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Facts
The assessee, a Securitisation Trust, paid 'Excess Interest Spread' (EIS) to Originators without deducting TDS. The AO held this violated Section 194LBC of the Income Tax Act and levied interest under Section 201(1A). The CIT(A) upheld the AO's order.
Held
The Tribunal referred to earlier decisions in similar cases where it was held that any surplus distributed to the Originator is not liable to TDS. The key conditions for Section 194LBC, namely the payment being to an investor and in respect of investment in the securitization trust, were not met.
Key Issues
Whether the assessee was liable to deduct TDS under Section 194LBC on the 'Excess Interest Spread' paid to the Originator, and consequently, whether interest under Section 201(1A) was rightly levied.
Sections Cited
201, 201(1A), 194LBC, 115TCA, 139
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Before: SHRI ANIKESH BANERJEE & SHRI PRABHASH SHANKAR
Date of Hearing 24.12.2025 Date of Pronouncement 09.02.2026 आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The present appeal arising from the appellate order dated 29.08.2025 is preferred by the assessee against the order passed by the Learned Commissioner of Income-tax, Appeal, ADDL/JCIT(A) Bhopal [hereinafter referred to as “CIT(A)”] pertaining to order passed u/s. 201/201(1A) of the Income-tax Act, 1961 [hereinafter referred to as “Act”] dated 28.02.2024 for the Assessment Year [A.Y.] 2017-18. P a g e | 2 A.Y. 2017-18 Hebros AHL IFMR Capital 2014 2. The grounds of appeal are as under:- Ground No. 1: No opportunity of personal hearing via video conferencing The learned CIT(A) erred in law and on facts by not providing the opportunity of personal hearing before disposing off the appeal even when the same was requested by the Appellant. Ground No 2: Appellant being treated as ‘assessee in default’ The learned CIT(A) erred on facts and in law in dismissing the appeal filed against the order passed under section 201/201(1A) (‘the order’) of the Income-tax, Act 1961 (‘the Act’) of the Income-tax officer (TDS)-1(2)(3) [‘learned AO’] and by treating the Appellant as ‘assessee in default". Ground No 3: Non-applicability of section 194LBC of the Act 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. Without prejudice to the above, the learned CIT(A) ought to have held that, since the payee had furnished its income-tax return (‘ITR’) under section 139 of the Act and had taken into account such sum for computing income in its ITR and had also paid the tax due on the income declared by them in such ITR, the Appellant could not be regarded as an assessee in default. Ground No 4: Levy of interest under section 201(1A) of the Act The CIT(A) erred on facts and in law in levying interest under section 201(1A) of the Act.
3. Briefly stated facts of the case are that the assessee is a Securitisation Trust under the trusteeship of M/s Catalyst Trusteeship Ltd., engaged in raising monies to fund acquisition of loan portfolio from financial institutions (i.e. the Originators). During the year under consideration, it had paid Rs. 61,55,769/- to the Originators under the P a g e | 3 A.Y. 2017-18 Hebros AHL IFMR Capital 2014 head ‘Excess Interest Spread’ (EIS) without deducting TDS. The AO, vide order u/s 201(1)/201(1A) of the Act, held that non-deduction of TDS on the payment of EIS by the assessee was in violation of the provisions of section 194LBC of the Act. In the subsequent appeal, the ld.CIT(A) observed that the impugned order of the AO u/s 201(1)/ 201(1A) was a speaking order, which elaborately discussed the meaning of securitisation, originator, investor, special purpose vehicle, EIS and the provisions section 194LBC, section 115TCA of the Act. The AO had also discussed 2012 and 2006 guidelines of the RBI in relation to payment of EIS to originators. The AO also provided opportunity to the assessee to furnish Form No. 26A in pursuance of rule 31ABC of Income tax Rule 1962, which the assessee failed to submit. The order of the AO was sustained dismissing its appeal.
Before us, the ld.AR argued that exactly similar case has been decided in a plethora of cases by the coordinate bench of ITAT, Mumbai i.e. Vivariti Cibus in ITA 3171/Mum/2022,SME Pool Series V August in ITA 341/342/MUM/2023 and Symantaka IFMR Capital 2027 in ITA 2640/MUM/2023. It is stated that the issue of TDS u/s 194LBC of the Act has been discussed therein threadbare and it has been held that any surplus distributed to the Originator is not liable to TDS. Although the cases were brought to the knowledge of the lower P a g e | 4 A.Y. 2017-18 Hebros AHL IFMR Capital 2014 authorities but they did not take proper cognizance thereof without citing any reason. The ld.DR on the other hand relied on the orders of the authorities below.
We find that exactly similar issue has been decided by the author of this order in the case of another Securitisation Trust INGUZ SBL IFMR in MUM/2025.Relevant parts of the said order are extracted as below for the sake of brevity:
“3. 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. Не 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. 4.1 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 P a g e | 5 A.Y. 2017-18 Hebros AHL IFMR Capital 2014 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. 5.1 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. 5.2 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. 5.3 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 P a g e | 6 A.Y. 2017-18 Hebros AHL IFMR Capital 2014 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 VivritiCibus 013 2017 v. ITO (TDS)- 2(3)(3) Mumbai [ITA No. 3171/Mum/2022]. Therefore, the decision of the Tribunal in the case of VivritiCibus (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:
"16. 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 17. Ergo, once the originator, (AMPL) is not holding any PTC /SDI, 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 P a g e | 7 A.Y. 2017-18 Hebros AHL IFMR Capital 2014 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."
6.1 Respectfully following the above decision of the Tribunal in the case of VivritiCibus (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 view of the legal position emerging from coordinate bench decisions on identical facts, respectfully following them, we hold that the P a g e | 8 A.Y. 2017-18 Hebros AHL IFMR Capital 2014 assessee was not liable to deduct TDS on the payments to the Originator. Therefore, we set aside the appellate order and direct the AO to delete the demand under aforesaid section allowing the grounds of appeal.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 09/02/2026. ANIKESH BANERJEE PRABHASH SHANKAR (न्याययक सदस्य /JUDICIAL MEMBER) (लेखाकार सदस्य/ACCOUNTANT MEMBER)