VENUS TRUST MARCH 2015,MUMBAI vs. ITO (TDS) 2(3)(3), MUMBAI

The Assessee further referred to section 191 of the Act and stated that liability towards payment of tax is on the recipient where tax is not deducted, the explanation to section 191, the payer can be regarded as an ‘assessee in default’ Venus Trust March 2015 under section 201(1) of the Act only to the extent of tax that has not been paid by the payee directly. The AO did not find the submissions of the Assessee acceptable due to the following reasons, firstly, as per the deed of assignment, the seller unconditionally and irrevocably sells, transfers, assigns and conveys all the right, title, benefit and interest of the seller in receivables, underlying security, together with all, other rights, benefits, powers, risk and guarantee and indemnities in relation thereto as contained in the respective documents. Secondly, the AO on the calculation of EIS observed that EIS is an income arising on account of securitization of underlying assets; therefore, distribution of such income by the Assessee Trust does require deduction of TDS u/s. 194LBC of the Act. Thirdly, the AO observed that the EIS is the residual amount that flows to the originator of the loan without the said EIS income being in relation to the investment made by the originator in the Securitization Trust.

The AO further observed that the EIS income can flow to the originator of the loan without the said EIS income being in relation to the investment made by the originator in the Securitization Trust, the AO also observed that the EIS income can flow to the originator irrespective of whether such originator holds any securities in the Securitization Trust or not and that prior to the 2012 amendment of the RBI guidelines, there was no requirement for the originator to have minimum investment in the Securitization Trust and even in such cases the EIS used to flow to the originator. The AO further observed that the Assessee Trust was paying the Originator on a monthly basis and stated that it was completely different from the conditions mentioned in the 2006 guidelines of the RBI. With reference to the 2012 RBI guidelines the AO stated that bringing Venus Trust March 2015 conditions of Minimum Retention Requirement (MRR) for the Originators, 2012 RBI guidelines also brought forward new accounting for the interest only stripped.

The AO thus dismissed the argument of the assessee that EIS flows to the originator of the loan without the said EIS income being in relation to the investment made by the originator in the Securitization Trust. The AO held that after the 2012 RBI guidelines, the Originator has to maintain the MRR throughout the securitisation period, therefore, the EIS and the MRR (originator's holding of PTCs) are also interlinked. If the Originator does not keep the said MRR at all times, then the question of EIS do not arise at all. The AO thus held that EIS is linked with the investment of the Originator in the Securitisation scheme and, hence, the assessee trust was bound to deduct the TDS u/s. 194LBC of the Act on the EIS paid to the Originator. The AO then referred to the definitions provided in Section 115TCA of the Act and held that the deed of assignment where the Originator and Assessee Trust-SPV are the parties is also an instrument in the nature of ‘securitized debt instruments’ which acknowledges the beneficial interest of the Originator and Assessee Trust- SPV in respect to the receivable in the nature of EIS. Therefore, the AO held the Originator to be an investor holding deed of assignment (securitized debt instrument) which acknowledges the interest of Originator (EIS) in the debt or receivables assigned to the special purpose distinct entity.

Further, on the Assessee’s submission that EIS does not equate with the yield committed to the investors the AO observed that section 194LBC of the Act creates liability on the payer to deduct TDS on any income payable to the investor, hence, the AO Observed that the EIS being equated to yield makes no Venus Trust March 2015 difference to the TDS liability u/s. 194LBC of the Act, in the same vein it makes no difference if the EIS works as a credit enhancement facility. The AO also observed that section 115TCA (3) of the Act is a deeming provision which means that if any income arises or accrues to investors even if it is not paid or credited shall be deemed to have been credited to the account of the said person (investor) on the last day of the previous year. Lastly, the AO observed that the section 115 TCA (3) of the Act explicitly holds that whatever income is going out from the Securitization Trust will be income of the investor. Thus, the AO held that such income payout by the Securitization Trust is subject to TDS u/s. 194 LBC @30% and that the payment of the EIS by the Securitization Trust to the Originator is duly covered under the purview of section 194 LBC of the Act. Thus, the AO in light of his above observations held that the Assessee Trust has committed a default under section 201(1) and 201(1A) of the Act.

