits in the contentions of the ld.AR. It is an admitted fact that in this case, the Originator has neither subscribed to PTC nor had made any investment. It only provided cash collateral. We find that the facts are identical as in the case of M/s Vivriti Cibus 013 2017 v. ITO (TDS)- 2(3)(3) Mumbai [ITA No. 3171/Mum/2022]. Therefore, the decision of the Tribunal in the case of Vivriti Cibus (supra) rendered in identical facts and circumstances, is applicable to the facts and circumstances of the present case. In that case, the Tribunal had deleted the demand raised upon the assessee under section 201(1A) of the Act for non-compliance with the provision of section 194LBC of the Act holding as under:
"
From the above definitions it can be inferred that securities debt instrument basically means any certificate of instrument is issued by special purpose vehicle, it, the securitisation trust which possesses any debt or receivable. We have also gone through RBI guidelines en security regulations formulated in 2012, wherein it has referred to Minimum Retention Requirement (MRR) prescribing the requirement for the originators to have certain minimum financial commitment whenever these loans are securitized. The originator is required to retain certain interest in the loan portfolio ever collateralization, i.e. collateralizing of excess receivables etc. which has been provided in the following manner in this case
Ergo, once the originator, (AMPL) is not holding any PTC / I, it cannot be regarded as investor as per the terms defined in the aforesaid provisions elaborated above. It is only in a situation where the originator has subscribed to the PTCs of the securitization trust and then only it can be regarded as an investor. In case where minimum retention requirement commitment has met via any other permissible alternator, the originator does not have hold in instrument in the securitization trust and therefore, cannot be reckoned as investor. Once the originator has not subscribed in PTCs, but the MRR is months) maintained via cash collateral and in the form of collateralizing of excess receivables, then the first condition provided in Section 194LBC is not fulfilled and therefore, in our opinion there cannot be any obligation to deduct tax in terms of said Section 18. The other condition as provided in Section 194LBC which is required to be fulfilled is that the income in the hands of AMPL should be in respect of investment in the securitization trust. As observed by us hereinabove, the cash flow received was to be utilized in the manner provided in the water flow mechanism of the trustee, the Excess Interest Spread (EIS) is the residual amount that flows to the originator and is not pursuant to any investment in the securitization trust or return of investment so made. Even assuming AMPL is to be treated as an investor, then also no tax was required to be deducted u/s 194LBC on the EIS as the said payment was not in respect of investment made by AMPL in the PTCs issued by the assessee. The surplus here especially represents a reward earned by AMPL that its effort of creating pool of loan receivables which is capable of assigning. The MRR requirement was introduced by RBI for the first time in the year 2012 and prior to such there was no requirement for the originator to comply with MRR and even for such bills prior to2012 EIS was paid to the originator. This further corroborates that EIS cannot be regarded as income in respect of investment. Thus, here in this case second condition is also not fulfilled and accordingly we hold that the TDS liability u/s 194LBC is not applicable on EIS."
The other condition as provided in Section 194LBC which is required to be fulfilled is that the income in the hands of AMPL should be in respect of investment in the securitization trust. As observed by us hereinabove, the cash flow received was to be utilized in the manner provided in the water flow mechanism of the trustee, the Excess Interest Spread (EIS) is the residual amount that flows to the originator and is not pursuant to any investment in the securitization trust or return of investment so made. Even assuming AMPL is to be treated as an investor, then also no tax was required to be deducted u/s.194LBC on the EIS as the said payment was not in respect of investment made by AMPL in the PTCs issued by the assessee. The surplus here especially represents a reward earned by AMPL that its effort of creating pool of loan receivables which is capable of assigning. The MRR requirement was introduced by RBI for the first time in the year 2012 and prior to such there was no requirement for the originator to comply with MRR and even for such bills prior to 2012 EIS was paid to the originator. This further corroborates that EIS cannot be regarded as income in respect of investment. Thus, here in this case second condition is also not fulfilled and accordingly we hold that the TDS liability u/s.194LBC is not applicable on EIS.
Our aforesaid finding is based on interpretation of the language provided in the statute where the liability to deduct TDS has been provided, only, where any income is payable to an investor in respect of investment in secutarisation trust. The investor' has been defined to mean a person who is a holder of any securitised debt instrument or securities or security receipts issued by the securitization trust. Once AMPL is not an investor and the conditions mentioned in Section 194LBC has not met, then the liability to deduct TDS does not trigger.
1 Respectfully following the above decision of the Tribunal in the case of Vivriti Cibus (supra), we hold that the provisions of section 194LBC of the Act would not be attracted in the facts and circumstances of the present case. Therefore, the assessee is held to be not under obligation to withhold tax from payment of EIS to the Originator. Accordingly, we set aside the appellate order and also demand under section 201(1)/201(1A) of the Act, are deleted.
In the result, appeal of the assessee is allowed. Order pronounced in the open court on 06/03/2025. SANDEEP GOSAIN (न्यायिक सदस्य /JUDICIAL MEMBER) Place: मुंबई/Mumbai दिनांक / Date 06.03.2025 Lubhna Shaikh / Steno PRABHASH SHANKAR (लेखाकारसदस्य/ACCOUNTANT MEMBER) आदेश की प्रतिलिपि अग्रेषित/