ITO TDS 2(3)(4) MUMBAI, INCOME TAX vs. ZION IFMR CAPITAL 2016, MUMBAI

Brief facts of the case are that the assessee is a Securitization Trust (ST) which is controlled under the trusteeship of IDBI Trusteeship Ltd. and is engaged in raising fund on a private placement basis through issuance of pass through certificates for fund acquisition of loan portfolio from financial institutions hereby termed as the ‘Originator’.

Aggrieved the assessee was in appeal before the first appellate authority who vide order dated 07.08.2024 allowed the appeal filed by the assessee on the ground that the assessee trust is not liable to deduct TDS and is, therefore, not ‘an assessee in default’.

The Revenue aggrieved by the impugned order is in appeal before us, on the above mentioned grounds, challenging the impugned order of the ld. CIT(A). on the order of the ld. A.O. and contended that the assessee was rightly held to be assessee in default. The learned Authorised Representative (ld. AR for short) for the assessee controverted the said fact and stated that the issue in hand is covered by various decisions of the Tribunal which was in favour of the assessee and also relied on the order of the ld. CIT(A).

We have heard the rival submissions and perused the materials available on record. The Special Purpose Vehicle (SPV) is a company/trust/entity constituted for limited purpose, here in this case for mitigating the risk of an originator who is the owner of the financial assets which is acquired by a securitization company or the trust for the purpose of securitization which is pooling of various types of debts and selling the same as financial instruments to the SPV. The SPV issues Pass Through Certificates (PTC) where all the risks and rewards are transferred to SPV in lieu of cash payments made by the PTC holders. The outstanding receivables pertaining to the securitized debts are credited in the trust accounts which are then distributed to the originators. The receipts are in the nature of principal amount, servicing fee and interest. The issue of whether or not the assessee is entitled to deduct TDS on the payments made to PTC holders u/s. 194LBC of the Act is only on the Excess Interest Spread (EIS) which is the difference in the rate of interest where the original loans are at higher rates which is generally ranging from 15 to 20% and the divisible securities/PTCs which are at lower rates between 6% to 9%. It is observed that the IDBI Trusteeship Ltd. manages and controls various securitization trust like the assessee Trust where the financial assets are sold to the asset. The assessee Trust had paid to the originator EIS amounting to Rs.8,73,92,849/-, spreading over from April 2016 to March, 2017 for which the ld. A.O. has contended that the assessee has failed to deduct TDS amounting to Rs.2,62,17,855/- u/s. 194LBC @ 30%, which is tabulated herein under:

The ld. CIT(A), on the other hand, held that the EIS paid by the assessee to the originator is not a committed return and is merely a residual amount on the investment made by the investor in securitization trust. The ld. CIT(A) further held that it is only a contractual payment as per the terms of the deed of assignment and that the originator in the present case has not subscribed to PTCs and, therefore, the same will not amount to an investment. The ld. CIT(A) further held that sub section (1) of section 115TCA of the Act entitles that any income accruing or arising to an investor is to be taxed under this section for which the enabling provision to deduct tax source is section 194LBC of the Act. The ld. CIT(A) held that since the originator in this case has not subscribed to any PTCs, it cannot be termed as an ‘investor’ as defined in section 194LBC r.w.s. 115TCA of the Act and further no investment has also been shown to have been made by the (A.Y.2017-18) ITO vs. Zion IFMR Capital 2016 originator, thereby determining that the originator in this case is not an investor. The provisions of section 194LBC of the Act could not be attracted in the said case and the income received by the originator from the assessee in the nature of EIS did not accrue or arise from the investment and, therefore, the assessee was not entitled to deduct TDS on the same.

The learned Authorised Representative (ld. AR for short) had relied on the following decisions in support of the assessee’s contention: • ITO vs. Syamantaka IFMR Capital 2017 (in vide order dated 08.05.2024) • M/s. Vivriti Cibus 013 2017 vs. ITO(TDS) (in vide order dated 30.11.2023) • SME Pool Series V August 2016 vs. ITO (in ITA Nos. 341 & 342/Mum/2023 vide order dated 21.02.2024)