The AO also dismissed the Assessee’s claim that the Originator has compiled with the provisions of the Act. The AO also held that the Assessee Trust had submitted its Form 26A dated 12.12.2019 vide its submission dated 13.12.2019 and that Form 26A makes the person (deductor) accountable to pay interest under sub-section 1A of section 201 of the Act. The AO held that the as per the above procedure notified by the Directorate of Income-Tax (Systems) in pursuance of section 201 (1) of the Act and Rule 31 ACB of the Income Tax Rules ,1962 from A.Y. 2017-18, form 26A must necessarily be filed electronically with the authorized AO i.e. CPC-TDS and interest on non-deduction of the whole or any part of the Tax or failure in payment after deduction as required by or under this

The Assessee being aggrieved by the order passed by the AO preferred an appeal before the Ld. CIT (Appeal), National Faceless Appeal Centre-Delhi (NFAC). The Ld. CIT (Appeal) vide his order dated 24.03.2023 confirmed the order of the AO. The Ld. CIT (A) firstly, rejected the Assessee’s submission dated 23.12.2021 wherein the Assessee requested for an adjournment sine die. The Ld. CIT(A) stated that the reason for the rejection for the adjournment sine die was that the case could not be postponed indefinitely, and further observed that the Assessee had not produced its Form 26A, thus, the matter was to be decided on merits. The Ld. CIT (A) in his order stated the facts of the case and thereafter reproduced the observations and findings of the AO and in view of the facts and circumstances of the case upheld the order of the AO and rejected the claim of the assessee.

The Assessee being aggrieved with the order passed by the Ld. CIT (A) preferred the present appeal before us. We have gone through the order passed under section 201, order of the Ld. CIT Appeal and submissions of the Assessee alongwith grounds taken before us. It is observed that the Assessee is a securitization trust acting and controlling under the trusteeship of M/s. IDBI Trusteeship Services Ltd., the Assessee trust’s main function is to raise money to fund acquisition of the originator’s loan portfolio, the originator herein is HDB Financial Services Limited, it originally created the loan portfolio which it intended to sell to a Securitization trust. The process where a loan portfolio of the originator is converted into securities is known as securitization and for this purpose an independent third party known as a trustee company is created, the Venus Trust March 2015 trustee company in the present case is IDBI Trusteeship Limited, thereafter securities are issued by the Securitization Trust to investors and money is raised, this money is then used by the Securitization Trust to acquire the loan portfolio from the originator. These Securities which are issued by the Securitization Trusts are known as Pass through Certificates (PTC).

Once the loan portfolio is assigned the Securitization Trust becomes the legal owner of the receivables and all the cash flows from the borrowers, which includes both the principal repayment and the interest. This cash received by the Securitization Trust is thereafter utilized in a pre-determined manner which is mentioned in the assignment deed and is known as the waterfall mechanism. The waterfall mechanism involves paying statutory dues, paying expenses incurred by the trust, paying arrears in the investor payouts to PTC investors and for reinstatement of credit enhancement in accordance with the terms of the deed. The surplus is known as the EIS and is paid back to the Originator. This process of Securitization is governed by the RBI Guidelines on Securitization of Standard Assets dated February 1, 2006 (2006 RBI Guidelines) and Revision to Guidelines on Securitization Transactions dated August, 21, 2012 (2012 RBI Guidelines), these guidelines lay down the law pertaining MRR which essentially is the continuing stake that the originator is bound to retain in the loan portfolio assigned, the originator can fulfill this condition by either subscribing to the PTC or through other methods like providing cash collaterals, over collateralization of receivables etc.

During the course of the survey proceedings u/s. 133(2A) of the Act conducted on 27.08.2019 at the premises of M/s. Sansar Trust, a securitization Venus Trust March 2015 trust, it was found that the Assessee Trust in the F.Y. 2017-18 had paid Rs. 1,75,82,670/- under the head of Excess Interest Spread (EIS) without deducting the TDS. It was observed by the AO that the Assessee trust deducts TDS on the payment of yield to the Pass-through certificate (PTC) u/s. 194LBC of the Act, but no TDS was deducted on the payment of the EIS to the originator. In view of the above facts the AO initiated proceeding u/s.201 (1) /201 (1A) of the Act and subsequently, held that the Assessee Trust had committed default u/s. 194 LBC of the Act by non-deducting TDS in the amount of EIS paid to the originator amounted to Rs. 1,75,82, 670/-. The TDS to be deducted worked out to Rs. 52, 74,801/-.

Further the AO held that the Assessee was liable to pay simple interest at the rate of 1% per month or part thereof on the amount of such tax from the date on which such tax was deductible to the date on the tax was actually paid under the provision of section 201(1A), the AO held that the Assessee had failed to comply with the provision of section 201(1A) and was thus liable to pay Rs. 16,58, 781/- interest u/s. 201(1A) of the Act.

Thus, the main issue to be adjudicated by us is whether tax is required to be deducted u/s. 194 LBC of the Act on EIS. For the sake of ready reference relevant provisions of Section 194LBC of the Act reads as under:-

From the plain reading of the above mentioned sectioned it is observed that the section casts an obligation for deduction of tax at source if the following twin conditions are satisfied, firstly, the income is payable to an investor and secondly, the income is in respect of investment in the Securitization Trust. Further the section states that the definition of the term ‘investor’ shall have the meaning assigned to it in Clause (d) of Explanation to Section 115 TCA which in turn defines ‘investor’ and ‘securities debt instrument’ as under:-

The above definitions are elucidated as follows-:

The relevant extract of the 2012 RBI guidelines pertaining MRR in securitization trust has been reproduced hereunder-:

In SME Pool Series V August 2016 v. Income Tax Officer (TDS) – 2 (2) (1) Mumbai, ITAT No. 341/Mum/2023 & 342/Mum/2023 this Hon’ble Tribunal held that-:

Section 115TCA of the Act was inserted by Finance Act, 2016 with effect from 01/04/2017 provides that any income of an investor of a securitisation trust out of investment made in such securitisation trust shall be chargeable to income tax. Section 194LBC of the Act casts an obligation to withhold tax on the person responsible for making such payment.

During the course of hearing reliance was placed by the Ld. Departmental Representative of the revised guidelines of securitization transaction dated 21st August, Venus Trust March 2015 2012 issued by the Reserve Bank of India (RBI/2012-13/17 DNBS PD No. 301/3.10.01/2012/13 dtd. 21st August, 2012 [for short 'MRR Guidelines']. A perusal of the MRR Guidelines makes it clear that the requirement of Minimum Retention Requirement (MRR) was introduced for the originator/seller in 2012. The MRR requirement was introduced to ensure that the originators continue to have staked in the securitized assets so that proper due diligence is carried out in respect of the loans securitized. Reserve Bank of India permitted the originators to fulfil MRR by way of an investment in the securities special purpose distinct entity/ (Assessment Year 2017- 18)securitization trust; or the providing required credit enhancement or by providing cash collaterals, balance sheet support etc. It has been urged that in the case before us the Appellant has made the MRR commitment by other permissible alternatives and had not subscribed to the PTCs issued by the securitization trust/appellant. The Revenue has not disputed the aforesaid position. On the other hand, it has been contended by the Revenue that the Assignment Deed constitutes securitized debt instrument. On perusal of the MRR Guidelines, we are of the view that in cases where the MRR commitment is met via any other permissible alternative, the originator cannot be regarded as an 'Investor' since the Originator does not hold any investment in the special purpose distinct vehicle/securitization trust. In our view, an originator can also be 'Investor' provided such originator makes investment in the special purpose distinct vehicle/securitization Trust by subscribing to PTC or other securities/instruments. However, it is admitted that in the present case the Originator has neither subscribed to PTCs nor had made any other investment. MRR has been maintained via cash collateral and in the form of collateralising of excess receivables. 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 Income Tax Officer (TDS) – 2 (2) (4) Mumbai v. Syamantaka IFMR Capital 2017, ITAT No. 2640/Mum/2023 this Hon’ble Tribunal held that-:

Thus in light of the above judicial pronouncements and the language provided in the statute which clearly provides that the liability to deduct TDS arises only where any income is payable to an investor in respect of the investor’s investment in a secularisation 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 it seen that the Assessee is an investor but that the income in the hands of the originator is not in respect of investment in the securitization trust and that the 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, therefore the twin conditions mentioned in Section 194LBC have not been met and hence the liability to deduct TDS does Venus Trust March 2015 not trigger. Before us without prejudice it has been stated that since the payee has discharged its liability to deduct tax in respect of EIS, then assessee cannot be regarded as ‘assessee in default’. Thus, Grounds 1 and 2 of the Assessee are allowed. Since, we have already held that there is no liability to deduct TDS in the present case, then whether or not form 26A was filed before the AO, or has been filed before us due to the reasons as stated above is purely academic and hence Grounds 3 and 4 of the Assessee are allowed. Therefore, the entire payment and interest levied by AO is deleted and the appeal of the assessee is allowed.

In the result, the appeal filed by the assessee is allowed.